The recent announcement by the Indian Finance Minister has restored indexation benefits for Long-Term Capital Gains (LTCG) on assets acquired before July 23, 2024, specifically benefiting land and buildings. Taxpayers now have the option to calculate LTCG tax at either a flat rate of 12.5% without indexation or 20% with indexation, depending on which results in a lower tax liability. For instance, selling a property for ₹4 crore, purchased for ₹1 crore, yields a lower tax with indexation (₹7.4 lakh) compared to without it (₹37.5 lakh). However, this benefit is restricted to individual taxpayers and Hindu Undivided Families (HUFs), excluding entities like firms and non-residents. Additionally, the indexation benefit does not apply to assets other than land and buildings, such as jewelry or financial instruments. Non-residents and entities like companies are also ineligible. Taxpayers should carefully evaluate their options under the restored provisions, considering both the indexation benefit and the lower tax rate to minimize their tax liability. The restoration aims to ease tax burdens but adds complexity in implementation, especially for different asset types and taxpayer categories. Read our Arjuna (Fictional Character) and Krishna (Fictional Character) article on restored indexation benefits for Long-Term Capital Gains (LTCG) on assets acquired before July 23, 2024.
Arjuna (Fictional Character): Krishna, I have heard that the Hon’ble Finance Minister has recently announced the restoration of indexation benefits for Long-Term Capital Gains (LTCG). This has caused a lot of buzz among taxpayers, and there seems to be some confusion around the details. Can you explain what this restoration entails?
Krishna (Fictional Character): Arjuna, the restoration of indexation benefits is a significant development, especially for those dealing with the transfer of land and buildings. The finance minister has clarified that for assets purchased before 23rd July 2024, specified taxpayers can opt to calculate their LTCG tax either at a flat rate of 12.5% without indexation or at 20% with indexation—whichever results in a lower tax liability.
For Example: Let’s say a taxpayer sells a property for ₹4 Crore in August 2024. And let’s assume original cost price of the property in 2001 was ₹1 Crore, and after applying indexation, the indexed cost becomes ₹3.63 Crore then,
- Without indexation, the LTCG would be ₹3 Crore (₹4 Crore – ₹1 Crore), and at a tax rate of 12.5%, the tax payable would be ₹37.5 Lakhs.
- With indexation, the LTCG reduces to ₹37 Lakhs (₹4 Crore – ₹3.63 Crore), and at a tax rate of 20%, the tax payable would be ₹7.4 Lakhs.
As per the new amendment, the taxpayer would pay the lower amount of tax, which in this case is ₹7.4 Lakhs.
Now, lets take another example where let’s say a taxpayer sells a property for ₹5 Crore in August 2024. And let’s assume original cost price of the property in 2020 was ₹3 Crore, and after applying indexation, the indexed cost becomes ₹3.62 Crore then,
- Without indexation, the LTCG would be ₹2 Crore (₹5 Crore – ₹3 Crore), and at a tax rate of 12.5%, the tax payable would be ₹25 Lakhs.
- With indexation, the LTCG reduces to ₹1.38 Crore (₹5 Crore – ₹3.62 Crore), and at a tax rate of 20%, the tax payable would be ₹27.6 Lakhs.
As per the new amendment, the taxpayer would pay the lower amount of tax, which in this case is ₹25 Lakhs.
Arjuna (Fictional Character): Krishna, does this mean that all assets purchased before this date will qualify for indexation benefits?
Krishna (Fictional Character): Arjuna, the indexation benefit has been restored specifically for land and buildings, hence it is a Gain for assets like Land and Building but Pain for other types of assets, such as jewellery or financial instruments, as they are excluded from this benefit.
Arjuna (Fictional Character): Krishna, what about land that I have purchased through a partnership firm? Will this land be eligible for the indexation benefit?
Krishna (Fictional Character): Arjuna, the restored indexation benefit is limited to individual taxpayers and Hindu Undivided Families (HUFs). Unfortunately, properties purchased by entities like firms, companies, or associations will not be eligible for this benefit. Thus, this benefit of Indexation is Gain for Individuals and HUFs but a Pain for entities like firms, companies, and associations.
Arjuna (Fictional Character): Krishna, suppose a person is an NRI, owns some non-agricultural land in Delhi. And he decides to sell this land, will he be able to avail the indexation benefit?
Krishna (Fictional Character): Arjuna, the benefit of indexation is further restricted to resident individuals and HUFs. Non-residents will not be eligible for this benefit when they sell their land. Hence this benefit is a Gain for Resident Individuals and HUFs but a Pain for Non-resident individuals and HUFs.
Arjuna (Fictional Character): Krishna, If I sell my residential house and reinvest the capital gains into another property or capital gains bonds, can I apply indexation to these gains to claim full exemption under sections 54, 54B, or 54EC?
Krishna (Fictional Character): Arjuna, the reintroduction of indexation is primarily for the purpose of determining tax liability on the transfer of land and buildings. For exemptions under sections 54, 54B, and 54EC, the amount you invest will be compared against the gains calculated without applying indexation. Moreover, if there is any loss after indexation, it will not be allowed to be carried forward or set off against other capital gains.
Arjuna (Fictional Character): Krishna, what should a taxpayer learn from these changes?
Krishna (Fictional Character): Arjuna, the key takeaway for taxpayers is to be vigilant and well-informed about the specific conditions that come with these restored benefits. While the indexation benefit provides an opportunity to reduce tax liability on land and buildings but Lower Tax Rate also reduces the Tax Burden. Taxpayers should compare their Tax Liability under both the option and then select the option whichever results in a lower tax liability. It might appear more complex, but the government’s intention, as outlined in the Finance Bill memorandum, is to simplify the tax laws. However, simplification often comes with its own set of challenges, particularly in how these laws are implemented.
Author Bio
