Bye Bye Indexation: LTCG rate reduced to 12.50% from 20%
Effective from 23rd July 2024, the tax rate on Long Term Capital Gains (LTCG) from the sale of immovable property has been proposed to be reduced from 20% to 12.50%. This seemingly positive change comes with a significant caveat: the benefit of indexation has been removed. The new 12.50% LTCG rate applies without any indexation benefit, a shift that has sparked widespread debate and confusion among taxpayers. Let’s delve into the details to understand the implications of this change.
Purpose of Indexation:
The effect of inflation over money was compensated by using the tool of indexation. Inflation erodes the purchasing power of money over time & indexation used to bring the cost of the assets at a higher value so as to remove the impact of inflation. Indexation was aimed to offset the inflationary trend and find out the inherent appreciation in the value of the Assets. As a result, the taxable capital gain & resultant tax liability was lower.
Whether it will be beneficial for the Taxpayers:
a)The elimination of indexation benefits is a major concern, especially for long-term property holders. The elimination of indexation benefits is a matter of significant concern, especially for those taxpayers who are holding properties for a long time. To illustrate this, let us consider the case of Mr. X & Mr. Y who both purchased a property for Rs. 100/- in FY 2001-02. Mr. X sold his property in FY 2024-25 for Rs. 500, while Mr. Y sold his for Rs. 2,000. The indexed cost of acquisition of the property purchased in FY 2001-02 for Rs. 100/- is Rs. 363/- in FY 2023-24. The tax liabilities under both the old regime with tax rate of 20% with indexation benefit and under new systems of 12.50% rate without Indexation benefit would have been as under:
| Person | Tax @ 20% with indexation benefit | Tax @ 12.50% without indexation benefit | Tax Saving |
| Mr. X | 27.40 | 50.00 | (22.60) |
| Mr. Y | 327.40 | 237.50 | 89.90 |
In this example, Mr. X tax liability has increased by Rs. 22.60 despite the reduced tax rate from 20% to 12.50, whereas Mr. Y saved the tax of Rs. 89.90 as a result of reduction in the tax rate. Whether the reduction in the tax rate is beneficial or not would depend upon the period of holding as well as appreciation in the value of the property. Properties that have significantly appreciated will benefit more from the new rate, while those with stagnant or minimal appreciation may face higher tax liabilities.
b)As far as Gold & Silver acquired prior to 01.04.2001 is concerned, the rate of 12.50% without indexation benefit would be beneficial for the taxpayers.
Whether 20% or 12.50% rate is optional:
The new rate of 12.50% is mandatory with no option for taxpayers to choose between the old 20% rate with indexation and the new rate of 12.50% without indexation.
Impact on Capital Gain Exemption:
Though the reduction in tax rate & removal of indexation benefit is aimed at simplification & rationalization of the capital gain taxation, it might pose some challenges for individuals looking to sell properties. For claiming an exemption under section 54 as well as 54EC, taxpayers will now be required to invest the higher amounts as the LTCG amounts would be higher now due to removal of indexation benefit. Additionally, there is a ceiling of Rs. 50 Lakh for exemption under section 54EC which may make full LTCG exemption claim difficult for majority of the taxpayers.
Unchanged aspects in Budget – 2024:
Following aspects of capital gains taxation remain unchanged:
1. The period of holding of 2 years for recognizing the immoveable property as Long Term Capital Assets has remained unchanged.
2. 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.
3. 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. There is some confusion & rumour that the indexation benefit would still be available if the asset is acquired prior to 01.04.2001. I would like to clarify that the Finance Bill doesn’t provide for it and no indexation benefit would be available in respect of assets acquired prior to 01.04.2001.
Conclusion:
The changes in the long-term capital gains (LTCG) tax regime, particularly the withdrawal of the indexation benefit, has become one of the most contentious decisions of the Union Budget for 2024-25. The elimination of indexation benefit is expected to have a significant impact by potentially increasing the tax liability on property transactions. Notably, this removal of indexation benefits extends beyond immovable properties to include other assets such as gold, ornaments, shares, rights, etc. Except in case of capital gain exemption by investment in another house property or bonds, every taxpayer selling the immoveable would now be required to contribute some amount to the exchequer. In summary, while the reduction in the LTCG tax rate to 12.50% might appear beneficial, its impact varies based on individual circumstances. Taxpayers must carefully evaluate their specific situations, considering the appreciation of their assets and the new mandatory rate, to understand how this change affects them.
[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]
The copy of the order is as under:
