Saturday Brain Storming Thought (233) 27/07/2024

NEW CAPITAL GAIN TAX REGIME PROPOSED IN THE UNION BUDGET 2024-25

New Capital Gain Tax Regime proposed in the Union Budget 2024-25

In the Union Budget 2024, presented by Finance Minister Nirmala Sitaraman on 23/07/2024

1) Raising the tax rate on long-term capital gains on equity from 10% to 12.50% 

2) Raising the tax rate on short-term capital gains on equity from 15% to 20%

3) Exemption limit of Rs 1 Lakh on sale of equity has been raised to Rs 1.25 Lakh on Long Term Capital Gain 

4) Long Term Capital Gain rate on all other assets has been slashed from 20% to 12.50%, while the indexation benefit has been phased out 

5) Listed financial assets held for more than a year will be classified as long term 

6) Unlisted financial assets and all non-financial assets will have to be held for atleast two years to be classified as long term 

7) Unlisted bonds and debentures, debt mutual funds and market linked debentures, irrespective of holding period, however will attract tax on capital gains at applicable rates

Major changes brought about in taxation of capital gains by the Finance (No 2) Bill, 2024

The taxation of capital gains has been rationalised and simplified 

1) Holding period has been simplified ie 1 year or 2 year

2) Tax rates have been rationalised and made uniform for majority of assets 

3) Indexation has been done away with for ease of computation with simultaneous reduction of rate from 20% to 12.50%

4) Parity between Resident and Non-resident 

5) No changes in roll over benefits 

Date when the new taxation provisions comes into force

Taxation of capital gains come into force from 23/07/2024 and shall apply to any transfer made on or after 23/07/2024

Holding period

1) For listed securities – 1 year

2) Unlisted securities and all other assets – 2 year

Listed Securities

Listed securities are any financial instruments that are publicly traded on an exchange 

This includes the stocks and bonds you buy and sell, as well as derivatives that experienced traders and investment companies trade

The path to becoming listed takes time and preperation 

Unlisted securities

A security traded in the over-the-counter market that is not listed on an organized exchange 

Benefits from the changes in holding period

1) Listed assets like REITs, InVITs – holding period is reduced from 36 months to 12 months

2) Holding period of gold, unlisted securities is also reduced from 36 months to 12 months

Holding period of Immovable property and unlisted shares

The holding period of Immovable property and unlisted shares remains the same as earlier ie 24 months

Change in the rare structure for STT paid capital assets

Rate of short-term STT paid listed equity, Equity oriented mutual fund and units of business trust ( Section 111A) has increased from 15% to 20%

Similarly the rate for these assets for long-term (Section 112A), has increased from 10% to 12.50%

Who will benefit bt change in rate from 20% (with indexation) to 12.50% (without indexation)

The reduction in the rate will benefit all category of assets 

In most of the cases, the taxpayers will benefit substantially 

But where the fain is limited vis-a-vis inflation, the benefit will also be limited or absent in a few cases

Taxpayer can avail Roll over benefits on capital gains

Yes

The roll over benefits remains the same as earlier 

There is no change in roll over benefits already available under the IT Act

Taxpayers who want to save on LTCG tax even with low rates, can continue to avail roll over benefits on fulfilment of conditions as applicable 

In which assets, can the LTCG be invested for roll over benefits

For roll over benefits, taxpayers can invest their gains in house under section 54 or section 54F or in certain bonds under section 54EC

For complete details of all roll over benefits, refer sections – 54, 54B, 54D, 54EC, 54F, 54G of the Income Tax Act 

What is amount upto which roll over benefit is available

Investment of capital gains in 54EC bonds (upto Rs 50 Lakh)

In other cases, the capital gain is exempt from tax, subject to certain specified conditions 

Overall rationale for changes

Simplification of any tax structure has benefits of ease of compliance viz computation, filing and maintaining of records

This also removes the differential rates for various classes of assets 

Major exemptions for LTCG Tax

1) Section 54

This section concerns LTCG on the sale of house and reinvestment of the amount received on another house 

2) Section 54EC

This section concerns LTCG on the sale of house and the reinvestment of the amount received in specified bonds

3) Section 54F

This section is related to LTCG on the sale of any asset other than a house and the reinvestment of the amount received in buying a house

4) Capital Gains Account Scheme ( CAGS)

If you are unable to invest the LTCG within the specified time, you can deposit the amount in CAGS account 

The amount should be used within a given timeline to build or buy another residential property 

Exemptions under section 54

1) You can get an exemption only for the purchase of 1 house

2) If you are using the capital gains to buy more than 1 house, you will be able to claim exemption only for the cost of 1 house 

3) You can get an exemption under section 54 only if you are buying a house in India 

4) Any residential property purchased outside the country will not get any exemption from paying LTCG tax 

5) You can not sell the new house brought from the gains of sale of the old house untill 3 years after the purchase or completion of construction 

Impact of change in LTCG tax rules

Case 1 : Those who purchased property recently and are selling Now

For example property purchased in year 2018-19 and selling now

1) Indexation was anyways less helpful 

2) as the inflation of 5% to 6% over short periods not make much of difference 

3) The cut in LTCG tax will significantly benefit them

Case 2 : If property was purchased long ago (after year 2001) and is being sold now

For example purchased in year 2002 and selling now

Impact on Building construction valuation

2002 – RCC – Rs 5500/Sqm

Indexed Cost = 5500 X (363/105)

= Rs 19014/Sqm

2024 – RCC – Rs 21780/sqm

Depreciation @ 20%

2024 – RCC – Rs 17424/Sqm

If new LTCG rules applied – Gain will be higher than old rules atleat for construction 

Impact on Plot Valuation

Year 2002 – Plot Rate 

Rs 1200/Sqm

Indexed plot rate = 

1200 X (363/105)

= Rs 4148/Sqm

Year 2024 – Plot Rate 

Rs 12000/Sqm

Gain as per old rule =

(12000 – 4148)

= Rs 7852/Sqm

Gain Tax as per old Rule 

= (7852 X 20%)

= Rs 1570/Sqm

Gain as per New rule

= (12000 – 1200)

= Rs 10800/Sqm

Gain Tax as per New rule

= (10800 X 12.50%)

= Rs 1350/Sqm

So for the Plot Case

New rules are beneficial for taxpayers

In this care we have considered Ready Recknor Rates for both years

If Market Value of plot is much more than ready Recknor Rates

Calculation of gain tax will be changed from case to case 

Case 3 : Those who purchased property before year 2001 and selling now

The indexation benefit will continue to be applicable on properties purchased  before Year 2001

Finance Secretory T V Sonanathan has clarified in the post budget press conference 

So actually, either there is a reduction or no change in respect of the effective rate of tax on immovable property and gold

As per Income Tax Department

The reduction in LTCG tax rate from 20% to 12.50% without indexation for real estate will benefit in majority cases

COMPILED BY:-

Er. Avinash Kulkarni
9822011051

Chartered Engineer, Govt Regd Valuer, IBBI Regd Valuer