Understanding Indexation in Long-Term Capital Gains Tax Calculation
The withdrawal of indexation benefit from long-term capital gains tax regime has raised concerns among taxpayers, particularly in the real estate sector.
Long Term Capital Gains TaxIndexationReal EstateTaxationFinanceReal Estate NewsJul 27, 2024
Indexation is the process of adjusting the original purchase price of an asset or investment to account for inflation over the holding period. This helps arrive at a realistic cost of acquisition, which is essential for calculating gains or losses from the sale or redemption of an asset. Without indexation, the gains may appear extremely high, but they may not reflect the actual value of the asset.
The new LTCG regime proposes to do away with the indexation benefit for calculating LTCG on property, gold, and other unlisted assets, while reducing the LTCG tax rate to 12.5% from 20%. For properties and other assets purchased prior to 2001, the fair market value as on April 1, 2001, will be considered as the cost of acquisition.
The government has justified its decision, saying that it would simplify the capital gains tax structure without causing a loss to most taxpayers. However, there are concerns that the changes would result in a large increase in the LTCG tax liability for those who were looking to sell property. The government has issued clarifications, stating that the new LTCG tax regime would be beneficial in most cases, especially in the property sector.
Industry players and analysts have flagged concerns that the new regime without indexation benefit may lead to an increase in secondary market real estate sales, as people would not want to hold on to assets for more than 3-5 years. There are also concerns that the new regime may incentivise the use of cash in property transactions, as sellers will be tempted to deflate the actual transaction value on paper in order to pay less tax.
Despite the government's explanations, stakeholders remain apprehensive about the implications of the new LTCG tax regime.
Frequently Asked Questions
What is indexation in the context of long-term capital gains tax?
Indexation is the process of adjusting the original purchase price of an asset or investment to account for inflation over the holding period.
What is the purpose of indexation in LTCG computation?
Indexation helps arrive at a realistic cost of acquisition, which is essential for calculating gains or losses from the sale or redemption of an asset.
What are the changes proposed in the new LTCG tax regime?
The new LTCG regime proposes to do away with the indexation benefit for calculating LTCG on property, gold, and other unlisted assets, while reducing the LTCG tax rate to 12.5% from 20%.
What are the concerns raised by industry players and analysts about the new LTCG tax regime?
There are concerns that the new regime without indexation benefit may lead to an increase in secondary market real estate sales, and may incentivise the use of cash in property transactions.
What is grandfathering in the context of the new LTCG tax regime?
Grandfathering is a provision that allows an old rule or law to be applicable to some or all situations up to a certain date, while the new rule or law is applicable to all situations after that date.
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