[Opinion] Has Indexation Benefit Been Actually Restored Post-Budget Uproar?

Kanika Mahajan & Rohit Bhatt – [2024] 167 taxmann.com 756 (Article)

The Indian Union Budget was presented on 23 July 2024 bringing about humongous changes in direct taxes, specifically in the taxation of Capital Gains. The most controversial proposed amendment being the withdrawal of indexation benefits conferred by Section 112 of the Income Tax Act, 1961 (‘Act’) for computation of Long-Term Capital Gains (‘LTCG’). Simultaneously, the rate of taxation of LTCG was reduced from 20% to 12.5%.

However, the budget encountered huge backlash, particularly from the middle class since the proposed amendment was viewed as being purported to snatch away the benefit of adjustment of cost of acquisition or cost of improvement with the inflation in the economy (i.e., Cost Inflation Index). Hence, the Finance Bill was amended to become the Finance Act (No.2), 2024.

Section 48 of the Act is the computation mechanism for income arising from capital gains, allowing expenses in connection with the transfer and cost of acquisition or improvement of the capital asset being transferred. The second proviso to Section 48 provides indexation benefit to the assessee for computation of LTCG taxable under Section 112 of the Act.

The words ‘which takes place before the 23rd day of July 2024’ have been inserted to the second proviso, The amended proviso is reproduced below-

‘Provided further that where long-term capital gain arises from the transfer (which takes place before the 23rd day of July, 2024) 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’

Hence, it is amply clear that the benefit of indexation shall not be available for computation of capital gains on asset transferred with effect from 23 July 2024, conversely that benefit of indexation under section 112 of the Act is available only in case of transfers taking place up to 22 July 2024.

Inter alia, a proviso has been inserted to Section 112 to provide that in case where the transferor is a resident individual or HUF transferring an asset being land or building or both, acquired before 23 July, 2024 and the income-tax computed at rate of 12.5% without indexation (i.e., under new provisions) exceeds the income-tax computed in accordance with the provisions of the Income-tax Act, 1961, as they stood immediately before their amendment vide the Finance (No. 2) Act, 2024, such excess shall be ignored.

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