With every new tax law and amendment, taxpayers face fresh challenges and complexities. One significant recent change involves the taxation of capital gains, a shift that will impact many taxpayers. If you’re looking to claim an exemption from Long Term Capital Gains (LTCG) tax, it’s essential to understand the provisions updated by the Finance Act, 2024 (No. 2).
For individuals and Hindu Undivided Families (HUFs), the primary sections used to claim exemptions from capital gains are Section 54, Section 54F, and Section 54EC. Here’s a simplified look at how this work:
- Section 54 & Section 54F:
- These sections allow exemptions if you invest the capital gains in purchasing or constructing a residential property within specific timelines:
- For purchase: Within one year before or two years after the sale/transfer date.
- For construction: Within three years from the sale/transfer date.
- These sections allow exemptions if you invest the capital gains in purchasing or constructing a residential property within specific timelines:
- Exemption Under Section 54EC:
- You can save LTCG tax from the sale of immovable property by investing in specified capital gain bonds within six months from the date of the asset transfer.
Note: Section 54B also offers capital gain exemption specifically for the sale and purchase of agricultural land.
Changes in Capital Gain Taxation
For immovable property acquired before July 23, 2024, individual and HUF taxpayers will calculate LTCG tax using the lower of two methods:
- Option 1: Tax at 20% with the benefit of indexation.
- Option 2: Tax at 12.50% without indexation.
If the tax at 12.50% is higher, taxpayers may still opt to pay 20% with indexation.
Impact on Capital Gain Exemption
The new rules mean that if you’re selling a property acquired before July 23, 2024, you can benefit from whichever method results in the lower tax. However, this decision also affects how you should plan for capital gain exemptions.
Example:
Mr. Ram sold a house after July 23, 2024, for ₹2 Crore. He originally bought it for ₹30 Lakh, and the indexed cost is now ₹65 Lakh. The LTCG under the 12.50% option (without indexation) is ₹1.70 Crore, whereas it’s ₹1.35 Crore under the 20% option (with indexation). Let’s look at two scenarios:
- No Plans for Capital Gain Exemption:
- Tax @ 12.50%: ₹21.25 Lakh
- Tax @ 20%: ₹27 Lakh
- In this case, the 12.50% option is more favorable.
- Planning for Capital Gain Exemption:
- Under the 12.50% option, Mr. Ram needs to invest ₹1.70 Crore, whereas under the 20% option, he only needs to invest ₹1.35 Crore to reduce his tax liability to zero. The 20% option requires a smaller investment, making it more attractive.
However, the best choice depends on the amount Mr. Ram plans to invest. Here’s a quick comparison:
| Investment for Capital Gain Exemption | Taxable LTCG @ 12.50% | Taxable LTCG @ 20% | Tax @ 12.50% | Tax @ 20% | Best Option |
|---|---|---|---|---|---|
| ₹45,00,000 | ₹1,25,00,000 | ₹90,00,000 | ₹15,62,500 | ₹18,00,000 | 12.50% |
| ₹60,00,000 | ₹1,10,00,000 | ₹75,00,000 | ₹13,75,000 | ₹15,00,000 | 12.50% |
| ₹75,00,000 | ₹95,00,000 | ₹60,00,000 | ₹11,87,500 | ₹12,00,000 | 12.50% |
| ₹76,66,667 | ₹93,33,333 | ₹58,33,333 | ₹11,66,667 | ₹11,66,667 | Neutral |
| ₹90,00,000 | ₹80,00,000 | ₹45,00,000 | ₹10,00,000 | ₹9,00,000 | 20.00% |
| ₹1,15,00,000 | ₹55,00,000 | ₹20,00,000 | ₹6,87,500 | ₹4,00,000 | 20.00% |
| ₹1,35,00,000 | ₹35,00,000 | ₹0 | ₹4,37,500 | ₹0 | 20.00% |
As shown, the ideal tax rate depends on the investment amount. If the investment is under ₹76.67 Lakh, the 12.50% rate is better, while the 20% rate is preferable for higher investments.
Conclusion
While tax laws are designed to simplify processes, they often introduce new complexities. The recent amendments in capital gains taxation, though intended to streamline the system, have added layers of decision-making for taxpayers. As we anticipate further changes in the coming months, we hope for more straightforward and consistent tax laws that promote clarity and fairness.