Impact of Indexation on Tax For AY 2026-27

Overview

Indexation was once a powerful and widely-used tool that allowed Indian taxpayers to reduce their long-term capital gains tax significantly by adjusting the purchase price of assets for inflation. For decades, selling a property, gold, or debt mutual fund held over several years meant a sharply lower tax bill - because the indexed cost of acquisition ate into the taxable gain.

All of that changed dramatically with the Finance (No. 2) Act, 2024, presented on July 23, 2024. The government removed indexation benefits for most capital assets and replaced the earlier 20% LTCG tax rate with a uniform flat rate of 12.5% - a change that has profound implications for taxpayers filing their returns for AY 2026-27 (covering income from FY 2025-26: April 1, 2025 to March 31, 2026).

But the story doesn't end there. A grandfathering provision was introduced - specifically for residential property - giving taxpayers holding pre-July 2024 property a one-time choice between the old and new regimes. Understanding this choice correctly can save lakhs of rupees in tax.

What Is Indexation and Why Did It Matter?

Indexation is the process of adjusting the original purchase price (cost of acquisition) of a long-term capital asset upward to account for inflation over the holding period. This inflation-adjusted cost - called the Indexed Cost of Acquisition - is then subtracted from the sale price to arrive at the taxable long-term capital gain.

The logic is straightforward: if you bought an asset for Rs 20 lakh in 2010 and sold it for Rs 60 lakh in 2025, your nominal gain is Rs 40 lakh. But a significant portion of that gain simply reflects inflation - the rupee in 2025 is worth far less than in 2010. Without indexation, you would be taxed on the full Rs 40 lakh. With indexation, your purchase price is restated to its inflation-equivalent value, substantially reducing the taxable gain.
The tool that makes this possible is the Cost Inflation Index (CII).

Cost Inflation Index (CII) for FY 2025-26 (AY 2026-27)

CII for FY 2025-26 is 376

The CBDT notified the Cost Inflation Index (CII) for FY 2025-26 at 376, up from 363 in 2024-25. The new index will be used to calculate long-term capital gains for AY 2026-27 and subsequent years, coming into effect from April 1, 2026.

The CII for FY 2025-26 was notified via CBDT Notification No. 70/2025 dated July 1, 2025. The base year is FY 2001-02, where CII = 100. For assets acquired before April 1, 2001, the higher of actual cost or Fair Market Value as on April 1, 2001 must be used as the cost of acquisition.

CII Table (Base Year 2001-02 = 100)

Source: CBDT Notification No. 70/2025

How Is CII Calculated?

CBDT calculates the CII as 75% of the average rise in CPI (Consumer Price Index) for Urban Non-Manual Employees for the immediately preceding year. The 3.3% increase from 363 (FY 2024-25) to 376 (FY 2025-26) reflects moderate urban inflation.

The Indexation Formula

Indexed Cost of Acquisition =

Original Purchase Price × (CII of Year of Sale ÷ CII of Year of Purchase)

Indexed Cost of Improvement =

Cost of Improvement × (CII of Year of Sale ÷ CII of Year of Improvement)

Long-Term Capital Gain (with indexation) =

Sale Price − Indexed Cost of Acquisition − Indexed Cost of Improvement − Transfer Expenses

The Landmark Change: Indexation Removed from July 23, 2024

What the Finance (No. 2) Act, 2024 Did

The Finance (No. 2) Act, 2024 removed the indexation benefit and introduced a uniform tax rate of 12.5% on long-term capital gains. No indexation benefit is allowed while computing capital gain from long-term capital assets transferred on or after July 23, 2024.

Effective from July 23, 2024, a uniform 12.5% tax rate applies to long-term capital gains (LTCG) across all asset classes, regardless of indexation benefits. Previously, LTCG on listed shares and equity mutual funds was taxed at 12.5% on gains exceeding Rs 1.25 lakh, while other assets were taxed at 20% with indexation or 10% without. The indexation benefit has been removed for most assets.

Why Did the Government Remove Indexation?

Finance Minister Nirmala Sitharaman stated that the indexation benefit was proposed to be removed to bring all asset classes under one uniform rate - and not to enhance revenue. The government's view was that indexation created complexity and asymmetry across asset classes.

What This Means for AY 2026-27 Filers

For income reported in AY 2026-27 (FY 2025-26):

• Assets sold between April 1, 2025 and March 31, 2026 - all these sales fall after July 23, 2024
• Therefore, for most assets, the new rules apply: 12.5% LTCG without indexation
• The Income Tax Act, 2025 mainly renumbers and clarifies these rules; it does not change the substance for 2026-27 - those changes already came through the 2024 Budget and Finance Act

The Grandfathering Provision - The Most Important Exception

Who Gets the Choice?

For land or buildings acquired before July 23, 2024, resident individuals and HUFs can opt for indexation and pay 20% tax if it results in lower tax liability compared to the new 12.5% rate without indexation.

This is the grandfathering provision - a transitional relief measure that prevents taxpayers who bought property before the law changed from being adversely impacted.

The Two Options for Pre-July 23, 2024 Property

For properties purchased before July 23, 2024, taxpayers can choose between 12.5% without indexation or 20% with indexation, whichever results in lower tax.
Under the new regime, taxpayers simply subtract the original purchase price from the sale price and pay 12.5% on the difference - no Cost Inflation Index adjustment is applied.

Who can use grandfathering?

• Resident individuals and resident HUFs only
• Property (land or building) must have been acquired before July 23, 2024
• Property must have been sold during or after FY 2024-25
• The taxpayer must compute both options and pay whichever is lower

Asset-Wise Indexation Applicability for AY 2026-27

Capital Gains Tax Rates for AY 2026-27 - Complete Summary

Note: The exemption threshold for LTCG on equity-oriented assets was increased from Rs 1,00,000 to Rs 1,25,000 per tax period for resident taxpayers.

Worked Examples: Indexation vs No Indexation for AY 2026-27

Example 1 - Property Sold (Pre-July 2024 Purchase): Grandfathering in Action

Scenario: Vinay purchased a flat in FY 2012-13 for Rs 35,00,000. He sells it in FY 2025-26 (AY 2026-27) for Rs 1,10,00,000.

Step 1 - Indexed Cost (Old Regime)

CII of purchase year (FY 2012-13): 200
CII of sale year (FY 2025-26): 376
Indexed Cost = Rs 35,00,000 × (376 ÷ 200) = Rs 65,80,000

Old Regime Calculation:

Sale Price= Rs 1,10,00,000
Indexed Cost of Acquisition= Rs 65,80,000
LTCG (Old Regime)= Rs 44,20,000
Tax @ 20%= Rs 8,84,000
Add: 4% Health & Education Cess= Rs 35,360
Total Tax (Old Regime)= Rs 9,19,360

New Regime Calculation:

Sale Price= Rs 1,10,00,000
Actual Cost of Acquisition= Rs 35,00,000
LTCG (New Regime)= Rs 75,00,000
Tax @ 12.5%= Rs 9,37,500
Add: 4% Health & Education Cess= Rs 37,500
Total Tax (New Regime)= Rs 9,75,000

Verdict: The Old Regime with indexation saves Rs 55,640 for Vinay. He should choose the 20% with indexation option.

This is typical for properties held for a long period (10+ years) - indexation makes the old regime more beneficial.

Example 2 - Property Purchased After July 23, 2024 (No Choice - New Regime Applies)

Scenario: Priya bought a flat in October 2024 for Rs 50,00,000 and sells it in FY 2025-26 for Rs 65,00,000 (held for more than 24 months - hypothetically).

Since the property was purchased after July 23, 2024, no grandfathering applies.

Sale Price= Rs 65,00,000
Cost of Acquisition= Rs 50,00,000
LTCG= Rs 15,00,000
Tax @ 12.5%=  Rs 1,87,500
Add: 4% Cess= Rs 7,500
Total Tax= Rs 1,95,000

No indexation available. The new regime at 12.5% is the only option.

Example 3 - When the New Regime Is Better for Pre-July 2024 Property

Scenario: Robert bought a house in FY 2021-22 for Rs 80,00,000 and sells it in FY 2025-26 for Rs 1,05,00,000.

Old Regime (with indexation):

CII FY 2021-22: 317 | CII FY 2025-26: 376
Indexed Cost = Rs 80,00,000 × (376 ÷ 317) = Rs 94,89,590
LTCG = Rs 1,05,00,000 − Rs 94,89,590 = Rs 10,10,410
Tax @ 20% = Rs 2,02,082 + cess = Rs 2,10,165

New Regime (without indexation):

LTCG = Rs 1,05,00,000 − Rs 80,00,000 = Rs 25,00,000
Tax @ 12.5% = Rs 3,12,500 + cess = Rs 3,25,000

Verdict: The Old Regime with indexation saves Rs 1,14,835 here too. However, for properties held for a shorter period (3-5 years) where inflation adjustment is modest, the new regime at 12.5% can sometimes be more beneficial. Always compute both options before filing.

Example 4 - Equity Mutual Fund (No Indexation at All)

Scenario: Arjun invested Rs 5,00,000 in equity mutual funds in FY 2020-21 and redeemed them in FY 2025-26 for Rs 9,00,000 (held more than 12 months).

Redemption Value= Rs 9,00,000
Cost of Acquisition= Rs 5,00,000
LTCG= Rs 4,00,000
Less: LTCG Exemption= Rs 1,25,000
Taxable LTCG= Rs 2,75,000
Tax @ 12.5%= Rs 34,375
Add: 4% Cess= Rs 1,375
Total Tax= Rs 35,750

No indexation available for equity mutual funds - even for pre-July 2024 investments.

Debt Mutual Funds - A Separate Story

Before July 23, 2024, long-term capital gains on most assets were eligible for indexation at a 20% rate. The Finance (No. 2) Act, 2024 removed indexation for most transfers, paired with the reduced 12.5% rate.

For debt mutual funds, the situation is different - and more adverse:

• Effective from April 1, 2023 (Budget 2023), gains on debt mutual funds are taxed at normal slab rates, not the flat 20% LTCG rate
• No indexation benefit is available
• This applies regardless of whether the fund was purchased before or after July 2024
• For AY 2026-27, all debt fund gains continue to be added to total income and taxed at the applicable slab rate

How to Decide: Old Regime (20% + Indexation) vs New Regime (12.5%)

Use this quick decision framework for property sold in AY 2026-27:

Step 1: Was the property acquired before July 23, 2024?

• No → Only the new regime applies (12.5% without indexation). Stop here.
• Yes → You have a choice. Proceed to Step 2.

Step 2: Calculate Indexed Cost of Acquisition

• Use CII 376 (FY 2025-26) as the sale year CII
• Look up the CII of the year you purchased the property from the table above

Step 3: Compute tax under both regimes

• Old Regime: (Sale Price − Indexed Cost) × 20%
• New Regime: (Sale Price − Actual Cost) × 12.5%

Step 4: Add 4% Health & Education Cess to both

Step 5: Pay whichever is lower

Rule of thumb: The longer you held the property, the more likely indexation under the old regime saves tax. Properties held for 5 years or less may benefit from the 12.5% new regime. Always calculate both.

Exemptions That Reduce Capital Gains Tax - Still Available in AY 2026-27

Even without indexation, several exemptions can reduce or eliminate capital gains tax for AY 2026-27:

Note: These exemptions apply on the capital gains amount - even in the new regime where indexation is not available. They remain effective tax-saving tools.

Impact of Indexation Removal: Who Gains, Who Loses?

FAQs

Is indexation available for AY 2026-27? 

Indexation is available in AY 2026-27 only for residential property or land purchased before July 23, 2024, under the grandfathering provision. For all other assets - shares, mutual funds, bonds, gold purchased after that date - indexation is not available.

What is the CII for FY 2025-26 (AY 2026-27)?

The CBDT notified the Cost Inflation Index for FY 2025-26 as 376, via CBDT Notification No. 70/2025 dated July 1, 2025. This is used to compute indexed cost for eligible assets.

What is the LTCG tax rate on property sale in AY 2026-27?

For property sold after July 23, 2024, the LTCG tax rate is 12.5% without indexation. For property purchased before July 23, 2024 and sold thereafter, taxpayers may choose between 20% with indexation or 12.5% without - whichever results in lower tax.

Who can opt for the grandfathering provision? 

The grandfathering provision allows resident individuals and resident HUFs to apply indexation on land or building acquired before July 23, 2024 and pay tax at the old rate of 20%, if the tax under the new law (12.5% without indexation) results in a higher amount.

Can NRIs use the grandfathering provision?

No. The grandfathering provision is available only to resident individuals and resident HUFs. NRIs selling Indian property must apply the new regime at 12.5% without indexation.

Is indexation available on equity mutual funds?

No. Indexation was never available for equity mutual funds. LTCG on equity mutual funds is taxed at 12.5% on gains exceeding Rs 1.25 lakh per year.

What happens to debt mutual fund indexation in AY 2026-27?

Indexation on debt mutual funds was removed from April 1, 2023 (Budget 2023). Gains from debt mutual funds are now taxed at applicable slab rates, regardless of holding period or purchase date.

Can I use Section 54 exemption even without indexation? 

Yes. Section 54 and other exemptions (54F, 54EC) are independent of whether indexation is claimed. Reinvesting long-term capital gains from property into a new house or notified bonds still qualifies for full exemption under the respective sections.

How do I compute indexed cost for a property improvement done separately? 

Each capital improvement is indexed separately using the CII of the financial year in which the improvement was incurred, against the CII of the year of sale. Only capital improvements qualify - not regular repair, painting, or annual maintenance.

What if the property was purchased before April 1, 2001?

For assets acquired before April 1, 2001, use the higher of actual cost or Fair Market Value as on April 1, 2001 as the cost of acquisition, and use CII = 100 for the base year calculation.