Whether the new capital gain tax regime regarding non-financial assets is unfair to the extent it ignores time value of money?
One of the very significant aspects of the proposals made by the Finance (No.2) Bill, 2024 (FB 2024) is revamping of the capital gain tax regime with a cut-off date of July 23, 2024. While the long-term capital gain tax rate applicable on sale of immovable properties is proposed to be reduced from 20% to 12.5%, its impact will be different on different persons in view of the fact that the indexation benefit is also proposed to be withdrawn.
Does it look fair to levy flat rate of tax on gain in absolute terms on two persons, one purchasing the property on say April 01, 2001, and another purchasing the property on say April 01, 2021. In this case, the person who had purchased the property in 2001, he suffers time value of money for 23 years and on the other hand the person who had purchased the property in 2021 will suffer time value of money for only 3 years, and the proposals will treat both of them equally!
Immovable properties (particularly residential houses), by nature, are different from financial assets and generally a large section of common man acquires the same not for trading but as a core investment to be held for a long-term. The new regime seems to have significant impact, and everyone seems to be trying to figure out as to whether in his particular case, he will be better off or worse off…
Government should have taken a sympathetic view of the issue and should not make the date of July 23, 2024, as the cut-off date. The Government may consider one or more of the following:
1. Restore indexation benefit for immovable properties acquired upto July 22, 2024.
2. Amend section 55(2)(b)(i) of the Income-tax Act, 1961 to provide that the fair market value of the property as on April 01, 2021, shall be considered as ‘cost of acquisition’ (presently, it is based on April 01, 2001).
3. Make the proposals effective from transfer of property happening on or after say, April 01, 2026, so that the taxpayers (particularly individuals and for properties below a particular threshold) have sufficient time to understand the implications and plan accordingly.
4. Make the proposals as a default regime and give an option to the taxpayers to be governed by the existing regime for a defined duration, say upto assessment year 2027-28.
