LTCG liability to ease on cost inflation reset

Sub: Economy

Sec: Fiscal Policy

Tags: Long-term capital gains (LTCG) liability

Context:

Long-term capital gains (LTCG) liability on the sale or transfer of any capital asset, such as land, property, trademarks and patents is expected to be lower this year as the Cost Inflation Index (CII) for 2024-25 has been fixed at 363, a rise of 4.3% from 348 for FY24.
Come into force with effect from April 1, 2025.

Cost Inflation Index (CII):

The CII is a way to calculate inflation, that is, an estimated increase in the price of a good or service over the years.
Released annually by the Central Board of Direct Taxes (CBDT).
Indexation is used to adjust the purchase price of an investment to reflect the effect of inflation on it.
A higher purchase price means lower profits, which effectively means a lower tax.
The CII number assists in determining the long-term capital gains on which an assessee is required to pay taxes when she/he files income tax returns the following year.
The index is useful to adjust the capital gains for inflation so that the taxpayers are taxed on real appreciation of the assets and not the gains due to inflation.
The Finance Act, of 2023 removed CII for debt mutual funds.
- April 1, 2024, onwards, gains for funds are taxed at the investor’s tax slab rate, rather than the previous 20% with indexation benefit and 10% without that.
- As a result, if the investor is subject to the highest tax bracket, this rate would be 35.8% (including surcharge and cess).
Impact on taxable income:
- With the help of indexation, one can lower her/his long-term capital gains, bringing down the taxable income.
- The rate of inflation to be used for indexation can be obtained from the government’s CII.

Capital Gain Tax: A tax imposed on the profits (gains) derived from the sale of assets such as land, shares, etc.

Types of Capital Gains:

Long-Term Capital Gains (LTCG)

Short-Term Capital Gains (STCG)

Gains made on assets held for a period exceeding three years (one year for shares and mutual funds).

Capital assets such as land, building and house property shall be considered long-term capital assets if the owner holds it for a period of 24 months or more (from FY 2017-18).
Whereas, below-listed assets if held for a period of more than 12 months, shall be considered as long-term capital asset:
- Equity or preference shares in a company listed on a recognized stock exchange in India
- Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
- Units of UTI, whether quoted or not
- Units of equity oriented mutual fund, whether quoted or not
- Zero coupon bonds, whether quoted or not

Gains made on assets held for a period of three years or less.

The criteria is 24 months (2 years) for unlisted shares (those shares which are not listed in a recognized stock exchange in India) and immovable properties such as land, buildings and house property from FY 2017-18.
Some assets are considered short-term capital assets when these are held for 12 months or less. This rule is applicable if the date of transfer is after 10th July 2014 (irrespective of what the date of purchase is).
These assets are:
- Equity or preference shares in a company listed on a recognized stock exchange in India
- Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
- Units of UTI, whether quoted or not
- Units of equity oriented mutual fund, whether quoted or not
- Zero coupon bonds, whether quoted or not

Tax Rates:

LTCG Tax: Historically, LTCG arising from the transfer of listed equity shares were exempt from tax until the Union Budget 2018-2019. The budget reintroduced LTCG tax on equity investments, taxing gains exceeding 1 lakh at a rate of 10%, without allowing the benefit of indexation. Gains up to January 31, 2018, are grandfathered, meaning they are not subject to the new tax.
STCG Tax: Gains from equity shares held for up to one year are taxed at the rate of 15% for short-term capital gains.

Source: TH