Budget 2024 has brought in a lot of changes in the Income Tax Act and is bound to affect the taxpayers on multiple counts. Generally, all changes have been welcomed except the changes made in “Capital Gains” Tax. There is a constant hue & cry by the real estate industry, the investors & the general assessees at large against the proposed amendments.
There are 2 broad categories on which capital gains arise. One is the capital gains arising out of sale of shares/all listed securities which can be either short term capital gains or long term capital gains. It is pertinent that capital gains arising out of sale of shares where the holding period exceeds one year, the capital gains are termed as Long Term Capital Gains whereas where the holding period is less than 1 year, the gains arising are termed as short term capital gains. However, as per the amendment, the Gains from unlisted bonds and debentures transferred, redeemed or maturing on or after 23 July 2024 will be treated as Short-term Capital Gains (STCG) irrespective of the holding period.
There have been changes in capital gains tax in this category. The short term capital gains (STCG) under section 111A which applies to gains arising from STT paid equity shares, units of equity oriented mutual fund and unit of a business trust has been proposed to be increased from the existing rate of 15% to 20% w.e.f. 23 July, 2024. LTCG under 112A on gains arising from STT paid equity shares, units of equity oriented mutual fund and unit of a business trust, which were earlier taxed @10% above the exemption limit of Rs.1 lakh will now be taxed @12.5 % w.e.f. 23 July, 2024. However, the exemption limit of Rs. 1 lakh has been increased to Rs. 1.25 lakhs w.e.f. 23 July, 2024. Both these proposed amendments will have a dampening effect on the capital market in the long run and the individual investors would be adversely affected. At a time when the Government is committed to make India a forerunner on the economic/financial front, such a step was not warranted as strong capital markets reflect the strength of the economy.
The Second category is capital gains arising out of transfer of all other assets, excluding all listed securities. This category includes immovable properties, debt instruments, gold, silver & jewellery etc. The gains arising from transfer qualify as long-term capital gains if these capital assets are transferred after the holding period of 24 months or more. The rate of capital gains has been reduced from the existing rate of 20% to 12.5% w.e.f. 23-07-2024. All capital gains pertaining to transfers prior to 23-07-2024 would be taxable at the old rates.
There is nothing to be happy on the reduction of LTCG from 20% to 12.5% as there is a catch. From 23-07-2024, no indexation benefit is applicable in case of the said long-term capital assets. Thus, what appears to be a tax savings may in reality be a farce.
The Indexation benefit available for long-term capital assets has now been removed for the calculation of long-term capital gains. The Government claims that this was necessary for Simplification & Rationalization of long term capital gains. It is trite that the CBDT has issued an Indexation table and it is pure arithmetic to calculate the indexed cost. Hence the claim of simplification by the Government does not appear authentic.
In certain cases the assessee may be benefitted by the reduction of LTCG Tax in the current Budget but in most cases the assessee may be at a loss. It can be elucidated by the help of examples as to where the assessee will incur loss under the new change of LTCG from 20% to 12.5% without indexation.
Generally speaking the price rise in metros has been much higher than in the Tier Two cities. The prices in metros have multiplied manifolds. Thus, it is most likely that the assessees selling immovable properties in Metros would find the change favourable whereas those transferring immovable properties in Tier 2 cities would find it unfavorable. But this is a general statement and the impact would differ with the facts & circumstances of each case.
How the assessee, in most of the cases would be adversely affected by the new proposal. It can be shown by the following example. A purchases an immovable property for Rs. 50 lacs in the financial year 2009-10 & sells the same on 25th July, 2024 for Rs.200 lakhs. Let us calculate the LTCG under the earlier and the proposed rates. The Indexed cost for him works to 50,00,000 x 363/148= Rs. 1,22,63,500/-. The LTCG for A under the old rates works out to Rs. 2,00,00,000/- minus Rs. 1,22,63,500/- = Rs. 77,36,500 @ 20%= 15,47,300/-.The LTCG for A under the new proposed rate works to 200 lakhs minus 50 Lakhs= 150 lakhs@ 12.5% equals 18,75,000/-.
Thus, it is clear that A is at a loss of Rs. 3,27,700/- by the amendment in the budget 2024..
A could be benefitted if his property was sold for a much higher amount say 400 lacs. In that case the LTCG Tax under the earlier prevailing rate would be 4,00,00,000-1,22,63,500= 27736500 @20% totalling Rs. 55,47,300/- and the LTCG Tax under the amended rates would be 3,50,00,000/- @12.5%= 43,75,000/-. Thus, the proposed rate of 12.5% would be advantageous for the assessee. But, the price rise to this extent is sparingly possible.
There was a confusion whether the exemption available u/s 54, 54F or 54EC would no longer be applicable after 23-07-2024. The Government in the FAQ issued after the Budget has clarified thus:
“Q11. In which assets, can the long-term capital gains be invested for roll over benefits?
Ans. For roll over benefits, taxpayers can invest their gains in house under section 54 or section 54F or in certain bonds under section 54EC. For complete details of all roll over benefits, please refer section 54, 54B, 54D, 54EC 54F, 54G of the IT Act.”
Thus, from the forgoing it can be safely concluded that if the price rise is manifold, the new provisions would be beneficial but if the price rise is normal, the assessee would be adversely affected by the introduction of the new LTCG Tax. In most of the cases the assessee would be prejudicially affected.
Suggestions: In my considered opinion, there are two ways to address this dilemma. Either the LTCG be reduced to 10% without any indexation or the assessee be given a choice to choose between 12.5% LTCG without Indexation vis a vis 20% LTCG with Indexation.
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