In the Union Budget for 2024-25 presented on July 23, 2024, Finance Minister Nirmala Sitharaman reduced the tax on long-term capital gains (LTCG) from sale of Real Estate (Physical) and Physical Gold from 20 percent with the benefit of indexation to 12.5 per cent but without the indexation benefit. However, owners of old houses acquired before 2001 (ancestral property) will continue to get indexation benefit. For the purpose of deciding that the capital gain is long-term, the holding period for both the asset classes is 24 months. Whereas, for Physical Gold, it is down from 36 months earlier, in case of Real Estate (Physical), it remains unchanged.
The benefit of indexation allowed a person to adjust the cost of her investment to account for inflation, effectively reducing her capital gains and in turn, her tax liability. Consider a person who bought a house for Rs 100 lakh in FY 2020-21 and sells it for Rs 200 lakh in FY 2024-25. With indexation benefit, her capital gain from selling it will be calculated by deducting from Rs 200 lakh an amount arrived at by applying an inflation factor of say, 10 percent per annum to the initial investment of Rs 100 lakh. At the end of fourth year, the deductible amount comes to Rs 146 lakh. So, the capital gain will be Rs 54 lakh (200-146). 20 percent tax on this will be Rs 10.8 lakh.
This was the scenario before the budget.
In the 2024-25 budget, Sitharaman reduced the tax rate to 12.5 percent but took away the indexation benefit. This meant that in the above example, the capital gain will be taken as Rs 100 lakh (200-100). 12.5 percent tax on this will be Rs 12.5 lakh. Thus, this person would have ended up paying Rs 1.7 lakh more (12.5-10.8) when compared to the previous regime. The change led to widespread outcry
Bowing down to pressure from the real estate lobby, Sitharaman brought an amendment to the budget proposal. As per the amended rule, for property acquired before July 23, 2024, the person is free to choose either the old or the new regime.
The raison d’etre behind removing the indexation benefit and simultaneously reduce the tax was to make the tax regime ‘transparent’ and plug a major source of revenue loss from the real estate sector. Earlier, those investing in property with sole intent of making a quick buck could drastically reduce their tax liability by artificially inflating the deductible amount even though on the face of it, it would appear that they were paying 20 percent tax on LTCG. In the example, the effective tax came to 10.8 percent, courtesy indexation benefit.
The budget proposal sought to lift the veil. It meant that the person pays tax in a transparent way. Now, by doing a volte face, the government has enabled them to continue with their past opaque practice. Moreover, for property acquired before July 23, 2024, it has rendered the new 12.5 percent tax regime redundant. Paying a much lower tax (read: effective) under the old regime, and given the choice, why would they opt for the new?
The only consolation is that for properties acquired after July 23, 2024, the persons won’t have any choice and will pay 12.5 percent tax without indexation.
For all categories of assets – financial or physical, listed or unlisted – except debt and non-equity mutual funds (MFs) and unlisted bonds, the FM has imposed tax on LTCG at a uniform rate of 12.5 percent down from 20 per cent or the applicable slab rate earlier depending on the asset class. In the case of debt and non-equity MFs and unlisted bonds, the gains will be taxed at the applicable slab rate.
Seeking uniformity in tax rate sounds good. But, why tax shouldn’t be imposed at the applicable slab rate across all asset classes. This will be ‘progressive’ as low income earners pay less whereas those with higher income pay more. Another anomaly has to do with the holding period as this is 12 months in the case of stocks, equity MFs and REITs/InVITs against 24 months in all other cases.
Money has no color.
Irrespective of where the capital gains come from viz. asset type, listed or unlisted and when these accrue, these are an addition to her income in the relevant FY. Tax should be levied at the rate applicable to the slab her total income falls in.