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Economy
Mahesh

28/07/24 11:25 AM IST

Capital gains tax

In News
  • The changes in the long-term capital gains (LTCG) tax regime, particularly the withdrawal of the indexation benefit, has emerged as one of the most contentious decisions announced in the Union Budget for 2024-25.
Indexation
  • Indexation is the process of adjusting the original purchase price of an asset or investment in order to neutralise the impact of inflation on it.
  • Put simply, it involves revising upward the cost of acquisition of an asset based on the inflation over the period for which it was held.
  • Inflation reduces the value of money over time, and therefore, when an asset is sold or an investment is redeemed, indexation helps in arriving at the cost of acquisition with the impact of inflation over the holding period factored in.
  • The cost of acquisition thus arrived at, is called the indexed cost of acquisition. It resets the base for calculation of gains or losses from the sale or redemption.
  • The returns calculated on the indexed cost of acquisition are generally seen as more realistic than absolute gains calculated on the basis of the actual price at the time of purchase.
  • Without indexation, particularly in cases where the asset was held for an extended period, the gains may appear extremely high, but they may not paint a realistic picture.
  • This is mainly because the inflationary impact on the asset’s value was not taken into account.
  • Now, if the gains accrued on the sale of assets or redemption of investments are taxed, the absence of the indexation benefit would increase the tax outgo, assuming that the rate of tax stays the same.
Govt. recent decision
  • The new LTCG regime proposed in the Union Budget for 2024-25 presented earlier this week by Finance Minister Nirmala Sitharaman does away with the indexation benefit available for calculation of LTCG on property, gold, and other unlisted assets, while reducing the LTCG tax rate to 12.5% from 20%.
  • For properties and other assets purchased prior to 2001, the fair market value as on April 1, 2001 would be considered as the cost of acquisition.
  • According to the government, this exception has been made as even in the old LTCG tax regime, the same principle was used to determine the acquisition cost for such assets.
  • This specific measure, the government argues, will ensure that inherited ancestral property and property bought decades ago is not subject to supernormal tax.
  • The government has justified its decision saying that it would simplify the capital gains tax structure without causing a loss to most taxpayers.
  • This simplification, which removes the differential tax rates for various classes of assets, would help both taxpayers and tax authorities.
Concerns
  • Various industry players and analysts have flagged concerns.
  • There are apprehensions that the new regime without indexation benefit is likely to result in an increase in secondary market real estate sales, as people would not want to hold on to assets for more than 3-5 years.
  • If you are holding a property for a very long time and annual capital value growth is around 10-12%, you will end up paying more tax in the new regime.
  • Another concern that has been flagged by some industry watchers and Opposition lawmakers is that the new regime may incentivise the use of cash in property transactions, as sellers will be tempted to deflate the actual transaction value on paper in order to pay less tax.
  • One criticism that the move has attracted from various sections is the absence of grandfathering for purchases made over the past 24 years.
  • Grandfathering is a provision that allows an old rule or law to be applicable to some or all situations up to a certain date, while the new rule or law is applicable to all situations after that date.
Source- Indian Express

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