Removal of indexation to calculate capital gains on immovable properties targets the rich while benefiting the middle class, government said on Tuesday. It also clarified that indexation benefit for the period up to 2001 will continue.

In the Budget, short-term gains on certain financial assets were hiked to 20 per cent from 15 per cent while under the long-term capital gains (assets held for more than a year will be classified as long term), the rate is to be hiked to 12.5 per cent from 10 per cent. The exemption limit for long-term capital gains has increased to ₹1.25 lakh from ₹1 lakh.

Indexation

Also, with rationalisation of rate to 12.5 per cent, indexation available under section 48 of the IT Act is proposed to be removed for calculation of any long-term capital gains, which is presently available for property, gold and other unlisted assets. “This will ease computation of capital gains for the taxpayer and the tax administration,” said the Budget document.

Explaining the provision, Finance Secretary TV Somanathan said effective tax rate for 95 per cent people will not be more as “12.5 per cent without indexation benefit is higher than 20 per cent with indexation”. He said normally, long-term gain in real estate is around 20 per cent. “In the existing regime, effective tax rate (considering inflation benefit of 4 per cent), effective tax rate would be 3.2 per cent. However, with the new rate (without indexation), it would be 2.5 per cent,” he said while adding that this is going to benefit the middle class.

Revenue Secretary Sanjay Malhotra explained that based on data, around 88 per cent of LTCG earners have income of more than ₹15 lakh, while 61 per cent have more than ₹1 crore. This clearly shows that the overall exercise is focussing on the rich.

Explaining the provision, Harsh Bhuta, Partner with Bhuta Shah and Co LLP, said that they will only be two holding periods – 12 months (for listed securities) and 24 months (all other securities) – to determine short term and long-term capital gains. Thus, importantly holding period for bonds and debt mutual funds for being classified as long term reduced 24 months from 36 months. On the issue of revising the rate for LTCG for other securities (non-listed) to 12.5 per cent (without indexation) from 20 per cent (with indexation), he said: “This will be a big impetus for sale of immovable properties as long term capital gains tax would significantly reduce.”

Kalpesh Maroo, Partner with KPMG, said: “Indian founders and promoters would be smiling at the reduction of capital gains tax on exits from 20 per cent to 12.5 per cent (without indexation) and foreign investors are hit where it matters most. Exits would now be taxed at 12.5 per cent as opposed to 10 per cent.”

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