Sold Property After 23 July 2024? Indexation Now Works as a Tax Ceiling

Sold Property After 23 July 2024? Indexation Isn’t Gone – It Now Works as a Tax Ceiling

Summary: The article explains the changes introduced by the Finance (No. 2) Act, 2024 for taxation of long-term capital gains on land and buildings transferred on or after 23 July 2024. It states that while the tax rate under Section 112 was reduced from 20% to 12.5% and indexation under the second proviso to Section 48 was withdrawn, the second proviso to Section 112(1)(a) provides a safeguard for resident individuals and HUFs who acquired land or buildings before 23 July 2024 and transfer them on or after that date. For eligible taxpayers, tax payable is restricted to the lower of 12.5% on the un-indexed gain or 20% on the indexed gain computed in a parallel calculation. Using a worked example for AY 2026–27, the article demonstrates that although the reported long-term capital gain remains un-indexed, the indexed computation acts only as a cap on tax. It also states that an indexed loss under this parallel computation cannot be set off or carried forward, and that the relief is unavailable to non-residents, companies, firms, LLPs, persons acquiring property on or after 23 July 2024, and assets other than land or buildings.

Understanding the second proviso to Section 112(1)(a) of the Income-tax Act, 1961 — with a complete worked example for AY 2026–27

If you sold land or a building on or after 23 July 2024, you may have noticed something puzzling in your tax computation: your software still calculates an “indexed cost” even though indexation was famously withdrawn by the Finance (No 2) Act 2024. Is the software wrong?

No — it is applying one of the most taxpayer-friendly grandfathering provisions in recent memory: the second proviso to Section 112(1)(a). Indexation no longer reduces your capital gain, but for eligible taxpayers it survives as a cap on the tax payable. This article explains how the provision works, walks through a full computation for AY 2026–27, and highlights the one costly misconception you must avoid.

What changed on 23 July 2024

The Finance (No. 2) Act, 2024 rewrote the taxation of long-term capital gains (LTCG) on immovable property with effect from 23 July 2024:

• The LTCG tax rate under Section 112 was reduced from 20% to 12.5%.
• The indexation benefit under the second proviso to Section 48 was withdrawn— the cost of acquisition can no longer be inflated using the Cost Inflation Index (CII) while computing the gain.
• Holding periods were rationalised into two buckets — 12 months for listed securities and 24 months for all other assets. For immovable property the qualifying period continues to be 24 months.

For properties that appreciated strongly, the lower 12.5% rate is a clear win. But for properties bought recently, or those with modest appreciation, losing indexation could mean paying tax on gains that are largely inflationary. Parliament recognised this and built in a safeguard.

The safeguard: second proviso to Section 112(1)(a)

The proviso applies when all of the following conditions are met:

1. The taxpayer is a resident individual or a Hindu Undivided Family (HUF);

2. The asset transferred is land or a building, or both;

3. The asset was acquired before 23 July 2024; and

4. The transfer takes place on or after 23 July 2024.

Where these conditions are satisfied, the proviso directs that the income-tax computed at 12.5% (without indexation), in excess of the tax that would have been payable under the old regime — that is, 20% on the gain computed with indexation — shall be ignored. In effect, the taxpayer pays the lower of the two figures.

Note the precise design: indexation has not been restored for computing the capital gain. The gain in your return is always the un-indexed figure taxed at 12.5%. Indexation lives on only inside a parallel, shadow computation whose sole purpose is to cap the tax. This is exactly why tax software continues to display both columns.

Worked example (AY 2026–27)

Consider a resident individual who sells a non-residential building in FY 2025–26.

Preliminary check — Section 50C. The stamp duty value (₹ 88,00,000) is lower than the actual consideration (₹ 89,00,000), so no substitution is required. The full value of consideration is ₹ 89,00,000.

Holding period. From 29 January 2024 to 20 March 2026 is about 26 months — more than 24 months — so the asset is a long-term capital asset and Section 112 applies.

Step 1 — Compute the capital gain under the new regime (this is the actual gain)

Step 2 — Compute the shadow tax under the old regime (only for the cap)

Indexed cost = ₹ 73,44,000 × 376 ÷ 348 = ₹ 79,34,897

Step 3 — Apply the proviso

The taxpayer reports a long-term capital gain of ₹ 15,56,000 in the return, but the tax on it is capped at ₹ 1,93,021 (plus 4% health and education cess, and surcharge if applicable). The excess of ₹ 1,479 is simply ignored by operation of the proviso.

Had the proviso not existed, the taxpayer would have paid ₹ 1,94,500 — a tax higher than what the law promised when the property was purchased in January 2024. The proviso ensures no pre-amendment buyer is worse off.

Why this provision matters

It prevents retrospective hardship. Buyers who acquired property before 23 July 2024 made their investment decisions expecting indexation. Withdrawing it retroactively would have taxed purely inflationary gains. The proviso guarantees that such taxpayers pay the lower of the old-regime and new-regime tax — a genuine “no worse off” promise.

It automatically picks the better outcome. No option or election needs to be exercised. If the property appreciated strongly, the 12.5% rate produces the lower tax and applies naturally. If appreciation was modest — as in our example, where indexation nearly wiped out the gain — the 20%-with-indexation figure becomes the ceiling. The taxpayer always lands on the better side.

In extreme cases, the cap can reduce tax to nil. If the indexed computation results in a loss, the old-regime tax is zero — and therefore the tax payable is zero, even though a positive gain is reported in the return.

The critical limitation: a shadow loss is not a real loss

This is the misconception that costs taxpayers real money. Suppose the indexed computation produces a loss. That loss exists only for the purpose of capping the tax. It is not a capital loss under the Act. It cannot be set off against any other capital gain, and it cannot be carried forward to future years.

Under the old regime, an indexed loss on property was a genuine long-term capital loss, eligible for set-off against other LTCG and carry-forward for eight assessment years. That entitlement is gone for transfers on or after 23 July 2024. The proviso gives you a tax ceiling — never a loss.

Who does NOT get this relief

The proviso is narrowly drawn. The following taxpayers pay a flat 12.5% without indexation, with no cap, regardless of when the asset was purchased:

• Non-residents(including NRIs);
• Companies, firms and LLPs;
• Sellers of assets other than land or building— gold, unlisted shares, debt instruments and the like get no indexation relief at all;
• Anyone who acquired the property on or after 23 July 2024— for such assets, only the new regime applies.

Key takeaways

1. For land or building acquired before 23 July 2024 and sold on or after that date by a resident individual or HUF, tax is the lower of5% without indexation and20% with indexation.

2. The capital gain reported in the ITR is always the un-indexed gain; indexation affects only the tax.

3. An indexed loss cannot be set off or carried forward — it only caps the tax (potentially at nil).

4. The relief does not extend to NRIs, companies, firms, LLPs, or assets other than land and building.

5. Your tax software showing both “with indexation” and “without indexation” columns is correct and required by law — it is performing the mandatory two-track computation.

Frequently Asked Questions

Q1. Indexation was removed — why does my software still compute indexed cost?

Because the second proviso to Section 112(1)(a) requires a parallel computation of tax at 20% on the indexed gain, which acts as a ceiling on the tax payable for eligible taxpayers. The software must run both computations to determine th lower tax.

Q2. Which capital gain figure goes into my ITR — indexed or un-indexed?

The un-indexed gain (₹ 15,56,000 in our example). The indexed figure never enters the gain computation; it only limits the tax.

Q3. My indexed computation shows a loss. Can I set it off against gains on shares?

No. The indexed loss is notional and exists only to cap the tax on this transaction — it can reduce the tax on this property sale to nil, but it cannot shelter any other income or be carried forward.

Q4. I am an NRI selling an inherited flat bought in 2010. Do I get this relief?

No. The proviso applies only to resident individuals and HUFs. As a non-resident, you pay 12.5% on the un-indexed gain.

Q5. Does the relief apply to a plot of land, or only to buildings?

It applies to land, building, or both — but not to any other capital asset.

Q6. Is cess charged on the capped tax?

Yes. Health and education cess at 4% (and surcharge, where applicable) is computed on the tax as capped by the proviso.

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Disclaimer: This article is for informational purposes and reflects the law applicable for AY 2026–27. Capital gains taxation depends on specific facts; please consult a qualified tax professional before acting on any transaction.

By [Aafiya Sanadi, credentials — Practicing Chartered Accountant ]