How Removal Of Indexation Will Affect Capital Gains

The Finance No.2 Bill 2024 has as many as 99 clauses relating to the Income Tax Act. As always, many of these are justified as being rationalisations and simplifications, and, as always, several are retrospective or have a retroactive impact in the plans that assessees have made, and which are set at naught by amendments, which came into effect from July 23, the day the Budget was presented.

The most striking of these are provisions relating to capital gains tax. Until now, the capital gain on the sale of a property, which is a long-term capital asset, was calculated after deducting “the indexed cost”. This system was in force for many years, and was peremptorily removed with effect from July 23.

An index figure was announced each year with reference to the year 2001 and the index already announced for FY 2024-25 is 3.63 times the value as of April 1, 2001, in respect of long-term capital assets. Now the indexation benefit is being taken away. This is being done by way of an amendment to the second provision to section 48, and the amendment proposed is that only transfers before July 23, 2024 will be eligible for indexation.

Fortunately, section 55(2)(b)(i), which provides for the step up to the value as on April 1, 2001, in the case of a capital asset, which was acquired before 2001, has not been removed or amended.

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There are many transactions in process just now where an assessee proposed to sell the properties and has computed tax liability based on the indexation from 2001 or from the date of acquisition, whichever is later.

These calculations will now no longer be applicable. The rate of tax on a long-term capital gain will be 12.5% plus surcharge plus cess. The effect on each transaction will vary, and this needs to be looked into.

There are several other situations which arise which need to be considered. One situation is when a non-resident has proposed to sell a property and has applied to the assessing officer under section 197 of the Income Tax Act for a certificate for deduction of tax at a lower rate and has been granted such a certificate on the basis of the indexation. Now the certificates may have to be reviewed, or the seller may have to pay more tax.