Capital Gain Tax After Reinstatement of Indexation Benefit

Summary: Finance Bill, 2024 introduced key amendments to Section 112 of the Income Tax Act, reducing the long-term capital gains tax rate from 20% to 12.5% while withdrawing the indexation benefit for transfers after July 23, 2024. However, a second proviso reinstates the benefit for land and buildings acquired before this date if the tax exceeds the pre-amendment computation. Taxpayers can now calculate capital gains under both regimes and pay the lower tax, as illustrated with case studies. For example, if indexation results in higher tax liability, the taxpayer can opt for the old regime. However, this relief applies only to the tax calculation; capital loss carry-forward benefits under the old regime are no longer available. Multiple property sales in a financial year are assessed individually, and the sum determines the applicable tax regime. Importantly, this benefit excludes leasehold rights and non-land assets like securities and gold. The amendments aim to provide flexibility, but their financial impact varies, necessitating a careful assessment of each case. Detailed Analysis is as follows:

1. Section 112 of the Income Tax Act provides for taxation of Long-Term Capital Gain. The Finance Bill, 2024 amended Section 112 to reduce the rate of taxation of long-term capital gains from 20% to 12.5% while withdrawing the benefit of indexation for any transfers that took place after 23-7-2024

2. The hue and cry regarding the removal of the indexation benefit for certain taxpayers prompted the Government to take action by introducing an amendment to Section 112 of the Income Tax Act.

3. The second proviso to Section 112 has been inserted wherein it is provided that in case of transfer of land or building or both, which is acquired before 23-7-2024, where the income tax computed exceeds the income tax calculated by the provisions of the IT Act, as they stood immediately before their amendment by the Finance Act, 2024, such excess shall be ignored.

4. Let us try to understand the methodology of Computation of Capital Gain Tax on the transfer of Immovable property after 23.07.2024, with the help of Illustrations

5. Illustration 1 Mr. Anupam sold a residential property on 28.10.2024 for Rs.80,00,000, which he had purchased on 17.06.2000. The fair market value of the said property as of 01.04.2001 was Rs.11,00,000. The Capital Gain Tax will be calculated as follows:

The excess tax of Rs 61,100 (Rs.8,62,500-Rs. 8,01,400) is ignored, and Mr. Anupam will pay LTCG Tax of Rs 8,01,400 under the old regime.

6. Loss (if any) due to indexation benefit will not be available even if the property is acquired before July 23, 2024. The rollback of indexation benefit is not as attractive as it seems. The relief only comes at the time of calculating taxes i.e. 20% with indexation, 12.5% without indexation, and paying the lower amount. This relief does not change the capital gain/loss calculation.

For a property investment that has not done quite well and the assessee incurred a loss on the transfer of such property, there will be NIL Capital Gain Tax and the difference will be ignored.  Let us try to understand it with another Illustration.

6. Illustration 2. In Illustration 1, the investment made by Mr. Anupam in the said property turned out dud, and he could sell the property for Rs. 38,00,000/- only. The computation will be as follows:

7. The second proviso to Section 112 allows taxpayers to calculate their taxes under both the new and old schemes and pay whichever amount is lower. In the pre-amendment regime, with such poor-performing investments, the assesse could carry forward losses for the next 8 years. Now, the option to choose pre- pre-amendment regime will not be considered for the determination of the amount of loss. The assesse will no longer be entitled to carry forward the losses of Rs. 1,93,000/- even if he opts for the old regime for Capital Gain calculation. However, Capital Gain Tax will be NIL in such cases.

8. Option will be exercised for Net Gain / Loss in case of sale of multiple properties: An individual might have sold more than one property in a financial year. In such case, Capital Gain will be calculated individually for each property and the sum of Capital Gain will be considered for option to be exercised.

9. Illustration 3:  Mr. Anupam sold 2 properties in the year 2023-24(post 23.07.2024) Both the properties were purchased in 2000 and the fair Market value as of 01.04.2001 was Rs 11,00, 000. He sold property A for Rs 80,00,000 whereas, due to some unavoidable reason he could fetch only Rs 38,00,000 for a second property. The option to exercise a new regime or old regime will be ascertained as follows:

The excess tax of Rs (12,00,000 – 762800) 4,37,200 due to amendment will be ignored and Mr. Anupam will pay the lower tax of Rs. 7,62,800/-.

10. Other Key Points:

(a) Individuals or Hindu Undivided Families (HUFs) who bought houses before July 23, 2024, are eligible to choose preferred regime.

(b) The benefit is available only for assets in the nature of land/building and not for any other class of assets (like gold, securities).”

(d) The benefit is not available for leasehold rights. (it can be a potential subject-matter of dispute on whether such rights should be treated on par with land or building or otherwise)

(e) Tax calculations in the new Regime cannot be used to determine investment requirements under Sections 54, 54B, 54EC, etc.

Conclusion:  The decision to choose between the indexation benefit or the lower 12.5% tax rate should be based on the specific financial situation and the nature of the capital gain. While the amendments aim to simplify taxation, their impact varies case by case.

Disclaimer: The article is for educational purposes only.

The author can be approached at caanitabhadra@gmail.com