The changes in the long-term capital gains (LTCG) tax regime, particularly the withdrawal of the indexation benefit, has emerged as one of the most contentious decisions announced in the Union Budget for 2024-25. 

Indexation

• About: Indexation is the process of adjusting the original purchase price of an asset or investment in order to neutralise the impact of inflation on it. 
  • It involves revising upward the cost of acquisition of an asset based on the inflation over the period for which it was held.
• Purpose of Indexation: Neutralising Inflation is the purpose of Indexation.
  • Inflation reduces the value of money over time, and therefore, when an asset is sold or an investment is redeemed, indexation helps in arriving at the cost of acquisition with the impact of inflation over the holding period factored in.
• Indexed Cost of Acquisition: The cost of acquisition thus arrived at, is called the indexed cost of acquisition. 
  • It resets the base for calculation of gains or losses from the sale or redemption. 
  • The returns calculated on the indexed cost of acquisition are generally seen as more realistic than absolute gains calculated on the basis of the actual price at the time of purchase.

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Long Term Capital Gains (LTCG)

• About: Long-term capital gains refer to the profit earned from the sale of assets held for more than a year. The tax treatment for long-term gains is generally more favourable.
• If long-term capital gains exceed INR 1 lakh, long-term capital gains tax is currently assessed on listed assets at a rate of 12.5%. 

Government’s New Long Term Capital Gains Regime

• Changes in Indexation Benefit: The new LTCG regime eliminates the indexation benefit for calculating LTCG on property, gold, and other unlisted assets.
• Reduced LTCG Tax Rate: The LTCG tax rate has been reduced from 20% to 12.5%.
• Fair Market Value for Older Assets
  • Pre-2001 Purchases: For assets purchased before 2001, the fair market value as of April 1, 2001, will be considered as the cost of acquisition.
  • Rationale: This measure aligns with the old LTCG tax regime, ensuring inherited ancestral property and decades-old purchases are not excessively taxed.
• Government’s Justification
  • No Major Loss to Taxpayers: The government asserts that the new regime will not cause significant financial loss to most taxpayers.
  • Enhanced Clarity and Efficiency: By streamlining the tax structure, the government aims to provide a clearer and more efficient system for both taxpayers and tax authorities.
    • This simplification is expected to ease the tax filing process for taxpayers and improve administrative efficiency for tax authorities.
  • Unified Tax Rates: The government aims to simplify the capital gains tax structure by removing differential tax rates for various asset classes.

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