{"id":34071,"date":"2024-11-07T21:39:55","date_gmt":"2024-11-07T16:09:55","guid":{"rendered":"https:\/\/kuvera.in\/blog\/?p=34071"},"modified":"2024-11-07T21:39:55","modified_gmt":"2024-11-07T16:09:55","slug":"how-does-the-removal-of-indexation-benefit-impact-your-investments","status":"publish","type":"post","link":"https:\/\/kuvera.in\/blog\/how-does-the-removal-of-indexation-benefit-impact-your-investments\/","title":{"rendered":"How Does the Removal of Indexation Benefit Impact Your Investments?"},"content":{"rendered":"

Are you considering mutual funds or <\/span>passive funds India<\/span> that offer indexation benefits? Indexation has historically been a great way to save on Long Term Capital Gains (LTCG) tax, helping long-term investors keep more of their returns. However, the recent Union Budget 2024 removed indexation benefits, potentially leading to higher tax payments.<\/span><\/p>\n

 <\/p>\n

\"Start<\/a><\/b><\/h4>\n

 <\/p>\n

Let\u2019s break down what indexation is, the benefits indexation provides, the recent changes from Budget 2024 changes, and how they might affect your investments. <\/span><\/p>\n

 <\/p>\n

What Is Indexation?<\/b><\/h2>\n

 <\/p>\n

Before we examine the impact of removing indexation, let\u2019s explore what indexation benefit means.\u00a0<\/span><\/p>\n

Indexation is a tax-saving mechanism that benefits long-term investors. When you invest in equities for an extended period, the cost of acquisition of these shares increases over time due to inflation and market fluctuations.\u00a0<\/span><\/p>\n

Indexation benefit allows you to adjust the purchase price of your shares to account for this increase, thereby reducing your taxable capital gains (especially for investments of more than one year).<\/span><\/p>\n

In recent years, there have been discussions about potential changes to the indexation benefit. While the specific details and the extent of these changes might vary, the general trend is towards reducing or eliminating this tax advantage.\u00a0<\/span><\/p>\n

 <\/p>\n

Union Budget 2024 and Abolition of Indexation<\/b><\/h2>\n

 <\/p>\n

The Union Budget 2024 introduced a significant shift in how LTCGs are taxed on real estate in India. Previously, when selling a property held for the long term, individuals could adjust the original purchase price for inflation using the cost inflation index. This mechanism, known as indexation, effectively reduced the taxable profit and tax liability.<\/span><\/p>\n

However, the recent Union Budget 2024 removed indexation benefits for properties acquired on or after 23 July 2024. The purchase price remains static, irrespective of how long the property has been held or how much inflation has occurred. This means the taxable gain is calculated on the nominal difference between the selling price and the original purchase price, potentially leading to a higher tax outgo.<\/span><\/p>\n

The government reduced the LTCG tax rate from 20% to 12.5% to offset this. While seemingly beneficial, the absence of indexation could outweigh the lower rate, especially for assets held for an extended period.<\/span><\/p>\n

This policy shift has sparked debate. Some argue it simplifies capital gains calculations and broadens the tax base. Others contend it disincentivises long-term investment in real estate and disproportionately impacts those who acquired properties during periods of high inflation.<\/span><\/p>\n

It is crucial to note that the government later provided an option for taxpayers to choose between the new regime (12.5% without indexation) and the old regime (20% with indexation) for properties acquired before 23 July 2024. This offers flexibility and allows individuals to opt for the system that best suits their financial situation.\u00a0<\/span><\/p>\n

 <\/p>\n

How Does This Impact Your Investments?<\/b><\/h2>\n

 <\/p>\n

The removal or reduction of indexation benefits can significantly impact your long-term investment returns in several ways:<\/span><\/p>\n