In the Union Budget 2024, the finance minister has made an adjustment regarding the treatment of long-term capital gains (LTCG) in property transactions. Specifically, the indexation benefit has been eliminated, resulting in substantial modifications to the LTCG calculation.
All about Indexation
- Indexation is used to adjust an investment’s purchase price to reflect inflation’s effect on it. Put simply, it involves revising upward the cost of acquisition of an asset based on the inflation over the period for which it was held.
- Inflation reduces the value of money over time, and therefore, when an asset is sold or an investment is redeemed, indexation helps in arriving at the cost of acquisition with the impact of inflation over the holding period factored in. The cost of acquisition thus arrived at, is called the indexed cost of acquisition.
- The income-tax department uses cost inflation index (CII) to calculate the inflation-adjusted cost of acquiring specified assets. Adjusting to inflation increases the acquisition cost, thus reducing the long-term capital gains tax.
- Every year, the central govt publishes CII through its official gazette.
- Budget eliminates indexation benefit for all assets (barring property acquired prior to 2001). This change is likely to lead to higher capital gains tax on sale of long-term capital assets.
- Finance Minister Sitharaman’s recent announcement regarding the introduction of a new flat Long-Term Capital Gains (LTCG) tax rate of 12.5% has sparked concerns within the financial community.
- This newly introduced uniform LTCG tax rate of 12.5% replaces the previously existing varied tax rates that were applied to different asset classes. For example, equities were subjected to a 10% LTCG tax rate, whereas non-financial assets such as real estate and gold were taxed at a higher rate of 20% for LTCG.
