Is the Indexation Removal a Tax Burden or a Benefit?
Investing in house property is a popular choice because it allows you to own a home. Some people also invest to earn a profit by selling the property in the future. It’s important to know that a house property is considered a capital asset for income tax purposes. Any gain or loss from selling a house is taxed under ‘Capital Gains.’ Capital gains or losses can also come from trading stocks, mutual funds, bonds, and other investments.
Holding Period Classification
Starting from FY 24-25, there will be only two holding periods for classifying assets into long-term and short-term: 12 months and 24 months. The 36-month holding period has been removed.
- Listed Securities: The holding period for all listed securities is 12 months. Any listed securities held for more than 12 months are considered Long-Term.
- Other Assets: The holding period for all other assets is 24 months.
Changes in Tax Rates
- Short-Term Capital Gains: The tax rate for listed equity shares, units of equity-oriented funds, and units of business trusts has increased from 15% to 20%. Other short-term and non-financial assets will continue to be taxed at slab rates.
- Long-Term Capital Gains: The exemption limit for long-term capital gains on equity shares, equity-oriented units, or units of business trusts has increased from Rs.1 lakh to Rs.1.25 lakh per year. However, the tax rate has increased from 10% to 12.5%.
Impact of Indexation Removal
- The tax on long-term capital gains for other financial and non-financial assets has been reduced from 20% to 12.5%. However, the indexation benefit is no longer available. Any sale of long-term assets made after July 23, 2024, will be taxed at 12.5% without the indexation benefit.
What is Capital Gains Tax in India?
Any profit or gain from selling a ‘capital asset’ is known as ‘income from capital gains.’ These gains are taxable in the year when the capital asset transfer occurs, referred to as capital gains tax. There are two types of Capital Gains:
- Short-Term Capital Gains (STCG)
- Long-Term Capital Gains (LTCG)
Defining Capital Assets
Capital assets include land, buildings, house properties, vehicles, patents, trademarks, leasehold rights, machinery, and jewelry. This also includes rights in or related to an Indian company, management rights, control, or other legal rights.
Study on the Impact of Indexation Removal
A study evaluated the impact of removing indexation on capital gains tax and found that taxes would increase significantly without indexation. Here’s a summary of the findings:
LTCG Taxes Without Indexation
The study simulated tax calculations for 10 significant cities using RBI’s House Price Index (2011-2024) and the Cost Inflation Index. It found that:
- LTCG taxes, on average, increase 2.9 times without the indexation benefit.
- Longer holding periods result in higher taxes, with or without indexation.
- The average indexed tax on LTCG from 2010-2023 is 3.90%, while the average non-indexed tax rises to 11.34%, implying additional taxes of 7.44%.
Short-Term Holdings
- All taxes with indexation were 0 from 2016-17.
- Without indexation, taxes rose significantly, with values ranging from 3.02% to 8.70%.
All India LTCG
- Due to indexation, no long-term capital gains from 2016-17 resulted in long-term losses.
- Without indexation, there are significant increases in LTCG for all years, including from 2016-17 onwards.
All India LTCG Tax
- There has been a severe loss of tax savings, especially from 2016-17 onwards. Longer holding periods lead to more enormous tax liabilities.