In response to criticism regarding the Budget proposal to eliminate the indexation benefit on long-term capital gains (LTCG) from the sale of unlisted assets, the government has introduced an option for taxpayers.
Capital Gain Tax
A capital gains tax is levied on the sale of an asset, calculated as the difference between the sale price and the purchase price.
Gains or losses from selling a house property fall under the 'Capital Gains' category.
Capital gains or losses can also arise from selling other assets like stocks, mutual funds, bonds, and various investments.
Types:
Short-term Capital Gains: Applies to assets held for a period shorter than the defined threshold.
Long-term Capital Gains: Applies to assets held beyond the specified threshold.
Budget 2024 and Capital Gain Tax: Assets will be classified as long-term or short-term based on two holding periods: 12 months for listed securities and 24 months for other assets. The previous 36-month period has been eliminated.
Tax Rate Changes:
Short-Term Capital Gains on listed equity shares, equity-oriented funds, and business trusts now face a 20% tax rate, up from 15%.
Short-term gains from other financial and non-financial assets continue to be taxed at slab rates.
The exemption limit for Long-Term Capital Gains on equity shares, equity-oriented units, or business trusts has been increased from Rs.1 lakh to Rs.1.25 lakh per year.
The tax rate on these gains has risen from 10% to 12.5%. The tax rate for long-term capital gains on other assets has been reduced from 20% to 12.5%.
Indexation Benefits:
Indexation adjusts the purchase price of a property for inflation, reducing taxable capital gains by accounting for inflation over the investment period.
This adjustment ensures that investors are taxed only on real gains, not inflationary increases.
Calculation:
The government provides Cost Inflation Index (CII) numbers to adjust capital gains.
The formula for the adjusted purchase price is:
Indexed Cost = Purchase Amount (CII in year of sale / CII in year of purchase).
The base year for indexation was initially 1981 and later changed to 2001, with a base value of 100.
Annual index values are calculated relative to this base to ensure the taxable gain reflects real asset value increases, excluding inflation effects.
Impact of Removal of Indexation Benefit:
Slowdown in Resale Market: Owners of older properties may be deterred from selling due to higher tax liabilities, potentially reducing market activity.
Rise in Cash Transactions: Increased tax burdens might lead to a rise in cash transactions to evade taxes, undermining efforts to formalize the real estate market.
Higher Property Prices: Sellers might increase property prices to offset the higher tax costs, shifting the burden onto buyers.
Govt to Restore Indexation Benefit for Property
Budget 2024 Changes: The budget had initially removed the indexation benefit for property sales, imposing a 12.5% LTCG tax rate without indexation.
Previous Status: Indexation benefits, which were formerly available for long-term assets, were eliminated.
Current Tax Rate: Sales of long-term assets after July 23, 2024, will incur a 12.5% tax rate without indexation.
Restoration of Indexation Benefits:
Retroactive Adjustment: Indexation benefits will remain applicable for properties bought or inherited before 2001.
Government Response: In reaction to widespread criticism, the government decided to restore indexation benefits on property transactions.
Finance Bill Amendment: The Finance Bill, 2024, has been amended to offer taxpayers a choice: either a 12.5% LTCG tax rate without indexation or a 20% rate with indexation for properties acquired before July 23, 2024.
Taxpayer Choice: Residents can now select the tax rate option that is more advantageous for properties acquired before the specified date.
Initial Exclusion: Initially, properties purchased after April 1, 2001, were not included under any grandfathering provisions.
For properties bought before July 23, 2024, taxpayers can choose to either pay LTCG tax at 20% with the indexation benefit or at the new rate of 12.5% without the indexation benefit. This adjustment is a result of amendments made by the government to the Finance Bill.
