Long Term Capital Gains or LTCGs are gains on the transfer of certain capital assets. The government sets time periods to determine whether a gain is a long term gain or a short term gain. This information is specified, renewed and restructured by the government with the help of taxation authorities in the Union Budget presented every year.
How Were Long Term Capital Gains Treated Before Union Budget 2024?
Before Budget 2024 was announced, the Long Term Capital Gains were taxed at 20% along with an indexation benefit. The indexation benefit allowed taxpayers to deduct an ‘indexed’ amount from their long term capital gains and then reach the payable amount. The Cost Inflation Index (CII), notified by the Central Board of Direct Taxes, is used for indexation calculation.
For example, if a person held a property for more than 24 months and then sold it, it would classify as a LTCG. The taxpayer could claim an indexation benefit of this amount and would pay a tax of 20% on the amount reached after reducing the indexed amount.
However, this LTCG treatment was changed in the Union Budget 2024. The indexation benefit was proposed to be removed and the taxation rates were reduced to 12.5%. This move was not exactly appreciated by many capital assets holders, especially those in the real estate sector. With the Budget 2024 update, they might have had to pay more.
After considering the concerns of everyone, the Finance Minister introduced an amendment to the Financial Bill 2024 regarding this. Let us find out what these changes are!
What Are The Changes In LTCG Treatment Under Finance Act, 2024?
Finance Minister, Nirmala Sitharaman announced that taxpayers would now be given the option to choose between either:
i) Paying 12.5 percent tax without indexation benefit or,
ii) Paying 20% tax with indexation benefits.
The taxpayers can compute and choose the option which allows them to pay lesser tax. This shall however only apply to properties bought or acquired before July 23, 2024 when the Union Budget 2024 was presented. The proposed amendment will also apply to unlisted equity transactions done before July 23, 2024.
Example: A bought a property on 12th March 2021 (before July 23,2024). In the future, or present, in case he plans to sell it, he will have the option of choosing between the two available taxation choices.
This new change is expected to reduce the tax burden of taxpayers and drive investment and increase sales in the housing sector. Middle- class people will also be majorly benefited from this since they will be able to choose better for themselves.
How Is Indexation Benefit Calculated?
The indexation benefit is calculated using the CIIs released by CBDT everywhere. The formula to calculate is:
ICoA = Original cost of acquisition x (CII of the year of sale/CII of year of purchase)
Example:
A bought a property for Rs. 20,000 in June 2021. He sold it for Rs. 40,000 in May, 2024. Calculate the indexation benefit to be received.
CII for 2021 was 317 and CII for 2024 is 363.
Hence, it will be solved as 20000x 363/317= 22,902.
The taxable amount will be Rs. 40000-Rs. 22,902= 17098.
The amount is subtracted from the sale amount along with other deductions if applicable, depending on the taxpayer.
Conclusion
This move has come as a relief for major taxpayers who felt that their tax burden had increased due to the changes in LTCG treatment proposed by Union Budget 2024. They can now enjoy the benefit of choosing! As a responsible taxpayer, do not forget to pay correct and on time taxes to the government.
For more information, visit your nearest Income Tax office or contact your Chartered Accountant. For any queries, you can also call on the official helpline number 1800 103 0025 or 1800 419 0025. Stay updated with Jaagruk Bharat for latest tax insights and news.
