Indexation benefit restored: Finance Bill 2024 passed by Loksabha
The Finance Bill 2024 is passed in the Lok Sabha on Wednesday, August 7th, 2024 with around 45 new amendments & now waiting for the presidential assent. Most of the amendments were intended to remove ambiguities/ uncertainties arising from the proposals as contained in the Bill. However, there is one important substantial amendment that has been done during the passage of the bill in the Loksabha. It is with regard to the indexation benefit on transfer of capital assets. In the original Finance Bill – 2024 (No. 2) presented by Finance Minister Nirmala Sitharaman on 23rd July 2024, capital gain tax rate on Long Term Capital Gains (LTCG) on sale of immoveable properties was proposed to be reduced to 12.50% from 20%. The indexation benefit was also proposed to be taken away in totality.
After backlash & criticism from different quarters of the country, the Finance Minister has decided to restore back the indexation benefits. However, the restoration of the indexation benefit back in the statute book is altogether in a different form & mode. It is not the same as it was earlier. Let us see what has changed and how it would impact the taxpayers:
1. Grandfathering of Assets Purchased Before July 23, 2024:
Now, the LTCG tax on the sale of assets purchased before July 23, 2024 can be computed under the old scheme with indexation benefit & the new scheme without indexation benefit. Taxpayers can compare the tax & opt for the option under any one scheme. In short, if the tax calculated @ 12.50% is higher than taxpayers may continue to offer the tax @20% by availing the indexation benefit.
In short, the benefit of grandfathering to LTCG on the sale of immovable property acquired before July 23, 2024 is offered now.
2. New Assets Purchased After July 23, 2024:
All the properties purchased on or after 23.07.2024will not be having any extended benefit of indexation. It will be compulsorily required to be calculated without any indexation benefit and would be taxable @ 12.50%.
3. Eligibility for the Benefit:
The benefit of 20% with indexation or 12.50% without indexation is given only to Resident Individual & Hindu Undivided Families (HUFs) only. This benefit is not available to Companies, LLP, LLP, Firms, etc. Similarly, this benefit is also not available to NRI.
4. Applicability Limited to Immovable Properties:
The benefit is available only on sale of Land & Building (be it house, plot, commercial properties, etc) and not available on transfer of any other capital asset such as gold, ornaments, shares, rights, etc. Such other assets would be mandatorily covered by only one option of paying tax @12.50% without any indexation benefit.
5. Determining LTCG Tax::
If the taxpayers opt for the regime of 20% with indexation benefit and if it results in a Long Term Capital Loss as a result of indexation then such loss will not be allowed to be set off or carried forward. It will get lapsed. However, if the loss is there without indexation then such loss would continue to be eligible for set off and carry forward benefit.
6. How to determine the LTCG tax now?:
Now, Resident Individual & HUF would be required to work out capital gain computation in following two steps:
a) Steps – I:
Compute the LTCG tax on sale of immovable property @20% after factoring indexation benefit.
b) Step – II:
Compute the LTCG tax on sale of immovable property @12.50% without factoring indexation benefit.
With the above two steps, taxpayers can choose the beneficial option and will have the flexibility of paying the tax accordingly.
7. Earlier Law and Present Law:
a)In earlier law, the taxpayers were having an option to carry forward the Long Term Capital Loss arising even after indexation. The same would not be there now. Loss arising due to indexation will not be allowed to be set off or carry forward. However, if there is a loss without indexation then such loss will be allowed to be set off and carry forward.
b)The period of holding of 2 years for recognizing the immoveable property as Long Term Capital Assets has remained unchanged.
c)Any gain arising from sale within 2 years would continue to be considered as Short Term Capital Gains (STCG) & will continue to remain taxable at applicable tax slab of the individuals.
d)If the property is acquired prior to 01.04.2001, then the option to adopt the lower of stamp duty value or fair market value as on 01.04.2001 would still be there.
Impact on Capital Gain Exemption:
Though taxpayers have an option to choose between two tax rates, the exemption benefit may not be the same as it was in the earlier regime. Taxpayers merely have an option to pay tax @ 20% or 12.50%. Indexation benefit is restored for the limited purpose of computing LTCG tax liability only. The mode of computation as originally proposed in the Finance Bill (No. 2) 2024 has not been changed. Now, LTCG would now continue to be the difference between the Sale consideration (i.e., full value consideration) as reduced by transfer expenses and the cost of acquisition & improvement without indexation benefit. As a result of this, for claiming an exemption under section 54 as well as 54EC, taxpayers will now be required to invest the higher amounts as the LTCG would be higher due to removal of indexation benefit. Further, the ceiling of Rs. 50 Lakh for exemption under section 54EC may make full LTCG exemption claim difficult for majority of the taxpayers.
Conclusion:
The changes in the long-term capital gains (LTCG) tax regime, particularly the withdrawal of the indexation benefit for capital gain computation, has become one of the most contentious decisions of the Union Budget for 2024-25. By carrying out the necessary amendment, the taxpayers have been compensated from the burden of additional tax liability. Taxpayers have been conferred with the benefit of both the world & taxpayers will be in a total win – win situation. However, the fact remains; the more the Government aims to simplify the tax laws, more complexities are added therein.
[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]
