What is Indexed Purchase Price?

Why in news? Finance Minister Nirmala Sitharaman introduced significant revisions to capital gains taxation, focusing particularly on real estate transactions in the Union Budget 2024.

The budget eliminated the indexation benefit, which previously enabled property owners to adjust their purchase price for inflation, thereby reducing taxable profits.

About  Indexed Purchase Price:

• Indexed purchase price is the original purchase price of an asset adjusted for inflation using the Cost Inflation Index (CII). This adjusted price is used to calculate long-term capital gains tax.

How it works ?

Cost Inflation Index (CII): This is a numerical figure released annually by the Indian government to account for inflation.

Indexation: The original purchase price of an asset is multiplied by a ratio of the CII of the year of sale to the CII of the year of purchase. This gives the indexed purchase price.

Capital Gains Calculation: The indexed purchase price is subtracted from the sale price to determine the capital gains. This adjusted figure is then taxed at the applicable long-term capital gains tax rate.

Why it’s important:

Reduces tax liability: By accounting for inflation, indexation helps reduce the taxable capital gains.

Fairness: It ensures that the taxpayer is not unduly burdened by the effects of inflation.

For example, if you purchased a property for ₹25 lakhs in 2000 and sold for ₹1 crore in 2024, the indexed purchase price would have been adjusted for inflation, substantially reducing the taxable gain.