LTCG on sale of Immovable property by resident individuals & HUFs

Income by way of long-term capital gain (LTCG) is an occasional happening for personal taxpayers.  Any person may buy a residential apartment and after sometime sell the same to buy yet another for reasons such as more facilities or space or prominent location or for any other reason. When an apartment is sold there is surplus which is technically called as ‘capital gain’. It may be deficit also, which is called as ‘capital loss’. The word ’capital’ denotes that it is not related to stock in trade of a business and thus not a regular happening.

Recently, the legal provisions relating to sale of land or building or both for individual taxpayers who owned the same for more than 24 months before sale has undergone significant change. Amendments in section 48 and section 112(1) are somewhat dicey that the amount of capital gain considered for computing the total income is different from the amount of capital gain considered for the purpose of income tax payable thereon.  The change of law is from 23^rd July, 2024.  So, when the said capital asset (i.e. land or building or both) is sold after the said date the taxpayer cannot claim indexation benefit for computing the long-term capital gain. Of course, the benefit of indexation would arise only if its ownership tenure exceeds 24 months before the date of sale. Thus, the total income which is the aggregate of all heads of income from all the sources of the taxpayer would include long-term capital gain which has to be computed by deducting cost of acquisition from the sale consideration.

The intricate aspect is the tax computation which is by comparing the tax on (i) long-term capital gain so computed without indexation @12.5%; and (ii) after applying indexation benefit, ascertain the tax liability by applying the rate @20%. The lesser of the two would be the actual tax liability of the individual tax payer. It may be noted that this benefit is available only to individual and Hindu Undivided Family (HUF) with status of being resident besides being applicable only for land or building or both. In respect of other taxpayers like firms, LLPs, companies this benefit is not available.

It is interesting to note that the Finance (No.2) Act, 2025 has inserted a further proviso to section 87A stating that rebate shall not exceed the amount of income tax payable as per the rates provided in sub-section (1A) of section 115 BAC. Upon reference to section 115BAC (1A), it is obvious that the income tax computation prescribed therein is applicable for incomes liable to tax at regular rates and is not applicable for incomes liable for special rates of tax. The Explanatory Memorandum to the Finance Bill, 2025 thus says that rebate under section 87A would not be allowed in respect of capital gains taxable under sections 111A, 112 and 112A.