IMPACT OF COST INFLATION INDEX AFTER AMENDMENT MADE BY FINANCE ACT, 2024

The Finance Act, 2024, introduced significant amendments affecting the computation of capital gains tax in India, particularly concerning the Cost Inflation Index (CII) and indexation benefits.

As Indexation benefit available under second proviso to section 48 has been removed for calculation of any long-term capital gains which is presently available for property, gold and other unlisted assets w.e.f. 23.7.2024. The amended proviso reads as below:

“Provided further that where long-term capital gain arises from the transfer (which takes place before the 23rd day of July, 2024)of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first provi­so, the provisions of clause (ii) shall have effect as if for the words "cost of acquisition" and "cost of any improvement", the words "Indexed cost of acquisition" and "Indexed cost of any improvement" had respectively been substituted:”

So, the Long-Term Capital Gain is to be arrived at without allowing Indexation if the property is sold on or after 23.7.24 whereas tax can be calculated taking into consideration of second proviso of section 112.

Key Changes Introduced by the Finance Act, 2024:

Reduction in Long-Term Capital Gains (LTCG) Tax Rate- The LTCG tax rate on the sale of immovable property has been reduced from 20% to 12.5%.

Removal of Indexation Benefits- The benefit of indexation, which allowed taxpayers to adjust the purchase price of an asset for inflation using the CII, has been removed for computing LTCG on immovable properties.

Option for Properties Acquired Before July 23, 2024- For immovable properties acquired before July 23, 2024, taxpayers have the option to choose between:

• 12.5% tax rate without indexation.

• 20% tax rate with indexation.

It is pertinent to note that the relief has been provided only to individuals and HUFs who are residents, and thus, the Non-Resident Indians (and other non-residents) cannot take benefit of the aforesaid relief. Similarly, this relief will not be available if the real estate is held by such individuals and HUFs not directly but through a company or Limited Liability Partnership etc. Also, the relief has been provided only to restrict the tax outflow up to the tax under the old capital gains tax regime and it cannot result in carrying forward any loss on account of indexation under the earlier capital gains tax regime.

The changes in the LTCG on sale of unlisted securities or shares by NRI or foreign company are as follows:

• Sale before 23 July 2024: Taxable at 10% (without benefit of indexation or foreign currency conversion benefit

• Sale on or after 23 July 2024: Taxable at 12.5% (without benefit of indexation or foreign currency conversion benefit

Earlier the Finance Bill, 2024 had not specifically dealt with the tax rate on LTCG arising from transfer of such capital assets on or after 23 July 2024 which could mean that the applicable LTCG tax will be 12.5% with foreign currency benefit. This has now been addressed by specifically providing that the tax rate on LTCG arising from transfer of such capital assets on or after 23 July 2024 will be 12.5% and the LTCG will be computed in INR and without benefit of indexation.

Impact of These Changes:

Increased Tax Liability for Long-Term Asset Holders- Previously, taxpayers could adjust the purchase price of long-term assets for inflation using the CII, effectively reducing taxable gains.

With the removal of indexation benefits, the entire appreciation in asset value is now subject to tax, potentially increasing the tax burden for assets held over long periods.

If the property is held for several years or decades, there may be a possibility that the tax outflow in the previous regime (with indexation) may prove to be beneficial for the reason that the indexation benefit may outdo the reduction of tax rate.

Similarly, the sale of newly acquired properties will benefit from these tax proposals as the indexation benefit will be marginal.

Potential Impact on Investment Decisions- There is another impact of the new tax proposal on removal of indexation. These provisions will also increase the amount of capital gains. This would mean that those who intend to invest capital gains in a new house for availing the rollover benefits under Section 54 or section 54F of the IT Act would now be required to invest more money to avail the benefit.

Imagine a taxpayer has sold a property for Rs 1,00,000. Its actual cost was Rs 20,000, and after indexation, the cost is Rs 40,000. Now, the capital gain would be Rs 80,000 under the new tax proposal, instead of Rs 60,000 under the prevailing tax regime. Therefore, the taxpayer would now be required to invest Rs 80,000 in a new house property to avail the exemption from capital gains tax.

The removal of indexation benefits may influence investment strategies, particularly in real estate and other long-term assets, as the tax advantages of holding assets for extended periods have diminished.

Simplification of Tax Computation-The standardized tax rates aim to simplify the capital gains tax regime. Taxpayers no longer need to compute indexed costs, reducing complexity in tax calculations.