• This FAQ presents budget proposals for taxing long-term capital gains along with implications, positive and negative and benchmarks with the West. Read and decide. 

The proposed change in the law on Long Term Capital Gains (LTCG) in 2024 Budget is a hot topic of discussion for the last week. I read opinions in the media, spoke to some practicing Chartered Accountants and heard online interviews.

I have explained proposals in FAQ format, compared with USA/UK and shared U.S. tax rates. In order to make it simple excluded impact on REIT/Gold Bonds.  

1. What is the reason for rationalization of LTCG rate of tax?

Neelkanth Mishra, Head of Axis Global Capital, said in an interview to Moneycontrol.com, “There was a visible distortion in the flow of savings, disproportionately flowing into equity, and the reason I think that equity risk premium was so low that it made sense to buy govt bonds, which was not happening. The purpose was to reduce distortion in the flow of savings caused by differential taxation.” He added that if country returns are going to be attractive over the next 3 to 5 years this is a minor change. To hear interview on U Tube 37 minutes

2. Since protests are about the denial of indexation in the real estate class what is the law in the U.S./UK?

A friend who invests in equity markets with homes in India and U.S.A. says, “In US no indexation is allowed for any class of asset.”

A London based practicing chartered accountant of Indian origin says, “Yes we have same indexation allowance in working out CGT - India probably followed tax laws from here.” 

A Melbourne, Australia based practicing chartered accountant of Indian origin says, “Theoretically there is indexation but it only applies to assets acquired before 21 September 1999 and can only be indexed up to 30 September 1999. So it is very rarely used. Most people use the discounting method where LTCG is discounted by 50% and the balance 50% is included in the assessable income.”

3. What are tax rates in USA?

In India individuals pay income-tax to the Central government. Conversely, in USA individuals pay income-tax to the state and federal governments. Further, income-tax rates vary across states. Plus Inheritance and Estate taxes are levied in USA. Read here  

Examples of the Top Marginal Individual State Tax Rates as on 1/1/2024 are California 13.3%, Arizona 2.5%, Kansas 5.7%, New York 10.9%, Rhode Island 5.99%. To know state wise tax rates  Federal rates for 2024 - single filers, “up to $ 11,600 -10%, $ 1,00,526 to $ 1,91,950-24% and above $ 6,09,351-37%. Source

So, income-tax is paid to state and federal governments with two income-tax returns being filed. A person resident in California being a single filer at the highest rate would pay 50.3% (13.3% to the state and 37% to the federal government). Similarly, a resident of Arizona would pay 39.5% (2.5% to the state and 37% federal).

Compare the USA tax rates and filing of two income-tax returns with Bharat. 

4. What are the asset classes?

Class 1 is Real estate, gold. Class 2 is equity and units of equity oriented mutual funds.

5. What is the holding period for each asset class?

As proposed there are 2 holding periods, 12 and 24 months as against a third of 36 months earlier. For listed equities, the holding period is 12 months. For other asset classes it is 24 months. The holding period of immovable property and unlisted shares remains the same as earlier i.e. 24 months. “The holding period of gold, unlisted securities (other than unlisted shares) is reduced from 36 months to 24 months.” 2

6. What is the proposed tax rate for Short-term (12 months) capital gains?

The STCG on equity shares and units of equity mutual funds is increased from 15 to 20%.

The tax rate for all categories of long-term assets is changed to 12.5% as against 20% with indexation for real estate asset and 10% for equity class. For properties purchased before 1 April, 2001 indexation is available till FY 2001. For example see here

CA Harish Sarda wrote in Taxman.com, “This removal of indexation has benefits as well as disadvantages and it is not a black and white picture. Therefore, the new regime is better who has made a significantly higher profit over medium to long term inflationin property. So, the rate of growth depends upon the city or place where the property is located.” 1

On STT paid equity shares LTCG exemption increased from Rs 1 lakhs to Rs 1.25 lakhs.

“The government has announced a significant change in the tax treatment of immovable properties, clarifying that the indexation benefit will be removed for properties bought after 2001 while retaining it for those purchased before that year.” (July 24 report) Also read this TOI report  Indexation means adjusting the cost of the property for inflation.

IT dept clarifies acquisition cost of real estate bought before 2001 for LTCG calculations.  “The Income Tax department has clarified that the cost of acquisition of real estate properties purchased before 2001 will be the fair market value (FMV, not exceeding the stamp duty value) as of April 1, 2001, or the actual cost of the land or building for the purpose of calculation of long-term capital gains (LTCG) tax.” July 27 report Source Business Today

7. Should tax-payers be concerned with change of LTCG tax rate to 12.5%?

According to this MINT article, “The elimination of indexation benefits is a significant concern for numerous investors in the real estate market, especially for those holding properties over the long term. In the absence of indexation, it is anticipated that the taxable capital gain on real estate sales will increase, increasing the sellers' tax burden. The higher tax obligation might reduce the total return from the sale, discouraging real estate investment—particularly for those with longer holding periods where inflation is more significant.”  

Conversely, well-known builder Niranjan Hiranandani told moneycontrol.com, “We view it very positively. We've been asking for matching the long-term capital gains tax with the capital markets for a long period. So historically, those who are investors in the capital markets and also in the case of real estate always looked at this differential of 10% to 20%, which was there in the investments into real estate.” To read full interview

8. Now suppose I bought a house in the 1970/80/90s and sell it, will lack of indexation affect me?

The government has clarified that indexation will be available for houses bought before April 1, 2001. So fears about increase in tax liability should disappear.

Nevertheless, if you are living in a house, sell it and utilize the entire capital gains to buy a new house, there will be no tax payable. For roll-over benefits under section 54, 54B, 54D, 54EC 54F, 54G of the IT Act please click

9. Now suppose I am in need of funds, retired and wish to sell a legacy house and move into a smaller house?

Depending on the actual sales and purchase price some tax may be payable. It will vary from case to case.

The Budget has simplified and rationalized.

According to this India Today article, “Gold mutual funds, gold ETFs, and international equity funds will now benefit from the new LTCG tax rate if held for over 24 months, making them more attractive to investors.”

If at all, anyone is affected significantly it is investors in real estate projects. The extent of effect depends on a variety of factors for e.g. actual price increase of property over time.

In case of any errors please write back with sources.  

References

1. Taxman article by CA Harish Sarda

2. FAQ on new Capital Gains Tax Regime

The author is a Chartered Accountant.