[Opinion] Is Dropping of Rate of Tax on Capital Gain to 12.5% a Bait to Bury Cost Indexation Benefits?

CMA Raji Nathani & CA Gopal Nathani – [2024] 164 taxmann.com 652 (Article)

1. What is capital gain?

Capital gain is the profit earned on the sale of an asset which has increased in value over the holding period. Interest rates directly impact the cost of borrowing for developers and homebuyers. Lower interest rates make borrowing cheaper, encouraging developers to undertake new projects and homebuyers to invest in properties. It stimulates demand in the real estate market, leading to increased sales and development activity. Thus the real estate sector has played a significant role in India’s economy and added significantly to the country’s Gross Domestic Product (GDP) through various channels. Post 2001 the Government has prompted taxpayers to invest into land and building assets directly or indirectly essentially to boost infrastructure in the nation building. Likewise, the prices of the property have also risen due to low interest rates offered by banks on home loans coupled with low interest rates on savings and inflation.

Thus Indexation is a proactive solution to “bracket creep” and helps taxpayers maintain their same purchasing power and avoid higher tax rates brought on by inflation year on year basis of holding asset based on index factor announced by the Government. It is essentially usedto adjust the numbers so that the value of our assets keep up with inflation. Even the bankers would take into account the indexation to make assessment of property value. Approved valuers provide estimates of valuation also considering the inflation. Indexation allowance is thus interwoven in any given transaction for transfer of long term capital asset because the value of money declines as the years go by. The same is also provided under sec 48 of the Income Tax Act,1961

2. Long Term Capital gains

2.1 Indexation Allowance/Mode of computation. (sec 48)

48. The income chargeable under the head “Capital gains” shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:—

1. expenditure incurred wholly and exclusively in connection with such transfer;
2. the cost of acquisition of the asset and the cost of any improvement thereto
   Provided further that where long-term capital gain arises from the transfer of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of clause (ii) shall have effect as if for the words “cost of acquisition” and “cost of any improvement”, the words “indexed cost of acquisition” and “indexed cost of any improvement” had respectively been substituted:
3. “indexed cost of acquisition” means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 2001, whichever is later;

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