Taxpayers now have the option to pay long-term capital gains tax of 20 per cent with indexation benefits on the sale of a property that has been acquired before July 23, 2024.
In the Union Budget 2024-25, Finance Minister Nirmala Sitharaman announced a review of the Income Tax Act, 1961. The rationale for this exercise was straightforward — to make the Act simpler to “read and understand”, thus helping bring down tax disputes and consequent litigation. The budget took a step in this direction by proposing simplification of provisions for reassessment and capital gains taxation, among others. There was a need to reexamine the capital gains tax framework considering the differences in both the tax rates as well as the holding periods for determination of long-term gains across asset classes such as equities, debt, real estate etc. The budget had proposed levying a tax of 12.5 per cent on long-term capital gains on all financial and non-financial assets. However, it also proposed to eliminate the benefit of indexation that was available to investors for property, gold and unlisted assets for the purpose of estimating long-term capital gains. While this was done to “ease computation of capital gains for the taxpayer and the tax administration”, the proposal was met with widespread criticism. After first defending the proposal on grounds that the lower tax rate of 12.5 per cent, from 20 per cent, compensates for the removal of the indexation benefit, the government has now changed tack, heeding the concerns of taxpayers.
Taxpayers now have the option to pay long-term capital gains tax of 20 per cent with indexation benefits on the sale of a property that has been acquired before July 23, 2024. Indexation refers to the adjustment of the purchase price of an asset based on the rate of inflation over the period that it has been held by the investor. With this option now available, all purchases before the date of the budget presentation have been grandfathered. Investors, though, can also choose the option proposed in the budget of paying a lower tax rate of 12.5 per cent, but, without availing the indexation benefit. This framework now provides investors the option of being able to select the tax structure which leads to a lower tax liability for them.
Over the years, the government has taken steps to ease the burden on ordinary taxpayers. For instance, in order to reduce tax uncertainty and disputes, the recent budget has said that an assessment can only be reopened beyond three years if the “escaped income” is Rs 50 lakh or more. But, more needs to be done. The review of the IT Act, which is to be completed in six months, should examine the contentious sections and aim to address the areas of disputes.
