How to Save on LTCG Tax While Selling Property: Smart Use of Indexation Explained

If you’ve sold a long-held real estate property like land or a house, chances are you’ll face a Long-Term Capital Gains (LTCG) Tax. But did you know that a smart tax-saving tool called indexation can significantly reduce your tax liability? Let’s dive into how it works, when it’s applicable, and how to decide if it's the right option for you.

💡 What Is LTCG Tax on Real Estate?

When you sell a property that you’ve owned for more than two years, the profit you make from the sale is considered a long-term capital gain. This gain is taxable under the Income Tax Act. However, the tax payable can vary depending on whether or not you opt for indexation.

📊 What Is Indexation?

Indexation is a method used to adjust the purchase price of your property to account for inflation. By inflating your property's purchase value based on the Cost Inflation Index (CII) provided by the government, your taxable gains are significantly reduced.

For instance, if you purchased a property in 2010 for ₹50 lakhs and sold it in 2025 for ₹1.5 crore, the actual taxable gain isn't ₹1 crore. After indexation, the purchase price may be considered around ₹1.08 crore, lowering your taxable gain to approximately ₹41 lakh — saving you lakhs in taxes.

🗓️ Who Can Claim Indexation?

You can claim indexation only if:

• You purchased the property before July 23, 2024.

• You choose to pay LTCG tax at 20% with indexation, instead of 12.5% without indexation.

From July 23, 2024 onwards, newly purchased properties are not eligible for indexation benefits. In such cases, the only option is a flat 12.5% tax without indexation.

📉 Example: How Indexation Reduces Your Tax

Let’s break it down with an example:

Details With Indexation Without Indexation

Selling Price	₹1,50,00,000	₹1,50,00,000
Purchase Price	₹50,00,000	₹50,00,000
Indexed Purchase Cost	₹1,08,68,263	N/A
LTCG	₹41,31,736	₹1,00,00,000
Applicable Tax Rate	20%	12.5%
Tax Payable	₹8,26,347	₹12,50,000
Effective Tax Rate	5.51%	8.33%
Tax Saved	₹4,23,653	–

As seen, opting for indexation in this scenario saves over ₹4 lakh in taxes.

⚠️ When Indexation May Not Help

While indexation usually reduces tax, there are instances when it could lead to higher tax liability, especially if the holding period is short (around 2-3 years).

Example:
A property bought in 2022 and sold in 2025 may result in:

• With Indexation Tax: ₹8.64 lakh

• Without Indexation Tax: ₹6.25 lakh

In this case, not opting for indexation results in lower tax.

✅ Key Takeaways

• Check Purchase Date: If the property was bought before July 23, 2024, you have the option to choose between 20% tax with indexation or 12.5% without.

• Assess Holding Period: For long-held properties (over 5 years), indexation usually leads to significant savings.

• Do the Math: Always calculate both tax options before filing your return.

• For Properties Bought After July 23, 2024: Indexation is no longer applicable. A flat 12.5% tax will be levied.

💬 Final Thoughts

Tax planning is an essential part of any real estate transaction. Understanding tools like indexation empowers you to make informed decisions and legally reduce your tax outgo. Whether you’re planning to sell now or in the future, keeping track of your purchase dates, inflation trends, and current tax rules will ensure that you save more and stress less.