While rationalising capital gains tax, the removal of indexation benefit from long-term capital gains (LTCG) tax will hit hard those who are holding assets like property, gold and other unlisted assets. In the Budget, Union finance minister (FM) Nirmala Sitharaman says the long-term gains on all financial and non-financial assets will attract a tax rate of 12.5%.
The memorandum explaining the provisions of the Finance Bill says, "...simultaneously with rationalisation of rate to 12.5%, indexation available under second proviso to section 48 is proposed to be removed for calculation of any LTCG which is presently available for property, gold and other unlisted assets. This will ease computation of capital gains for the taxpayer and the tax administration."
Further, no indexation benefit will be available on any asset for sales done from 23 July 2024 onwards. It will also hit hard the transactions that are in the sale process.
Advocate Anil Harish, a partner in DM Harish & Co, says, "The removal of indexation on long-term capital gains is indeed a big blow to many. This loss of indexation, coupled with the fact that it comes into effect immediately and is, therefore, retrospective in a sense, affects many who are in the process of a transaction. From a macro point of view, it runs completely counter to the Union government's constant refrain of 'simplification and rationalisation'."
"Much of it is not simple, and it is certainly not rational, and the law has now even more distinctions than before, without a substantial difference," he added.
Sharing a
sample working on the indexation removal from LTCT tax on X , chartered accountant (CA) Ameet Patel, who is former president of Bombay Chartered Accountants' Society (BCAS) says, for very old properties, the new changes will result in higher tax, and for relatively newer properties, new regime will result in lower LTCG tax. "Tax would be lower in many cases at 12.5% without indexation as compared to 20% with indexation," he added.
Gautam Shahi, director at CRISIL Ratings says for the real estate sector, the impact of changes in taxation is expected to be mixed. "On the one hand, the reduction in the LTCG tax rate from 20% to 12.5% should boost investments over the near to medium term. On the other hand, removing the indexation benefit will increase the tax incidence on property sale, especially for older properties."
According to CA Vimal Punmiya from Vimal Punmiya & Co, the impact of the removal of indexation is co-related to the multiplier of stamp duty paid on the asset. For example, suppose you had paid a stamp duty of Rs10 lakh as of 1 April 2024 for a property. While selling the asset in 2024, if the multiplier value of the stamp duty is eight times (on sale price of Rs80 lakh) than the duty you paid in 2001, then your LTCG would be about Rs8.75 lakh.
However, when the multiplier value increases to 15 times, then your LTCG tax comes down to Rs17.50 lakh under the new regime, compared with Rs22.74 lakh in the old system, he says.
The rate of LTCG under provisions of various Sections of the Act is reduced to 12.5% in respect of all categories of assets. This rate earlier was 10% for securities transaction tax (STT) paid listed equity shares, units of the equity-oriented fund and business trust under Section 112A and for other assets, it was 20% with indexation.
For the benefit of the lower- and middle-income classes, the finance minister proposed increasing the exemption limit of capital gains on certain financial assets from Rs1 lakh to Rs1.25 lakh per year.
She stated that the listed financial assets held for more than a year will be classified as long-term, while unlisted financial assets and all non-financial assets will have to be held for at least two years to be classified as long-term. "...it is proposed that there will only be two holding periods, 12 months and 24 months, for determining whether the capital gains is short-term capital gains (STCG) or LTCG. For all listed securities, the holding period is proposed to be 12 months and for all other assets, it shall be 24 months. Accordingly, an amendment is proposed in clause (42A) of section 2 of the Act. Thus units of listed business trust will now be at par with listed equity shares at 12 months instead of earlier 36 months. The holding period for bonds, debentures, and gold will reduce from 36 months to 24 months. For unlisted shares and immovable property it shall remain at 24 months."
The unlisted bonds and debentures, debt mutual funds and market-linked debentures, irrespective of the holding period, will attract tax on capital gains at applicable rates, the FM added.
In the Budget, the government also increased the rate of STCG tax to 20% from 15%. "...the rate for short-term capital gain under provisions of section 111A of the Act on STT paid equity shares, units of equity oriented mutual fund and unit of a business trust is proposed to be increased to 20% from the present rate of 15% as the present rate is too low and the benefit from such low rate is flowing largely to high net worth individuals. Other short-term capital gains shall continue to be taxed at the applicable rate."
