Capital Gains Tax on Land, Building or both: 12.5% Rate & Indexation

Demystifying conundrum of capital gains on Land, Building or both under Sec 48 read with section 112

With the intention of promoting transactions which may be covered under capital gains, special regime taxation has been evolving by undertaking significant reduction in the tax burden from 20% to 12.5% w.e.f 23^rd July 2024. While 23^rd July was a D-day in the life of tax professionals, a lot of tax planning calls took place (perhaps if the telecom cos had not shifted to unlimited calling plans, their stock prices might have surged due to such advisory calls on this amendment:)

Breaking down the potential chaos on taxation of capital gains from transfer of LBB:

In the event Land, Building or both (LBB) was acquired before 23^rd July 2025 wherein the assessee could claim indexation benefit and transferred on or after 23^rd July 2025 with no indexation, the computation of capital gains becomes challenging, and the assessee might lose the benefit of indexation on account of asset being transferred post D-day :/

However, CBDT has taken all possible actions to make sure that the assessee is not in a fix.

Scenario 1 – Position of capital gains on transfer of LBB before the amendment:

Computation of capital gains-

Section 48 of the IT Act has been reproduced as under –

“The income chargeable under the head “Capital gains” shall be computed, by deducting xxxxxxx

Provided further that where long-term capital gain arises from the transfer of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of clause (ii) shall have effect as if for the words “cost of acquisition” and “cost of any improvement”, the words “indexed cost of acquisition” and “indexed cost of any improvement” had respectively been substituted: xxxxxxx” 

 (emphasis supplied)

Taxation of capital gains –

The relevant extract of Sec 112 applicable to Individuals and HUF is enumerated below –

“(ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent for any transfer  xxxxx”   

(emphasis supplied)

Let’s take an example with the following presumptions:

1.Date of Transfer – 1^st Jan 2024 (FY 2023-24)

2. Date of purchase – 14^th Feb 2019 (FY 2018-19)

3. Sale consideration – ₹ 500 lakhs

4. Cost of acquisition – ₹ 240 lakhs

5. Investment made for Sec 54 exemption – ₹ 150 lakhs

Given the above, the capital gains shall be computed as under-

Scenario 2 – Position of capital gains on transfer of LBB after the amendment:

Computation of capital gains-

Section 48 of the IT Act has been reproduced as under –

“The income chargeable under the head “Capital gains” shall be computed, by deducting xxxxxxx

Provided further that where long-term capital gain arises from the transfer [(which takes place before the 23rd day of July, 2024)] of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of clause (ii) shall have effect as if for the words “cost of acquisition” and “cost of any improvement”, the words “indexed cost of acquisition” and “indexed cost of any improvement” had respectively been substituted: xxxxxxx” 

 (emphasis supplied)

Taxation of capital gains –

The relevant extract of Sec 112 applicable to Individuals and HUF is enumerated below–

“(ii) the amount of income-tax calculated on such long-term capital gains, —

• • at the rate of twenty per cent for any transfer which takes place before the 23rd day of July, 2024; and
  • at the rate of twelve and one-half per cent for any transfer which takes place on or after the 23rd day of July, 2024:xxxxx”

(emphasis supplied)

Let’s take an example with the following presumptions:

1.Date of Transfer – 1st Jan 2025 (FY 2024-25)

2. Date of purchase – 14th Feb 2019 (FY 2018-19)

3. Sale consideration – ₹ 500 lakhs

4. Cost of acquisition – ₹ 240 lakhs

5. Investment made for Sec 54 exemption – ₹ 150 lakhs

Given the above, the capital gains shall be computed as under-

CBDT Relief: The Protective Proviso- The Plot Twist:

Second proviso to Sec 112(1)(a) states that in case of LTCA, being LBB which was transferred on or after 23^rd July 2024 and attract 12.5% tax, the assessee to compute capital gains as under i.e.,

A. Compute capital gain tax as laid down under sec 112 at 20% as existed prior to amendment

B. Compute capital gain tax at 12.5% as amended

C. Any income tax under (B) in excess of (A) shall be ignored

Thus, the assessee will be subject to reduced tax pursuant to the above captioned provisions.

Relevant extract of proviso is given hereunder –

“Provided further that in the case of transfer of a long-term capital asset, being land or building or both, which is acquired before the 23rd day of July, 2024, where the income-tax computed under item (B) exceeds the income-tax computed in accordance with the provisions of this Act, as they stood immediately before their amendment by the Finance (No. 2) Act, 2024, such excess shall be ignored;”

Revised computation under Scenario 2

Note: The above option of computation is only for the purpose of computation of tax for the purpose of Section 112, this does not configure the total income computation under Section 48. Accordingly, total income computation shall be as is specified i.e., without indexation for transfers on or after 23^rd July 2024.

Conclusion –  Rationalization of the capital gains provisions was a long standing ask from industry participants. CBDT has taken all possible actions to simplify such provisions and also keep the assessees protected from any significant changes due to the amendments sought.

*****

Disclaimer – This hotline does not constitute a legal opinion and may provide information existing at the time of drafting. It is recommended that professional advice be taken based on specific facts and circumstances. The article does not substitute the need to refer to the original pronouncements.