Parallel calculation

Indexation used to be the standard way of adjusting an asset's cost for inflation before working out a capital gain. From 23 July 2024, it was withdrawn for most assets, and long-term gains are now taxed at a flat 12.5% without any indexation adjustment.

Immovable property bought before that date but sold after it is where the change bites hardest, so the law gives it a transition rule: a parallel calculation. Work out the tax two different ways, and let the taxpayer keep whichever answer is lower.

When the parallel calculation applies. Only where a property, land or a building, was acquired before 23 July 2024 and transferred on or after that date.

The two calculations, run side by side:

1. With indexation, cost of acquisition adjusted using the Cost Inflation Index, gain taxed at 20%.
2. Without indexation, actual cost of acquisition, gain taxed at 12.5%.

The rule. Whichever of the two produces the lower tax payable is the one that applies. If indexation would otherwise create a loss, that loss is simply disallowed. The taxpayer cannot use indexation to manufacture a capital loss; the parallel calculation exists to protect the taxpayer from paying more tax because of the 2024 change, not to create a new tax-saving opportunity.

The three property scenarios, for contrast:

Mr Oberoi bought a plot of land in 2010 for Rs 20,00,000, and sells it in December 2024 for Rs 90,00,000. Because the purchase predates 23 July 2024 and the sale is after it, a parallel calculation is required. Assume the applicable Cost Inflation Index turns his Rs 20,00,000 cost into an indexed cost of Rs 42,00,000.

Method 1: with indexation
  Sale value                 Rs 90,00,000
  Less: indexed cost         Rs 42,00,000
  Gain                       Rs 48,00,000
  Tax at 20%                 Rs  9,60,000

Method 2: without indexation
  Sale value                 Rs 90,00,000
  Less: actual cost          Rs 20,00,000
  Gain                       Rs 70,00,000
  Tax at 12.5%                Rs 8,75,000

Method 2 gives the lower tax, Rs 8,75,000, so that is what Mr Oberoi pays, even though its computed gain looks larger on paper. Had indexation instead pushed his cost so high that Method 1 showed a loss, that loss would simply be disallowed, and he would fall back to Method 2's positive gain.

Chapter 8 (Capital Gains), section 8.5 (Computation of Capital Gains from Transfers), states the parallel calculation as the transition rule for immovable property spanning the 23 July 2024 change, alongside the broader withdrawal of indexation. Expect a two-column computation question exactly like the one above, testing whether the candidate correctly picks the lower of the two results.

• The parallel calculation applies only to land and buildings, acquired before and sold after 23 July 2024, not to other capital assets, which simply lose indexation outright from that date.
• Always pick the lower tax, not the lower gain. With different rates, 20% versus 12.5%, applying to each method, the lower gain does not always mean the lower tax.
• A loss generated purely by indexation is disallowed. The parallel calculation cannot be used to manufacture a capital loss.
• Property acquired on or after 23 July 2024 never gets indexation at all, even if held long-term. The parallel calculation is only for property that straddles the cut-off date.