Jigar M. Patel
International Tax Attorney
Indexation goes Away but Grandfathering to Stay!
Query: I am a senior citizen. I have been living in a residential house, which was purchased by my father in 1985 for Rs. 15 lakhs. I inherited the same under his Will in 2021. I have been planning to sell my house for which I expect to realize the present market value of this property, which is around Rs. 2 crores. Kindly guide me in regard to tax implications of the budget proposals in my case.
Reply: With effect from the budget day 23rd July, 2024, the benefit of indexation has been removed by amendment of section 48 of the Income-tax Act and simultaneous reduction in the rate of tax on long term capital gains (LTCG) from 20% to 12.50%. However, the special provisions relating to grandfathering under sections 49(1) and 55(2) in regard to determining the cost of acquisition where a property is acquired under a Will or inheritance and where the same has been acquired prior to 1st April, 2001 having still been retained, they shall come to your rescue.
In your case, though you have received the property under inheritance for no cost, the fair market value of the same as on 01.04.2001, determined on the then prevailing stamp duty (Jantri) valuation shall be adopted as its cost of acquisition.
Therefore, in your case, the taxable LTCG shall be computed on the basis of the difference in value between the current sale price and the Jantri value of your house as on 01-04-2001. The applicable tax rate shall now be 12.50%.
You can also plan to reduce your tax burden by investing your taxable gain in either a new residential house u/s. 54 or in capital gains bonds u/s. 54EC, or even both, as these exemptions have been retained!
Taxation of Pre-April, 2023 Debt Fund Units how affected?
Query: I had invested Rs. 20 lakhs in units of debt mutual funds in July, 2022. I plan to redeem the same in August, 2024 and the redemption is expected to fetch a consideration of Rs. 24.50 lakhs. My friend tells me that debt fund gains are now taxed as deemed short term capital gains (STCG). Is this true?
Reply: Section 50AA of the Income-tax Act was introduced in Budget 2023 providing that the gains arising from the transfer of any units of a debt mutual fund acquired on or after 1st April, 2023 shall be deemed as STCG. Therefore, the question of deeming your gains as STCG u/s. 50AA should not arise as you had acquired the units prior to 31.03.2023.
While with effect from the date of presentation of the Union Budget on 23rd July, 2024, the benefit of indexation has been removed, you will in fact stand to gain on the facts of your case, keeping in view two amendments as proposed under the Finance Bill, 2024, effective from the very same date.
Firstly, the holding period in respect of such Mutual Fund Units, for qualifying as long term, having been now reduced from 36 to 24 months, the Rs. 4.50 lakhs gain from units held by you for 25 months from July, 2022 to August, 2024 will get taxed as LTCG. Secondly, this LTCG will now attract tax of Rs. 56,250 at the rate of 12.5% in place of the earlier 20%.
