Understanding the Recent Amendment to Section in112 of the Income-Tax Act: Key Changes to Long-Term Capital Gains Taxation
Introduction of Amendment in Section 112
Long-Term Capital Gains (LTCG) are an essential component of the income tax framework, especially for those investing in assets like Land or Building or Both, Stocks, and Securities. LTCG arises when an asset is held for more than a specified period before being sold, and it is taxed differently than short-term gains. The recent amendment (Finance Act 2024) to Section 112 of the Income-tax Act, effective from July 23, 2024, introduces significant changes to how LTCG is taxed.
Key Changes Introduced by the Amendment in Section 112
Reduction in Tax Rates
The most notable change in the amendment is the reduction in the tax rates on LTCG. Previously, LTCG was uniformly taxed at 20%. However, with the new amendment:
- Before July 23, 2024: The LTCG continues to be taxed at the rate of 20% (with Indexation benefit).
- On or After July 23, 2024: The tax rate on LTCG is reduced to 12.5% (without Indexation benefit).
This reduction in tax rates applies across different types of entities, making it more favourable to sell capital assets after July 23, 2024.
Individuals and Hindu Undivided Families (HUFs):
- Rate Change: For residents, including individuals and HUFs, LTCG on assets sold before July 23, 2024, will be taxed at 20% (with Indexation benefit). For sales occurring on or after this date, the tax rate decreases to 12.5%.
- Provision for Low Income: If a taxpayer’s total income (excluding LTCG) falls below the taxable threshold, the LTCG is reduced by that shortfall. The tax is then calculated on the remaining LTCG at the applicable rate. For example, if a taxpayer’s income excluding LTCG is ₹2,50,000 (below the taxable limit), and the LTCG is ₹1,50,000, the taxable LTCG will be reduced by ₹50,000, with tax applied to the remaining ₹1,00,000.
- Land or Building or Both Provision: For LTCG arising from the sale of land or buildings acquired before July 23, 2024, if the new 12.5% rate results in higher tax than what would have been calculated under the old rules i.e.(20% with Indexation), the excess tax will be ignored. This provision ensure that taxpayers can take advantage of the option that results in the lowest tax payable for them
Summary:
- Details: For Land or Building or Both assets acquired before July 23, 2024, the amendment includes a safeguard. If the tax calculated under the new 12.5% rate is higher than what it would have been under the previous rules (20%), the excess tax will be disregarded. This ensures that taxpayers who invested in Land or Building or Both before the amendment aren’t unfairly taxed under the new tax rate(i.e.12.5%).
- Rationale: This provision likely aims to protect taxpayers from being disadvantaged by the rule change, especially those who made long-term investments in Land or Building or Both with the expectation of a lower tax burden.
For Taxpayers:
- Old or New Rate: Let’s say the property was purchased in the financial year 2013-14 for ₹40,00,000 and sold in the financial year 2024-25 for ₹90,00,000.
- – Under the new tax rate of 12.5%, the tax would be ₹6,25,000.
- – Under the old tax rate of 20% with indexation, the LTCG would have been ₹4,80,000. Thus, any excess tax calculated at the new rate (₹6,25,000 – ₹4,80,000 = ₹1,45,000) will be ignored, benefiting the taxpayer.
- New Tax Rate Benefit: let’s say the property was purchased in F.Y. 2016-17 for ₹40,00,000 and sold in F.Y. 2024-25 for ₹90,00,000
- – LTCG under the New Rate (12.5%): ₹6,25,000
- – LTCG under the Old Rate (20% with Indexation): ₹7,00,000
- As a result, the new rate leads to a tax saving of ₹75,000 as compared to the old rate.
- In this situation taxpayers go with the new tax rate (12.5%).
Additionally, for properties purchased after July 23, 2024, and sold in subsequent years, taxpayers will no longer have the option to benefit from the 20% tax rate with indexation. Instead, they will be required to pay tax at the rate of 12.5%. Benefit available to Individual/HUF only
Adjustment for Tax-Exempt Income:
- Explanation: The amendment includes a provision that allows taxpayers with a total income (excluding LTCG) below the taxable threshold to reduce their LTCG by the shortfall amount. The tax is then applied to the remaining LTCG at the applicable rate. For instance, if a taxpayer has a total income of ₹2,00,000 and LTCG of ₹1,00,000, the LTCG will be reduced by ₹50,000 (the amount below the taxable limit), with the remaining ₹50,000 subject to tax.
- Example: A taxpayer with a total income of ₹3,00,000 and an LTCG of ₹2,00,000. Since the taxable threshold is ₹2,50,000 the first ₹50,000 of the LTCG would be exempt, and the tax would be calculated on the remaining ₹1,50,000 at the applicable rate.
For calculation and Comparison of LTCG on Sale of Land or Building or both, Click on
LTCG Calculator
Call to Action
As tax laws evolve, it’s essential to stay informed and adjust your financial strategies accordingly. Consider consulting with a tax advisor or financial planner to ensure that you’re making the most of these changes. For more insights on tax laws and financial planning, subscribe to our blog or follow our updates.
