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Introduction: The much awaited Union Budget 2024-25 has been presented by our hon’ble Finance Minister Smt. Nirmala Sitharaman today on 23rd July 2024, before the Parliament. The budget speech of FM highlighted some very welcome budget amendments in the direct tax domain. The new personal tax regime has been further made sweeter. The tax slab rates have been proposed to be reduced in the new personal tax regime. The standard deduction in case of salaried class has been proposed to be increased from Rs. 50,000 to Rs. 75,000/-. The deduction available under section 80CCD(2)(b) in respect of private sector employer’s contribution to National Pension Scheme (NPS) has been proposed to be increased from the present 10% of salary to 14% of the salary of the concerned employees. These amendments are indeed welcome and will surely encourage a further switch towards the new personal tax regime, by the taxpayers.
However, there is one particular proposed amendment in the Finance Bill (No. 2) of 2024, which comes to light only by perusing the Fine Print of the Bill. This amendment is in respect of the taxability of long-term capital gains income arising on sale of an immovable property (land and building), w.e.f. 23.7.2024 and onwards.
Proposed Amendment in the Finance (No. 2) Bill, 2024
The clause 20 of the Finance Bill (No. 2) 2024, reads as under:
“Amendment of section 48.
20. In section 48 of the Income-tax Act, in the second proviso, after the words “where long-term capital gain arises from the transfer”, the brackets, words, figures and letters “(which takes place before the 23rd day of July, 2024)” shall be inserted and shall be deemed to have been inserted with effect from the 23rd day of July, 2024.”
The Explanatory Memorandum to the Finance Bill (No. 2) 2024, in this regard reads as under:
“Rationalisation and Simplification of taxation of Capital Gains
……2.1 The rate of long-term capital gains under provisions of various sections of the Act is proposed to be 12.5% in respect of all category of assets. This rate earlier was 10% for STT paid listed equity shares, units of equity-oriented fund and business trust under section 112A and for other assets it was 20% with indexation under section 112…….
3. Thirdly, simultaneously with rationalisation of rate to 12.5%, indexation available under second proviso to section 48 is proposed to be removed for calculation of any long-term capital gains which is presently available for property, gold and other unlisted assets. This will ease computation of capital gains for the taxpayer and the tax administration.”
Impact Assessment of Budget Amendments with Practical Examples
By virtue of the above stated budget amendments proposed in the Finance (No.2) Bill, 2024, w.e.f. 23.7.2024, the tax rate on long-term capital gains arising on sale of immovable property (land and building) has been reduced from the present rate of 20% to 12.5%. However, at the same time, the existing indexation benefit available under second proviso to section 48 of the Income Tax Act, has been withdrawn.
The impact assessment of proposed amendment in Union Budget 2024-25, pertaining to reduction in long term capital gain tax rate from 20% to 12.5% but simultaneous removal of indexation benefit can be understood with the help of an example.
Practical Example: Let us suppose, Mr A has acquired a house property for a purchase consideration of Rs. 1,00,000/- in different assessment years starting from AY 2001-02 till AY 2023-24 and he intends to sell his house property, after the budget presentation, on 24.7.2024, at different values of sale considerations, as considered in different scenarios, as tabulated below.
The comparative analysis of his tax liability in respect of his long-term capital gain on sale of his house property, under the existing provisions of the Income Tax Act, and after the proposed budget amendments, in different scenarios, is tabulated as under:
Conclusion: Therefore, from the above comparative analysis, it becomes clear and evident that the Break Even Point of the tax liability of higher LTCG tax rate of 20% with indexation benefit (as per pre-amended provisions) and the lower LTCG tax rate of 12.5% without indexation benefit (as per proposed Budget amendment), is coming at the Sale Consideration of Rs. 8,00,000 assuming a price appreciation of roughly around 8 times, if it is assumed that the Property was purchased in AY 2001-02 and sold in FY 2024-25. This roughly translates into a CAGR of 9%, which is the Break Even Point needed for the property price appreciation, where both the pre-amended and post budget LTCG tax liabilities become equal.
At a sale consideration of less than the break-even point of Rs 8 lakhs, (8 times increase), say Rs 3 lakhs or Rs 5 lakhs, the pre-amended provision of higher tax rate of 20% with indexation, is more beneficial as compared to the amended provision of reduced tax rate of 12.5% without indexation on long term capital gains of property, if the said property was purchased in comparatively older/earlier assessment years, viz, AY 2012-13 and prior years at a sale consideration of Rs 3 lakhs and AY 2008-09 and prior years at a sale consideration of Rs 5 lakhs.
[For any related queries, the author Sh. Mayank Mohanka, FCA can be reached at camayank@smmohanka.com]
