The Finance No2 Bill 2024 has as many as 99 clauses relating to the Income-Tax (I-T) Act. As always, many of these are justified as being rationalisations and simplifications and, as always, several are retrospective or have a retroactive impact in that plans that assessees have made, and which are set at nought by amendments, come into effect immediately from 23 July 2024.
The most striking of these is a set of provisions relating to capital gains tax. Up to now, the capital gain on the sale of a property, which is a long-term capital asset, was calculated after deducting 'the indexed cost'. This system was in force for many years and now has peremptorily been removed with effect from Tuesday (23rd July).
An index figure was announced each year with reference to 2001, and the index already announced for FY24–25 is 3.63 times the value as of 1 April 2001 in respect to long-term capital assets. Now, the indexation benefit is being taken away.
This is being done by way of an amendment to the second proviso to Section 48, and the amendment proposed is that only transfers before 23 July 2024 will be eligible for indexation.
Fortunately, Section 55(2)(b)(i), which provides for the step up to the value as of 1 April 2001, in the case of a capital asset which was acquired before 2001, has not been removed or amended.
There are many transactions in the process just now where an assessee proposed to sell the properties and has computed tax liability based on the indexation from 2001 or from the date of acquisition, whichever is later. These calculations will now no longer be applicable.
The rate of tax on a long-term capital gain will now be 12.5% plus surcharge plus cess. The effect on each transaction will vary and this needs to be looked into. Some illustrations have been provided below:
Illustration 1
Property acquired before 2001:
Value as of 1 April 2001 – Rs1,00,00,000 (Rs1 crore)
Indexed cost as of 2024 – Rs3,63,00,000 (Rs3.63 crore)
Selling price – Rs5,00,00,000 (Rs5 crore)
Capital gains tax before 23 July 2024, i.e., 20% of the gain of Rs1,37,00,000 (Rs1.37 crore)= Rs27,40,000 (Rs27.40 lakh) plus cess plus surcharge
Capital gains tax from 23 July 2024, i.e., 12.5% of the gain = Rs50,00,000 (Rs50 lakh)- plus cess plus surcharge
Illustration 2
Property acquired on 1 April 2018
Cost – Rs1,00,00,000 (Rs1 crore)
Indexed cost as of 2024 – Rs1,29,64,285 (Rs1.29 crore)
Selling price – Rs5,00,00,000 (Rs5 crore)
Capital gains tax before 23 July 2024, i.e., 20% of the gain of Rs3,70,35,715 (Rs3.70 crore)= Rs74,07,143 (Rs74.07 lakh) plus cess plus surcharge
Capital gains tax from 23 July 2024, i.e., 12.5% of the gain = Rs50,00,000 (Rs50 lakh) plus cess plus surcharge
There are several other situations which may arise and need to be considered. One situation is when a non-resident Indian (NRI) has proposed to sell a property and has applied to the assessing officer (AO) under Section 197 of the I-T Act for a certificate for deduction of tax at a lower rate and has been granted such a certificate based on the indexation. Now the certificates may have to be reviewed, or the seller may have to pay more tax.
There are several other amendments in relation to immovable property, of which one has to be mindful. One is Section 194-IA of the I-T Act. This provides for a tax deducted at source (TDS) of 1% on the consideration paid for the purchase of immovable property if the property is worth Rs50 lakh or more.
Now this is being clarified to state that if - for example, the property is worth Rs60 lakh and there are two sellers and each is to receive Rs30 lakh, a buyer, up to now, may not have deducted TDS on the basis that the amount payable to each seller was less than Rs50 lakh. Now the provision will be that TDS will be deducted if the total value of the property is Rs50 lakh or more and not every transaction or payment.
One feature of the I-T Act was that there were different periods applicable for different kinds of assets to determine whether the asset was a short-term capital asset or a long-term capital asset. This period of holding, in some cases, was one year, in others, it was two years and yet, in others, it was three years.
Section 2(42A) is now proposed to be amended to provide that listed securities will be treated as long-term capital assets if they have been held for more than 12 months and all other assets will be long-term capital assets if they have been held for more than 24 months. The category of assets required to be held for three years has now been removed.
The finance minister herself announced that the I-T Act has become complex and a review of the entire Act is to be carried out in the next six months to simplify it. The 99 amendments which have now been proposed could surely have waited for a few months, if the object is truly simplification!
(Anil Harish is a partner of DM Harish & Co Advocates. His practice includes many diverse areas of the law including property, taxation, exchange control and succession. He has been on the managing committee of several institutions in the legal and tax fields. Mr Harish is a director of several prestigious public limited companies and a trustee of several educational and charitable trusts.)
