Indexation Is Back… But With Hidden Side-Effects! (Part 2 of the Surcharge Saga)

 

“The taxpayer can compute the tax under the new scheme which is 12.50% without indexation and the old scheme 20% with indexation and pay such tax which is the lower of the two. Not only we are we coming up with an option, we are also saying calculate under both and tell us, whichever is the lower, you pay tax on that. So, we have given an option sir. This ensures that no one faces additional tax burden due to this change” –

said Finance Minister Nirmala Sitharaman in the Lok Sabha while piloting Finance Bill (No. 2) on August 7, 2024.

 

The Finance Bill was introduced with the lofty aim of simplifying capital gains tax – harmonizing rates and holding periods. But in Indian tax history, every ‘simplification’ comes stitched with a hidden complication. As Nani Palkhivala once quipped, our tax law is “a national disgrace,” because every promise of simplicity ends in a fresh dose of complexity wrapped in legalese.

 

In last week’s column, we discussed how the “return” of indexation looked like a happy ending but actually brought along the Surcharge Monster lurking in the background. Taxpayers who thought they got a choice between 20% with indexation and 12.50% without indexation discovered that the law has a side-effect. No matter which door you picked, the Government was waiting with a surcharge receipt.

But as every Bollywood sequel teaches us – if the villain isn’t finished in Part 1, he will surely return in Part 2 with a bigger army. Today, let’s talk about the other unintended (or should I say “side effects”) of this so-called beneficial amendment.

Act II: The Case of the Vanishing Loss:

Let’s meet Mr. A again. He has been our favorite guinea pig for testing these capital gain rules.

•  Bought property in April 2001 for ₹1 Cr.

•  Sold in March 2025 for ₹3 Cr.

•  Indexed cost = ₹3.63 Cr.

•  Result: An Indexed Loss of ₹63 Lakh.

Now, according to the 20% with indexation method, he has no tax liability – in fact, he has a capital loss! But the law, like a strict mathematics teacher, insists that even if you don’t “use” the 12.50% route, the numbers from that route will still peep into your computation. And what are those numbers?
Without indexation, LTCG = ₹ 2 Cr.
Now, Mr. A also carries a brought-forward LTCG loss of ₹ 1.50 Cr. Here comes the twist:

•  Even though Mr. A doesn’t ultimately pay tax (because indexation gave him a loss), his carried-forward loss will still be set off against the “ghost income” of ₹2 Cr (from the non-indexation method).

•  So instead of carrying forward the entire ₹1.50 Cr, he is left with just ₹ 50 Lakh only.

It’s like ordering dinner, cancelling it, but still being charged for the delivery boy’s petrol!

A Gift That Takes Away:

The Finance Minister’s intention in August 2024 was crystal clear: give taxpayers a fair chance to choose the lower of two tax liabilities. Sounds simple, right? Here’s the irony:

1.  Taxpayer pays lower tax– Yes, that promise is fulfilled.

2.  But the taxpayer’s total income is still computed without indexation – which means surcharge applies even if no actual tax is payable on that part.

3.  Brought-forward losses are eaten up – whether you like it or not, the system gobbles them up against the notional non-indexed gain.

The result? Taxpayers are left wondering if the amendment was a gift or a cleverly wrapped surcharge box.

Fine Print Strikes Back:
The Income Tax Act has a strange sense of humor. It says:

•  “We will restore the indexation benefit.”

•  “But hey, we will still calculate income without indexation.”

•  “Don’t worry, you can pay whichever is lower.”

•  “Oh, by the way, surcharge and loss set-off will be based on the higher number.”

So while you may win the battle of “lower tax,” you lose the war of “other tax consequences.”The way this law is drafted, it’s less of a “menu” and more of a “Buffet Thali.” You don’t really choose; everything lands on your plate, surcharge chutney included.

What Taxpayers Should Keep in Mind:

1.  Re-evaluate your capital loss planning:Don’t assume losses will carry forward like before. Factor in that indexed losses may vanish.

2.  Watch out for surcharge thresholds:Even if you don’t pay higher tax, inflated income could trigger surcharge.

3.  Track both sets of calculations:With two parallel workings (indexed vs non-indexed), keep crystal-clear records — you don’t want to explain arithmetic errors to the tax officer.

Concluding Note:

When Parliament passed this “tax neutral” law in August 2024, the intention was to calm taxpayers. But the execution has created a strange hybrid system: tax liability is lower, yet surcharge bites harder; indexation is back, yet loss carry-forward is weaker. In Indian taxation, just like in Indian cricket, the match is never really over till the last ball is bowled — or in this case, till the last proviso is read. So, dear readers, don’t be swayed by the headline “indexation restored.” The fine print hides an entire tax thriller inside. And as Palkhivala foresaw, every simplification is merely the trailer for the next complication.

[Views expressed are the personal view of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at nareshjakhotia@gmail.com.  Other articles & response to queries are available at www.theTAXtalk.com]