From UPSC perspective, the following things are important :
Prelims level: Indexation, Capital Gains Tax Regime.
Why in the News?
The withdrawal of the indexation benefit from the long-term capital gains (LTCG) tax regime has emerged as a contentious decision in the Union Budget for 2024-25.
What is Indexation?
- Indexation is a method used to adjust the purchase price of an asset to account for inflation over the period it was held.
- This reduces the taxable capital gain, as it reflects the increase in the asset’s value due to inflation.
- Purpose: To ensure that the taxpayers are taxed only on the real gains and not on the inflationary increase in the value of the asset.
Changes in the LTCG Regime
- The new LTCG regime removes the indexation benefit for property, gold, and other unlisted assets.
- The LTCG tax rate is reduced from 20% to 12.5%.
- For assets purchased before 2001, the fair market value as of April 1, 2001, is considered the cost of acquisition.
Implications of the Changes
- The government claims the changes simplify the capital gains tax structure without causing a loss to most taxpayers.
- The uniform tax rate for various asset classes is intended to benefit both taxpayers and tax authorities.
Concerns for Taxpayers
- There was significant concern, particularly in the residential real estate sector, about increased LTCG tax liabilities.
- The government clarified that the new regime would be beneficial in most cases, as real estate returns typically outpace inflation.
- The Income Tax Department explained that:
- For properties held for 5 years, the new regime is beneficial if the value has appreciated 1.7 times or more, and
- For 10 years, if the value has increased to 2.4 times or more.
Back2Basics: Capital Gains Tax Overview
| Details | |
| Definition | Tax on profit from the sale of a capital asset. |
| Launch | Introduced in 1956, as part of the Income Tax Act, 1961. |
| Types | Short-Term Capital Gains (STCG): Held for ≤36 months (≤12 months for specified assets).
Long-Term Capital Gains (LTCG): Held for >36 months (>12 months for specified assets). |
| Tax Rates (STCG) | With STT: 15%
Without STT: Applicable income tax slab rates. |
| Tax Rates (LTCG) | Listed Equity Shares & Equity-Oriented Funds: 10% on gains >₹1 lakh without indexation.
Other Assets: 20% with indexation (proposed 12.5% without indexation from FY 24-25). |
| Indexation | Adjusts purchase price for inflation using Cost Inflation Index (CII). |
| Purpose of Indexation | To tax only the real gains, accounting for inflation. |
| Formula (Indexation) | Indexed Cost of Acquisition: (Cost of Acquisition × CII of sale year) / CII of purchase year
Indexed Cost of Improvement: (Cost of Improvement × CII of sale year) / CII of improvement year |
PYQ:[2012] Under which of the following circumstances may ‘capital gains’ arise? 1. When there is an increase in the sales of a product 2. When there is a natural increase in the value of the property owned 3. When you purchase a painting and there is a growth in its value due to increase in its popularity Select the correct answer using the codes given below: (a) 1 only (b) 2 and 3 only (c) 2 only (d) 1, 2 and 3 |
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