When Software Overrides Law in LTCG Tax Computation Errors

Ayush Garg – [2025] 179 taxmann.com 115 (Article)

1. Background

1.1. The Finance (No. 2) Act, 2024 introduced a significant amendment to Section 112 of the Income-tax Act, 1961 (“Act”) with effect from 23rd July 2024. The amended provision provides that:

• For transfers before 23.07.2024, long-term capital gains (LTCG) on land/building are taxable @ 20% with indexation.
• For transfers on/after 23.07.2024, such LTCG are taxable @ 12.5% without indexation.

1.2. Further, the second proviso to Section 112 clarifies that where land/building was acquired before 23.07.2024, and income-tax computed under item (B) exceeds the income-tax computed in accordance with the provisions of the Act as they stood immediately before amendment, the excess shall be ignored.

1.3. The relevant extracts of provisions of section 112 of the Act is as follows:
112. (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 shall be the aggregate of,—

(a) in the case of an individual or a Hindu undivided family, being a resident,—

(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been his total income; and
(ii) the amount of income-tax calculated on such long-term capital gains,—

(A) at the rate of twenty per cent for any transfer which takes place before the 23rd day of July, 2024; and
(B) at the rate of twelve and one-half per cent for any transfer which takes place on or after the 23rd day of July, 2024:

Provided that where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, 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 the tax on the balance of such long-term capital gains shall be computed at the rate as applicable in sub-clause (ii):
Provided further that in the case of transfer of a long-term capital asset, being land or building or both, which is acquired before the 23rd day of July, 2024, where the income-tax computed under item (B) exceeds the income-tax computed in accordance with the provisions of this Act, as they stood immediately before their amendment by the Finance (No. 2) Act, 2024, such excess shall be ignored;

1.4. Thus, the second proviso is a legislative safeguard to ensure that tax rate after the amendment does not cause higher tax liability compared to the position before amendment, in respect of land/building acquired before the cut-off date.

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