Income under capital gains and taxation – Paradigm shift in traditional capital gain provisions
As per the provisions of Income Tax Act,1961(‘ITA’) income of any person is computed under five heads of income, one of which is Income Under the head Capital Gains. Whenever there is any transfer of any Capital Asset, tax is computed under this head. Further, a capital asset may be classified as a long-term capital asset or a short- term capital asset, basis on the period for which it is held by the assessee.
The Budget 2024 has proposed various amendments in the provisions related to Income computed under the head Capital Gains. The most significant of them is the changes in the tax rates and removal of the indexation benefit.
Let us discuss the major amendments in the provisions of capital gain taxation.
Period of holding
As per section 2(42A) of the ITA, short term capital asset was defined as a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer. Further, the proviso to this section prescribed a period of holding of 12 or 24 months for certain category of assets.
In the budget, the above definition is amended and the period of thirty-six months is been replaced with twenty-four.
Thus, post amendment there are only two periods of holding – either 12 months or 24 months.
| Particulars | Period of holding prior to amendment | Period of holding prior to amendment |
| Listed Security (other than a unit), Unit of Unit trust of India, Unit of Equity Oriented fund or zero coupon bond | 12 | 12
(Units also included here) |
| Unlisted shares or Immovable property | 24 | 24 |
| Other assets | 36 | 24 |
| Note – In case of Market Linked Debentures or Specified Mutual Funds as mentioned in section 50AA of ITA, the gains would always be short term, irrespective of the period of holding. | ||
To sum it up all the listed securities would now be considered as a Long term capital assets if held for a period of more than 12 months and for all other assets it shall be 24 months.
Mode of Computation and Tax Rates
Determination of period of holding and inferring whether the capital asset is a long term or a short term capital asset is important as the mode of computation and tax rates for the gain on long term capital assets differ from that of a short term capital asset.
However, in the Budget 2024, there have been some major changes proposed in the mode of computation of the capital gains and the tax rates.
Tax Rates
The tax rates under the capital gains head have also been amended
| Section | Transfers before 23rd July 2024 | Transfers on or after 23rd July 2024 | |
| 111A | Short term capital gain on listed equity, Equity Oriented Fund and units of business trust | 15% | 20% |
| 112 | Long term capital gain on any asset other than those covered under 112A | 20%/10% as the case maybe | 12.5% |
| 112A | Short term capital gain on listed equity, Equity Oriented Fund and units of business trust | 10 % limit – 1,00,000 | 12.5% limit -1,25,000 |
So, the tax rates on the short term gains on transfer of listed assets, the rate has been increased to 20% from 15%. In case of long term capital gains a uniform rate of 12.5% is proposed in all category of assets.
Amendment to section 48
Section 48 of the ITA, prescribes the mode of computation of income under the head capital gains. As per the said section capital gain from transfer of a capital asset is to be computed as follows –
Sale Consideration ————–
Less: Transfer expenses ————
Net Sales Consideration ———————
Less: Cost of acquisition ——————-
Less: Cost of improvement —————
Capital Gain/Loss ————-
The second proviso to section 48 mentioned about the indexation benefit in case of transfer of Long term capital assets. Thus, it stated that in case the transfer is of a long term capital asset, the cost of acquisition and improvement shall be indexed for the computation of the gain.
Indexation benefit means to inflate the cost for the inflation index in the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held. In case of an asset acquired before 01.04.2001, the CII of 2001-02 will apply.
Budget 2024 has proposed to remove the benefit of indexation on the transfer of any capital asset on or after 23rd July 2024.
So, in respect of any transfer on or after 23rd July 2024, the mode of computation would be similar in case of both short and long term capital assets.
This change is a very drastic change and has amended a very age-old settled law. Also, by doing this, it may be said that the government suggests that there is no impact of inflation index in the increase in the values of capital assets. This may be not be a very welcoming step in various cases. It has to be analysed from both aspects that is positive and negative.
Let us take some scenarios and study the impact of this amendment on the taxability of the assessees.
Example – Mr. A purchased a property for INR 15,00,000 in the year 2001. The property was sold in 2024 for INR 80,00,000. Let us compute gain both as per the old and new regime.
| Particulars | Old | New |
| Sale Consideration | 80,00,000 | 80,00,000 |
| Cost of acquisition | 54,45,000(15,00,000*363/100) | 15,00,000 |
| Gain | 25,55,000 | 65,00,000 |
| Tax Rate | 20% | 12.5% |
| Tax | 5,11,000 | 8,12,500 |
So, it can be observed that tax is higher in the new regime.
Let us assume the sale value to be INR 1,25,00,000. Then the capital gains and tax thereon would be
| Particulars | Old | New |
| Sale Consideration | 1,25,00,000 | 1,25,00,000 |
| Cost of acquisition | 54,45,000(15,00,000*363/100) | 15,00,000 |
| Gain | 70,55,000 | 1,10,00,000 |
| Tax Rate | 20% | 12.5% |
| Tax | 14,11,000 | 13,75,000 |
In such a case the tax here is lower in new tax rules. Thus, it can be observed that there is possibility that based on the percentage raise in the property value, the new tax provisions may be beneficial.
So, a question here arises is that how to determine when will the old provisions be beneficial and when the new? Is it a trial error or we may derive a break even point for the same.
Let us analyse for the above scenario.
Let us assume the sale value as y and cost of acquisition as x.
The tax in new provisions will be – 12.5% of (y-x). And the tax in the old provisions would be 20%(y-3.63x)
To determine a point where the tax is equal, that is a break even is achieved, let us equate them
So, 12.5%(y-x) = 20%(y-3.63x)
On solving the above equation, we get a relation between y and x that is – y = 8x. This signifies that if the sales consideration is 8 times the cost of acquisition, the assessee would be at break even. Any consideration below this, the assessee would be at a loss due to the removal of indexation benefit.
However, if the sale value is more than 8 times the cost of acquisition the assessee would be paying less tax as per the amended tax provisions. Thus, removal of indexation would be in his favour in that case.
This can also be observed by the above numerical example. In case 1, the indexation was beneficial, however not in the case 2.
Thus, it can be inferred that it is possible that the removal of indexation is also beneficial for the assessees.
Now, another question here is that what will be the case if the purchase year is after 2001-2002 ?. Like the above method, a relation can be derived between the cost of acquisition and sale consideration.
So, a possibility of new provisions being beneficial cannot be ruled out. However, it all depends on the facts and circumstances of the cases.
It can be observed that in case of a slow or stagnant growth in the property rates, the assessees would be at a loss because of the indexation benefit. Post the announcement of the budget, there was a lot of buzz about the negative impact that may be created by removal of indexation benefits, especially to the real estate sector.
Keeping this in mind, Honourable Finance Minister, has proposed an amendment to the Finance Bill in certain specific cases to protect the interests of the Resident Individual/HUFs, who may be in a disadvantageous position due to the removal of indexation benefits. The bill is passed with the proposed amendment.
The section 112 governing the tax rate on long term capital gain has been amended further.
Finance Bill, 2024
The finance bill, made an amendment to the section 48 and restricted the indexation benefit only on the transfers prior to the 23rd of July 2024. Further, section 112 of the ITA was amended and the rate specified as 20% was substituted as 12.5% for any transfers on or after 23rd July 2024.
Amendment Proposed in the Finance Bill,2024 as passed in the Lok Sabha
In order to rationalize the provisions, a new proviso is proposed to be added to the section 112 clause (a) that states about the resident Individuals/HUFs. The proviso states that in case of transfer of a long term capital asset, being land or building or both, that is acquired before 23rd July 2024, where income tax computed at the rate of 12.5% exceeds the tax computed in accordance with the provisions as they stood immediately before the amendment in Finance Bill, 2024, the excess shall be ignored. So, any resident individual/ HUF who has acquired a property prior to 23rd July 2024, and transfers it on or after the said date, he can compute the tax as per the old provisions (20% with Indexation) as well as the new provisions (12.5% without indexation). If the tax payable as per the new provisions exceeds the tax as per the old provisions, the excess shall be ignored.
Thus, it can be understood that the proviso is inserted only for the Resident Individuals and HUFs and not for any other categories of assessees like domestic companies or non – residents.
It is pertinent to note here that there is no change proposed in section 48 that governs the mode of computation. Thus, if there is any loss due to old provisions, such loss shall lapse and shall not be eligible to be carried forward and set off.
It would be interesting to consider the impact of section 54 providing the exemption to the capital gains. As there has been no change in the provisions of section 54 or 48 of the ITA.
Let us analyse the above amendment by using the above-mentioned numerical.
Example – Mr. A purchased a property for INR 15,00,000 in the year 2001. The property was sold in 2024 for INR 80,00,000. Let us compute gain both as per the old and new regime.
| Particulars | Old | New |
| Sale Consideration | 80,00,000 | 80,00,000 |
| Cost of acquisition | 54,45,000(15,00,000*363/100) | 15,00,000 |
| Gain | 25,55,000 | 65,00,000 |
| Tax Rate | 20% | 12.5% |
| Tax | 5,11,000 | 8,12,500 |
So, it can be observed that tax is higher in the new regime.
Thus, in this case after the amendment in the section 112, as the property is transferred by a resident Individual/HUF that was purchased prior to 23rd July 2024 and sold after 23rd July 2024, the excess tax as per the new provisions shall be ignored. So, the assessee has to pay tax of INR 5,11,000 only.
Further, if there had been loss, say the consideration would have been INR 50,00,000, the tax payable as per the old provisions would be NIL and the assessee would not be liable to pay any tax. However, he would not be allowed to set off or carry forward such loss.
By going through all the major amendments in the capital gains head, it can be understood that there have been quite major changes in this head. From determination of period of holding to computation of capital gain to tax calculation, it has all undergone a big modification. As we move forward, it would be thought provoking to work on and analyse the practical impacts of all these changes.
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