Indexation Relief under the Finance (No. 2) Act, 2024

Technical Insight | Capital Gains | Finance (No. 2) Act, 2024 | June 2026

Executive Summary

The Finance (No. 2) Act, 2024 changed the long-term capital gains regime in a manner that appears simple at first sight: a lower tax rate of 12.5% was introduced for several long-term capital gains, while indexation was substantially restricted for transfers made on or after 23 July 2024. However, in response to concerns around immovable property, a transitional relief was retained for resident individuals and HUFs in respect of land or building acquired before 23 July 2024.

The practical issue now emerging in return preparation is more nuanced. Where the indexed computation for one property results in a notional loss, can that loss be adjusted against long-term capital gains arising from another property or another capital asset?

On a plain reading of the amended framework and the official return forms, the stronger and safer view is that the indexed computation under the transitional rule is a tax comparison mechanism. It determines whether the tax under the 12.5% regime should be reduced by ignoring the excess over the old-law tax. It does not appear to create a separate, transferable long-term capital loss that can be set off against other capital gains.

This conclusion is not because the ITR utility is law. The utility cannot override the Act. The conclusion is based on the wording of the proviso to section 112(1)(a), the amendment made to section 48, the structure of sections 70 and 74, and the manner in which the ITR forms compute the relief. Since this is a recent amendment and the precise issue has not yet been judicially tested, taxpayers with substantial exposure should retain a detailed computation note and professional advice.

1. Why This Issue Has Become Important

Capital gains changes introduced in 2024 created a transitional year problem. Many taxpayers sold immovable properties after 23 July 2024 where, under the old indexed regime, the tax would have been lower. The law therefore preserved a form of relief for eligible resident individuals and HUFs. The relief is valuable, but its mechanics require careful reading.

The difficulty arises because indexation can sometimes turn a transaction that is profitable on an actual-cost basis into a loss on an indexed-cost basis. For example, a property may have been purchased long ago, inflation-adjusted cost may exceed the sale consideration, and the indexed computation may show a loss. If the same taxpayer has another long-term capital gain in the same year, it is natural to ask whether the indexed loss can be set off.

This is not merely an academic point. In high-value property cases, the difference between allowing and denying the set-off can materially change the tax liability. It also affects how tax professionals explain the ITR utility output to clients, especially where the utility calculates tax on gains without reducing them by the indexed loss visible in the working papers.

2. The Statutory Change in Brief

2.1 Amendment to Section 48

Section 48 is the core computation provision for capital gains. It permits deduction of expenditure connected with transfer and the cost of acquisition/improvement. Prior to the 2024 change, indexation under the second proviso was a familiar part of computing long-term capital gains in many cases.

The Finance (No. 2) Act, 2024 inserted the words “which takes place before the 23rd day of July, 2024” in the second proviso to section 48. The practical consequence is that indexation under section 48 is generally confined to transfers before 23 July 2024, subject to specific transitional relief under section 112 for eligible land/building cases.

2.2 Substitution of Section 112 Rates

Section 112 deals with tax on long-term capital gains. For resident individuals and HUFs, the amended provision applies 20% for transfers before 23 July 2024 and 12.5% for transfers on or after 23 July 2024. For qualifying land/building transactions, the further proviso protects eligible taxpayers from excess tax.

The relevant protection is important. In case of transfer of a long-term capital asset being land or building or both, acquired before 23 July 2024, if the tax computed at the new 12.5% rate exceeds the tax computed as per the old provisions as they stood before the Finance (No. 2) Act, 2024, such excess is to be ignored.

3. The Question: Tax Relief or Capital Loss?

The central question is not whether indexation is relevant at all. It clearly remains relevant for the limited purpose of computing the transitional tax relief in eligible cases. The real question is whether the indexed computation also operates as the final capital gains computation for section 70 set-off purposes.

There are two possible ways to look at the issue.

In our view, View B is the safer and more supportable position for return filing unless a taxpayer is prepared to litigate the issue.

4. A Practical Illustration

Consider the following simplified example for a resident individual in FY 2025-26. Both properties are long-term capital assets. Both were acquired before 23 July 2024 and sold after that date.

If the indexed loss of Rs. 8 lakh from Property A is treated as a real long-term capital loss, it could be argued that it should be set off against the indexed gain of Property B or against other long-term gains. However, this approach uses the transitional relief as if it creates a second computation stream for total income.

The more conservative approach is different. The post-amendment capital gain is first determined under the amended framework. The old indexed computation is then used only to test whether the tax under the new 12.5% method exceeds the old-law tax. If there is excess tax, the excess is ignored. If the indexed computation produces a negative figure, it does not travel into section 70 as an independent loss.

5. Reading Sections 45, 48, 70, 74 and 112 Together

5.1 Section 45: The Charging Provision

Section 45 charges profits or gains arising from transfer of a capital asset to tax under the head “Capital gains”. It does not independently answer how an indexed loss under the transitional comparison is to be treated. The computation architecture has to be examined through section 48 and the set-off provisions.

5.2 Section 48: Computation of Capital Gains

Section 48 is the mode of computation. After the Finance (No. 2) Act, 2024, the second proviso granting indexation benefit is linked to transfers taking place before 23 July 2024. Therefore, for post-23 July 2024 transfers, the normal computation no longer operates in the same way as the old indexed regime.

For eligible immovable property, indexation has not disappeared altogether; it survives through the limited protection in section 112. But the location of the relief is important. It sits in a tax-rate provision, not in the general computation or set-off provisions.

5.3 Section 70: Intra-Head Set-Off

Section 70 permits set-off of loss from one source against income from another source under the same head, subject to specific rules. In capital gains, short-term capital loss has wider set-off flexibility, while long-term capital loss can be set off only against long-term capital gains.

For section 70 to apply, there must first be a capital loss recognised under the computation provisions. A figure generated only for comparing tax under section 112 is not automatically the same thing as a loss computed for purposes of total income.

5.4 Section 74: Carry-Forward of Capital Losses

Section 74 deals with carry-forward and set-off of capital losses. If a notional indexed loss is not a recognised loss for section 70 purposes, it should likewise not be carried forward under section 74. Treating the comparison loss as capable of carry-forward would expand the relief beyond the statutory wording and beyond the apparent purpose of the transitional protection.

5.5 Section 112: A Tax Computation Provision

Section 112 determines tax payable on long-term capital gains. The second proviso to section 112(1)(a), for eligible land/building transfers, operates by comparing the new-tax result with the old-law tax result and ignoring the excess. The phraseology is tax-centric. It does not say that the old-law computation shall substitute the capital gain for all purposes of the Act, nor does it say that a loss so arrived at shall be available for set-off.

6. What the Official ITR Forms Indicate

The official ITR forms provide useful insight into the computational design, even though the form or utility cannot override the statute. For AY 2026-27, Schedule CG in ITR-3 refers to the indexed/alternate computation for residents “only for the purpose of computing” the relief under the second proviso to section 112(1)(a), and where the relevant balance is negative, it is to be considered as nil for that purpose.

This is significant. A negative result in the alternate indexed computation is not being carried into the ordinary capital gains total or the brought-forward loss adjustment mechanism. It is confined to computing the “excess amount to be ignored” in tax. This is consistent with the reading that the relief is a tax adjustment, not a loss-creation rule.

7. Arguments in Favour of Allowing Set-Off

A taxpayer adopting a favourable interpretation may argue that if old-law computation is preserved for eligible immovable property, the entire computational result, including a loss, should be respected. The taxpayer may also argue that beneficial provisions should be interpreted liberally and that the law does not expressly prohibit set-off of an indexed loss.

These arguments are not frivolous. In tax law, the text of the statute matters, and where the statute allows a computation method, a taxpayer may contend that both gains and losses flowing from that computation must be recognised. This is why the issue should not be described as completely free from doubt.

However, this argument faces a major difficulty: the transitional relief is not drafted as an amendment to section 48 permitting an alternative computation for all purposes. It is drafted within section 112 as a comparison of income-tax. The statute does not use deeming language to convert an indexed negative amount into a capital loss.

8. Arguments Against Allowing Set-Off

The stronger view, in our opinion, is that the indexed loss should not be set off. The reasons are practical as well as legal.

• The amended section 48 restricts indexation for transfers on or after 23 July 2024, subject to the separate section 112 relief.
• The proviso to section 112 does not recompute total income; it compares income-tax under two methods and ignores excess tax.
• Sections 70 and 74 have not been amended to recognise or preserve a notional indexed loss under the section 112 comparison.
• The ITR forms use the alternate computation only for calculating the relief and treat negative alternate results as nil.
• Allowing such losses to be set off against unrelated gains could convert a protective tax-relief mechanism into a broader tax shelter, which does not appear to be the object of the amendment.

The phrase “such excess shall be ignored” is especially important. It directs the computation mechanism to ignore excess tax. It does not direct the taxpayer to substitute the indexed result as the capital gains figure for all purposes of the Act.

9. Recommended Filing Position

For routine return filing, the safer approach is to follow the official ITR utility and not manually reduce other long-term capital gains by a notional indexed loss that arises only under the section 112 transitional comparison.

Where the tax amount involved is significant and the taxpayer wishes to take a contrary view, the matter should be treated as an interpretative tax position. In such cases, the taxpayer should consider retaining a detailed note, obtaining professional advice and being prepared for CPC adjustment or assessment-level examination.

10. Decision Flow for Practitioners

11. Frequently Asked Questions

12. Closing Perspective

The transitional indexation relief under the Finance (No. 2) Act, 2024 was introduced to avoid hardship for resident individuals and HUFs in eligible immovable property cases. It allows taxpayers to effectively benefit from the lower tax result between the new 12.5% regime and the old indexed-tax basis.

But the relief should not be stretched beyond its text. A provision that ignores excess tax should not, without clear words, be read as a provision that creates or preserves a capital loss for set-off against other gains. The official ITR forms reinforce this distinction by treating the alternate indexed computation only as a relief computation and by neutralising negative figures for that purpose.

Accordingly, until a specific CBDT clarification or judicial decision provides otherwise, the practical and defensible position is to follow the ITR utility and not claim set-off of a notional indexed loss arising solely from the section 112 transitional comparison.

References Reviewed

• Finance (No. 2) Act, 2024, Act No. 15 of 2024, Gazette of India, published on 16 August 2024.
• Income-tax Act, 1961, section 48, as amended by the Finance (No. 2) Act, 2024.
• Income-tax Act, 1961, section 112, including proviso applicable to resident individual/HUF for land or building or both acquired before 23 July 2024.
• Income Tax Department capital gains guidance page, reviewed for general explanation of revised capital gains tax rates and immovable property indexation relief.
• PIB/CBDT FAQs on the new capital gains tax regime dated 24 July 2024.
• ITR-2 and ITR-3 forms/instructions for AY 2026-27, Schedule CG and related treatment of section 112(1)(a) relief.