Long-term capital gains (LTCG) refer to money made from the sale or transfer of specific assets that are held for a given period. The Government of India determines what constitutes long-term and short-term gain, which they review annually through the Union Budget. This year, the Union Budget 2024 has drastically changed how LTCGs are taxed.

How Were Long-Term Capital Gains Treated Before The Union Budget 2024?

Before the Union Budget 2024, long-term capital gains (LTCG) were taxed at a rate of 20 percent plus indexation benefit. The indexation benefit helped taxpayers adjust asset purchase prices for inflation and hence reduced taxable gain. Such an indexation benefit was calculated by using the Cost Inflation Index (CII), notified by the Central Board of Direct Taxes (CBDT) annually.

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For example, if an individual sold a property after holding it for more than two years then any profit would be considered as Long Term Capital Gains (LTCG). Thereafter, a taxpayer can utilise the indexation benefit to decrease the value of tax obligation as well as pay tax on adjusted increments at a rate of 20%.

On this note, however, things changed when LTCGs began being subjected to new rules under the Union Budget 2024 that proposed doing away with this indexation benefit and reducing tax rates down to 12.5%. Many investors in capital assets especially those dealing in real estate did not like this change because it could result in higher taxes on their income sources.

What Are The Changes In LTCG Treatment Under The Finance Act 2019?

To address these concerns raised by taxpayers, the Finance Minister introduced an amendment to Finance Bill 2024. Consequently, taxpayers now have two options regarding their tax treatment:

• Taxpayers may choose to pay a flat rate of 12.5% without indexation benefits or,

• They could prefer instead paying a tax of 20% with the indexation benefits.

This option allows taxpayers to compute both scenarios and select whichever gives a lower tax liability. Nevertheless, it is only applicable for properties and unlisted equity transactions that were acquired before July 23, 2024, when the Union Budget 2024 was presented.

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For example, if I buy a property on March 12, 2021, there would be an opportunity to choose between any of these two taxation methods whenever I decide to sell it in future.

It is expected that this new flexibility will reduce the taxpayers’ tax burden and encourage housing sales and investments. This middle-class-friendly move is also likely to enable them to effectively plan their tax liabilities.

How Is Indexation Benefit Calculated?

The indexation benefit is calculated using the CII figures released by the CBDT each year. The formula to calculate the indexed cost of acquisition is as follows:

Indexed Cost of Acquisition (ICoA) = Original Cost of Acquisition x (CII of Year of Sale / CII Year of Purchase)

For instance, if a person bought a house for ₹20,000 in June 2021 and sold it for ₹40,000 in May 2024 then the indexation benefit can be worked out as follows:

CII for 2021 = 317

CII for 2024 = 363

Indexed Cost =20,000 x (363/317) =₹22,902

This will yield a taxable amount:

Taxable Amount = Sale Price - Indexed Cost = ₹40,000 – ₹22,902 =₹17,098

In addition to other appropriate deductions this indexed value is deducted from the sale price to determine the taxable gain.

Read More: Budget 2024: Everything You Need To Know About The Change In LTCG, STCG Tax Rates, And Holding Period

Conclusion

Finance Act 2024 has changed taxation on Long Term Capital Gains (LTCG) such that taxpayers have the option to choose what suits them best in tax. This move also comes as a relief to many who were apprehensive about the increased tax burden due to proposed changes in the Union Budget 2024. Now taxpayers can go with the method they want which would reduce their tax liability and stimulate investment into capital assets.

As a responsible taxpayer, you need to be up-to-date with these changes and ensure that your taxes are filed correctly and timely. For more details please visit your nearest Income Tax office or contact your Chartered Accountant. You may also call the official helpline numbers at 1800-103-0025 or 1800-419-0025 for any query related to taxation.

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