Removal of Indexation Benefit: The Impact on NRIs

Budget 2025, which became law on 29 March 2025, has been widely praised by Indian citizens, particularly for its focus on the working and middle-class segments. A key highlight is the increased rebate slab, which now provides income tax exemption on income up to ₹12 lakh. However, the budget has left the NRI community disheartened, as their long-standing request for the restoration of indexation benefits on the sale of real estate properties remains unaddressed.

The Background

The

FinanceBill, 2024, when first presented in the Lok Sabha on 23 July 2024, sought to introduce a significant shift in the landscape of capital gain taxation by proposing to eliminate the benefit of indexation on the transfer of all long-term capital assets, including immovable properties, in the name of simplification of taxes. tax relief that indexation provides, particularly in the case of long-term capital gains from real estate sales. The impact of this policy change was felt deeply by many in the NRI community, particularly those who had invested in Indian real estate with the understanding that indexation would help mitigate inflation-driven capital gains tax liabilities.

This change marked a pivotal moment as the long-standing practice of adjusting gains for inflation was taken out, and the impact is expected to be cushioned by the lowered capital gains tax rates of 12.5% without the benefit of indexation, as against the earlier rate of 20%.

In response to widespread public dissatisfaction that followed, the Bill was amended on 07 August 2024 and later received the presidential assent on 16 August 2024, allowing taxpayers to choose between:

(i) 20% with indexation; or

(ii) 12.5% without indexation

in respect of all transfers relating to immovable properties acquired before 23 July 2024. 

Shockingly, this choice was extended only to resident taxpayers, leaving non-resident Indians (NRIs) to pay tax at a flat rate of 12.5% without indexation.

This distinction created a significant financial disadvantage for NRIs, as they were left without the crucial

What is Indexation and How did it come into the picture?

In 1991, The Government appointed a

Tax Reforms Committee under Prof. Raja Chelliah to lay out the agenda for reforming India's tax system. In the Chelliah Committee Report it was clearly highlighted how the people’s purchasing power was greatly being eroded by inflation. Thus, in 1991-92, the Indian government introduced Section 48 in the Income Tax Act, 1961, which brought with it the Cost Inflation Index (CII). The purpose of CII was to bring the historical cost of purchase to its present-day value before using it to compute long-term capital gains.

For example, if the sales price of a property is INR 20 lakhs in 2023 while its purchase cost twenty years ago was INR 5 lakhs. Long-term capital gains without indexation would be 15 lakhs (20 lakhs – 5 lakhs).

With indexation, the purchase cost gets recalculated to reflect its 2023 value (5 lakhs x 348 (CII 2023) / 109 (CII 2003) = INR 15.96 lakhs). Hence, with indexation, the capital gains amount is brought down to INR 4.04 lakhs.

It is this benefit of indexation that the Finance Act, 2024, has taken away. Let’s understand the impact with examples:

Whether this new change is beneficial for the public or not depends on multiple factors, such as the year of purchase, the compounded annual growth rate of the property over the period of holding as compared with inflation, and the profit margin. One cannot be proved to be better than the other conclusively, as it varies case to case. However, the benefit of doubt is presently only being given to the Residents as they are the only ones granted an option to choose between the more favourable of the two regimes.

Ongoing Efforts to Reinstate Indexation Benefits for NRIs

Recognizing the significant impact of this policy shift on NRIs, many NRIs, NRI associations, MPs, and MLAs have actively stepped forward to advocate for change. A writ petition was filed by an NRI with the Honourable Kerala High Court, while several NRI associations have rallied support through appeals to Honourable Finance Minister Smt. Nirmala Sitharaman, urging the reinstatement of indexation benefits for NRIs in Budget 2025.

Despite this widespread advocacy and growing public support, lawmakers have not addressed these concerns. NRIs, especially those in the GCC countries, maintain strong ties with India, and much of their hard-earned money is invested in real estate in India. However, with this change, it appears that the Income-tax Act, 1961, has failed to award NRIs a regular treatment like that of an Indian resident in terms of taxing their investments in India.

While the Income Tax Act treats Residents and NRIs differently, the Foreign Exchange Management Act (FEMA), which is a regulation that governs investments in India by Non-Residents, treats NRIs at par with Residents when it comes to investing in Real Estate in India. This disparity, where NRIs receive favourable treatment during purchase but face disadvantages at the time of sale, raises questions about the fairness of the law. However, there remains hope that this issue will be revisited in the future, leading to a fairer resolution for Non-Resident Indians.

Conclusion

Ever since indexation benefits were removed in the Finance Bill of 2024, NRIs have faced heavy tax burdens on long-term capital gains from property sales. Despite strong opposition from both residents and NRIs, the government brought back the option of indexation—but only for resident taxpayers. This move has put a lot of financial pressure on NRIs, many of whom have contributed significantly to India’s economy through investments and remittances.

As shown above, indexation helps reduce the tax burden by adjusting the cost of property for inflation. Without it, NRIs are forced to pay much higher taxes. Unfortunately, no changes have been made since then.

However, there is still hope. Ongoing efforts by NRI groups and public representatives indicate that there remains hope that this issue will be reviewed in the future and provide a fairer solution for NRIs. Many are optimistic that indexation benefits will be reinstated for NRIs in a future budget, leading to a fairer tax system.

FAQs

Is removing indexation good or bad?

The removal of indexation is not universally good or bad.

For older properties, it can increase the tax burden due to higher inflation-adjusted cost loss.

However, the long-term capital gains (LTCG) tax rate has been reduced to 12.5%, which may benefit recent investors with lower appreciation.

Why was indexation removed in the budget?

The government aims to simplify the capital gains tax structure by removing indexation and applying a flat tax rate, making compliance easier and tax treatment more uniform.

Is indexation benefit completely removed?

The indexation benefit is entirely removed for NRIs in the recent Union Budget for any transfer that takes place on or after 23 July 2024.

Will the government bring back the indexation benefit?

Initially, the removal applied to both residents and NRIs, but after public feedback, indexation was restored for residents. As of now, NRIs remain excluded, though industry bodies and professionals are appealing for its reinstatement in future budgets.