Tax on long-term capital gains.
197(1)
Where the total income of an assessee includes any income arising from the transfer of a long-term capital asset which is chargeable under the head “Capital gains”, the tax payable by the assessee on the total income, subject to sub-sections (2) and (3), shall be the aggregate of—
- (a) income-tax payable on the total income as reduced by such long-term capital gains, had the total income, as so reduced, been his total income; and
- (b) income-tax calculated on such long-term capital gains at the rate of 12.5%.
197(2)
In the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by long-term capital gains computed under sub-section (1) is below the maximum amount which is not chargeable to incometax, then,—
- (a) such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax; and
- (b) the tax on the balance of such long-term capital gains shall be computed at the rate as referred in sub-section (1).
197(3)
In the case of an individual or a Hindu undivided family, being a resident, in the case of transfer of a long-term capital asset, being land or building, or both, which is acquired before the 23rd July, 2024, the excess income-tax computed as per the following formula shall be ignored:–– E = A – B where–– E = excess income-tax to be ignored; A = income-tax computed under clause (b) of sub-section (1); B = income-tax computed under clause (b) of sub-section (1) taking the rate as 20% and the capital gains is computed by taking the cost of acquisition as indexed cost of acquisition and the cost of improvement as indexed cost of improvement.
197(4)
Where the gross total income of an assessee includes any income arising from the transfer of a long-term capital asset, the gross total income shall be reduced by such income and the deduction under Chapter VIII shall be allowed as if the gross total income as so reduced were the gross total income of the assessee.
197(5)
In this section,—
- (a) “securities” shall have the same meaning as assigned to it in section 2(h) of the Securities Contracts (Regulation) Act, 1956;
- (b) “listed securities” means the securities which are listed on any recognised stock exchange in India;
- (c) “unlisted securities” means securities other than listed securities;
- (d) “indexed cost of acquisition” and “indexed cost of improvement” shall have the meanings respectively assigned to them in section 72.
Section Summary:
This section outlines the tax treatment of long-term capital gains (LTCG) in India. It specifies how LTCG is taxed, the applicable rates, and special provisions for individuals and Hindu Undivided Families (HUFs) regarding the transfer of long-term capital assets, particularly land or buildings. The section also clarifies the treatment of LTCG in relation to deductions under Chapter VIII of the Income Tax Act.
Key Changes:
- Tax Rate on LTCG: A flat tax rate of 12.5% is introduced for LTCG, replacing the previous regime where LTCG on certain assets (like listed securities) was exempt.
- Special Provisions for Land/Buildings: For individuals and HUFs transferring land or buildings acquired before July 23, 2024, the excess tax calculated under a specific formula (E = A – B) is ignored, providing relief.
- Indexation Benefit: The section reintroduces the concept of indexed cost of acquisition and improvement for calculating LTCG on certain assets, which was previously removed for some asset classes.
- Interaction with Deductions: LTCG is excluded from gross total income for the purpose of calculating deductions under Chapter VIII, ensuring that deductions are computed on the reduced income.
Practical Implications:
- For Individuals and HUFs:
- If their total income (excluding LTCG) is below the taxable threshold, the LTCG is reduced by the shortfall, and tax is calculated only on the remaining LTCG.
- For land or buildings acquired before July 23, 2024, the tax calculation ignores the excess tax computed under the formula, reducing the tax burden.
- For All Taxpayers:
- LTCG is taxed at 12.5%, which may increase the tax liability for those previously enjoying exemptions.
- Indexation benefits are restored for certain assets, reducing the taxable gain by accounting for inflation.
- Compliance: Taxpayers must ensure accurate computation of LTCG, including indexed costs, and report it separately in their income tax returns.
Critical Concepts:
- Long-Term Capital Asset: An asset held for more than 36 months (or 12/24 months for certain assets like listed securities, units, etc.).
- Indexed Cost of Acquisition/Improvement: Adjusts the purchase price and improvement costs for inflation using the Cost Inflation Index (CII) to reduce taxable gains.
- Excess Tax Ignored (E = A – B):
- A: Tax computed at 12.5% on LTCG.
- B: Tax computed at 20% on LTCG using indexed costs.
- E: The difference (A – B) is ignored, reducing the tax liability.
Compliance Steps:
- Calculate LTCG: Determine the sale price, deduct the indexed cost of acquisition and improvement, and compute the gain.
- Apply Tax Rates:
- For most LTCG, apply the 12.5% rate.
- For land/buildings acquired before July 23, 2024, compute tax under both methods (12.5% and 20% with indexation) and ignore the excess.
- Report in ITR: Include LTCG separately in the income tax return, ensuring proper documentation of indexed costs and calculations.
Examples:
Scenario 1: An individual sells a property acquired in 2010 for ₹50 lakh (indexed cost: ₹30 lakh). The LTCG is ₹20 lakh.
- Tax at 12.5%: ₹2.5 lakh.
- Tax at 20% with indexation: ₹4 lakh.
- Excess tax ignored (E = ₹2.5 lakh – ₹4 lakh): ₹1.5 lakh is ignored. No tax is payable in this case.
Scenario 2: An HUF sells listed shares held for 3 years, realizing a gain of ₹10 lakh.
- Tax at 12.5%: ₹1.25 lakh.
- No indexation benefit applies here, as the flat rate is used.
This section ensures clarity on LTCG taxation while providing relief for specific asset classes and taxpayers.