Removal of Indexation Benefit: The Impact on NRIs

Budget 2025, which become 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 Finance Bill, 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 transfer of all long-term capital assets, including immovable properties, in the name of simplification of taxes.

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 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.

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 re-calculated 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 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 year of purchase, compounded annual growth rate of the property over the period of holding as compared with inflation, and profit margin. One cannot be proved to be better over 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, 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.