Jigar M. Patel
International Tax Attorney
When the three decades plus benefit of indexation for long term capital gain tax computation was eliminated in a single stroke by Budget 2024, several taxpayers, likely to be adversely affected by its impact, aired their grave concerns to the FM.
Indexation only for Land / Building and that too with conditions attached
In response, under the amendments to the Finance Bill, 2024, indexation has come to be restored, with the grant of option to taxpayers to pay the lower of the two taxes computed on their taxable LTCG, being tax without indexation at 12.5% or tax with indexation at 20%. However, unlike the earlier benefit of indexation in case of all long-term assets viz. land and buildings, jewellery & ornaments, bullion, shares of a private company, etc., the present relief has been granted only to long term assets, being land or building or both.
Moreover, this relief granted by the FM has been offered with a number of terms and conditions attached. The impact of the same can be better appreciated with the help of a few case studies discussed hereinafter.
Case-Study 1: Shah and Mehta are partners in a partnership, which had purchased land a few years back. Whether the benefit of indexation can be availed in case the land is sold by the partnership firm after 23rd July, 2024?
Response: As per the pre-budget provisions, the benefit of indexation was available in case of all taxpayers. However, the indexation benefit has now been restored only in the case of an individual or HUF. Other taxpayers such as firms, companies, associations etc. shall no longer be eligible for the benefit of indexation, in case of transfer a capital asset.
Case-Study 2: Patel, who is an NRI settled in the US, has received ancestral land in Gujarat under his grandfather’s Will in 2023-24. The said land was purchased by his grandfather in the 1990s. Patel wishes to sell the land now and remit the proceeds back to the US. What would be the tax consequences in his case?
Response: There is not necessarily good news for Patel. Yes, the benefit of indexation for LTCG in the nature of land and buildings has indeed been restored. However, the said benefit has been made available only in case of an individual or HUF who is a ‘resident’. Therefore, in this case, the LTCG arising to Patel, computed on the basis of the difference between the sale consideration and the Fair Market Value of the land as on 1st April, 2001 shall be taxable at 12.5% without allowing any benefit of indexation.
Case-Study 3: Choksi plans on selling his residential house in September, 2024 and along with the benefit of indexation, he is keen to claim exemption by investing the taxable capital gains, computed after claiming the benefit of indexation, in another residential house and/or by purchasing notified capital gain bonds. Kindly advise.
Response: Indexation as a concept for computation of taxable capital gains has been done away with by the amendment to Section 48 in the Finance Bill, 2024. The restoration of indexation introduced for the limited purpose of determining the tax liability. For computing exemption under Sections 54, 54B or 54EC, the amount of taxable LTCG to be invested would now need to be calculated without indexation. Moreover, it would not be possible now to compute any loss giving effect to indexation and adjust the same against any other eligible capital gain.
