income tax
In response to concerns regarding the elimination of indexation benefits for long-term capital gains (LTCG) tax, the Ministry of Finance has provided clarifications. The Finance (No.2) Act, 2024, now streamlines the taxation of capital gains, establishing uniform holding periods: one year for listed assets and two years for others. Moreover, the general LTCG tax rate has been lowered from 20% to 12.5%, while roll-over benefits remain available. These modifications are designed to facilitate compliance, encourage investment, and alleviate the tax burden for the majority of taxpayers.
For properties, including land and buildings, acquired prior to July 23, 2024, resident individuals and Hindu Undivided Families (HUFs) may select a more favorable tax option. They can choose between the new 12.5% rate without indexation or the previously applicable indexed rate, ensuring that no increased tax liability arises from this revision. This option offers significant relief to domestic investors involved in real estate.
The government anticipates that these reforms will foster investment driven by market choices, particularly within the real estate sector, while simplifying the calculations needed for capital gains. It has addressed concerns regarding the potential discouragement of domestic investments and the need for measures to mitigate impacts on investors. Officials believe the reduced tax rates and simplified regime alleviate such worries.
Will the Minister of Finance be pleased to state:
a. Will the removal of indexation benefits on long-term capital gains tax discourage domestic investments, especially in real estate and long-term assets due to an increased tax burden?
b. Are there any steps being considered to alleviate any negative impact on domestic investors, particularly given the significant outflow of Foreign Institutional Investors (FIIs) from the country?
c. If such measures exist, what are the details? If not, what is the rationale?
THE MINISTER OF STATE IN THE MINISTRY OF FINANCE (SHRI PANKAJ CHAUDHARY):
(a) The Finance (No.2) Act, 2024 has rationalized and simplified the taxation of capital gains. Holding periods are now standardized: one year for listed assets and two years for other assets. The previous general tax rate of 20% on long-term capital gains has been reduced to 12.5%, with roll-over benefits still in place.
These adjustments result in a simplified capital gains regime that eases the computation process for taxpayers, while facilitating a more rational, market-driven choice of investment instruments. The reduction in the general rate to 12.5% under Section 112 of the Income-tax Act, 1961, is anticipated to lessen the tax burden and enhance investment in the real estate sector.
In instances where the property (land or building) is acquired before July 23, 2024, substantial relief is available through an option for resident individuals or HUF taxpayers. If the income tax calculated at the new rate of 12.5% without indexation exceeds that computed under previous provisions, such excess will be ignored. This effectively allows taxpayers to choose a rate that is more beneficial under either the previous or new capital gains regime.
In conclusion, it is incorrect to assert that the simplified capital gains tax regime will increase the tax burden on taxpayers or negatively affect domestic investors.