Selling a house in 2026: 12.5% without indexation or 20% with it, which is lower?

Rules and rates as of 12 October 2026.

The short version

If you are a resident individual or HUF and you sell a house, flat or plot this year that you bought before 23 July 2024, the law lets you pay the lower of two figures: tax at 12.5% on the gain worked out without indexation, or tax at 20% on the gain worked out with indexation. You do not have to pick one in advance. The statute simply says the extra tax under the 12.5% method is "ignored" if it is higher than the 20%-with-indexation figure.

Which one comes out lower depends mostly on two things: how long you held the property, and how much its price rose. This article walks through both methods with real Cost Inflation Index numbers, then shows a case where the answer flips.

Where the rule sits now

From 1 April 2026 the Income-tax Act, 2025 replaced the 1961 Act. The tax on long-term capital gains is now in section 197 of the 2025 Act (formerly section 112 of the 1961 Act). Section 197(1)(b) sets the rate at 12.5%. Section 197(3) carries forward the relief that the Finance (No. 2) Act, 2024 added to the old section 112.

Section 197(3) works as a formula: E = A minus B. Here A is the tax at 12.5% without indexation, B is the tax at 20% with the cost of acquisition and cost of improvement replaced by their "indexed" versions, and E, the excess, is ignored. In plain terms: you pay whichever of A or B is smaller.

Three conditions, all in the text of section 197(3):

• The seller is an individual or a Hindu undivided family, being a resident. Non-residents, companies and firms do not get this comparison.
• The asset is land or building, or both. Shares, gold and mutual funds are not covered.
• It was acquired before 23 July 2024.

The property must also be a long-term capital asset. Under section 2(101) of the 2025 Act, land or a building held for not more than 24 months before the sale is short-term, so you need to have held it for more than 24 months.

How indexation works

Indexation scales your purchase price up for inflation, using the Cost Inflation Index (CII) the government notifies each year. Section 72(8)(b) of the 2025 Act defines indexed cost as:

Indexed cost = Purchase cost × (CII for the year of sale ÷ CII for the year of purchase)

The CII for 2026-27 is 384 (CBDT notification No. 85/2026, 15 July 2026). The Income Tax Department's CII table gives 254 for 2015-16 and 317 for 2021-22, with 2001-02 as the base year at 100.

If you bought before 1 April 2001, indexation starts from 2001-02, and section 90(9) and (10) of the 2025 Act let you use the fair market value on 1 April 2001 as your cost instead of what you paid. For land or building, that value cannot exceed the stamp duty value on 1 April 2001, where one is available.

Worked example: a flat bought in 2015-16

Suppose you bought a flat in 2015-16 for ₹60 lakh and sell it in October 2026 (tax year 2026-27) for ₹1.35 crore. To keep the arithmetic clean, assume no improvement cost, no brokerage or transfer expenses, and no exemption claimed.

Method A: 12.5% without indexation

• Gain = ₹1,35,00,000 − ₹60,00,000 = ₹75,00,000
• Tax = 12.5% × ₹75,00,000 = ₹9,37,500
• With 4% health and education cess: ₹9,37,500 × 1.04 = ₹9,75,000

Method B: 20% with indexation

• Indexed cost = ₹60,00,000 × 384 ÷ 254 = ₹90,70,866
• Gain = ₹1,35,00,000 − ₹90,70,866 = ₹44,29,134
• Tax = 20% × ₹44,29,134 = ₹8,85,827
• With 4% cess: ₹8,85,827 × 1.04 = ₹9,21,260

Method B is lower by about ₹53,740 (after cess), so under section 197(3) that is what you pay. Indexation raised your cost by more than half, which is why the higher 20% rate still wins.

When the answer flips

Now take the same ₹60 lakh purchase and the same ₹1.35 crore sale, but say you bought in 2021-22 instead.

• Method A is unchanged: gain ₹75,00,000, tax with cess ₹9,75,000.
• Method B: indexed cost = ₹60,00,000 × 384 ÷ 317 = ₹72,68,139. Gain = ₹62,31,861. Tax = ₹12,46,372; with cess ₹12,96,227.

Here 12.5% without indexation is lower by about ₹3.21 lakh. Five years of inflation adjustment did not shrink the gain enough to offset the jump from 12.5% to 20%.

Price growth matters too. For the 2015-16 flat, solving 12.5% × (S − ₹60 lakh) = 20% × (S − ₹90,70,866) gives a break-even sale price of about ₹1.42 crore. Sell for more than that and Method A becomes cheaper; sell for less and Method B is cheaper.

Case	Gain, no indexation	Tax at 12.5% + cess	Gain, indexed	Tax at 20% + cess	Lower
Bought 2015-16 for ₹60 lakh, sold Oct 2026 for ₹1.35 crore	₹75,00,000	₹9,75,000	₹44,29,134	₹9,21,260	20% with indexation
Bought 2021-22 for ₹60 lakh, sold Oct 2026 for ₹1.35 crore	₹75,00,000	₹9,75,000	₹62,31,861	₹12,96,227	12.5% without

The pattern: the longer you have held the property, and the slower its price has grown relative to inflation, the more likely indexation wins. Recent purchases and fast-appreciating properties tend to favour the flat 12.5%.

What the example leaves out

• Surcharge. A large gain can push your total income into the bands where surcharge applies. Surcharge is added before cess and changes the final number, so a chartered accountant should work it out on your actual income.
• Improvement and transfer costs. Documented improvement costs reduce the gain, and section 197(3) indexes them under Method B. Expenses of the sale itself, such as brokerage, also reduce the gain; check with your CA which ones qualify.
• Low total income. Section 197(2) lets a resident individual or HUF whose other income is below the basic exemption limit use the unused limit against the gain.
• Exemptions. Reinvesting in another house or in specified bonds can reduce or remove the tax. That is a separate set of rules, covered in a separate article.
• Non-residents. Section 197(3) offers the comparison only to resident individuals and HUFs, so on our reading a non-resident seller is taxed at 12.5% without indexation. NRI sellers should confirm this with a CA.

This is an explanation of how the law computes the tax, not tax advice. Your own numbers depend on your purchase documents, any inheritance or gift history, and your other income. Take them to a CA before you file.