Finance Bill cleared in Lok Sabha with capital gains tax relief on property sales

The Lok Sabha on Wednesday cleared the tax proposals presented in the union budget for FY25 along with amendments proposed by finance minister Nirmala Sitharaman, including restoration of inflation adjustment benefit in taxing gains from property sales.

Sitharaman said that amendments are brought to the Finance Bill as the National Democratic Alliance (NDA) government follows the practice of broad-based consultation across the country after presenting the union budget so that the budget reflects the aspirations of the common man.

The minister proposed in her reply to the discussion on the Finance Bill in the House that when long term capital asset of land or building acquired before 23 July is sold, tax payers can compute the applicable tax on capital gains under the new scheme at 12.5% without indexation as well as under the old scheme at 20% with indexation and can pay the tax which is lower of the two.

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“Not only are we coming up with an option, but also are saying—calculate the tax under both the options and tell us whichever is the lower and pay that,” Sitharaman said.

Indexation refers to adjusting the purchase price of an asset for inflation while computing the capital gain. This helps to lower the amount on which tax is applied.

While seeking to remove the indexation benefit when the budget was presented last month—an exercise in simplification of the capital gains tax structure—the government had also proposed to lower the tax rate on such property transactions.

This invited mixed reactions about the combined impact on the tax obligation. If a seller uses the funds to buy another property within a specified time, there is no tax liability.

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The minister also explained that the logic of proposing changes to the regime of capital gains tax in the Finance Bill last month was to have more uniformity in the treatment of asset classes for ease of computation and record keeping.

The Lok Sabha passed the bill by a voice vote. Once the Rajya Sabha passes the bill, it will go for Presidential assent.

Sitharaman rejected Opposition criticism of the budget and pointed out that the government has dropped the angel tax—taxation of share premium on unlisted shares—and enhanced the threshold for taxation of long term capital gains on listed shares from ₹1 lakh to ₹1.25 lakh a year. This is meant to benefit the middle class, the minister said.

Sitharaman also explained that customs duty was lowered in the budget to bring down the prices of raw materials and inputs to make domestic production far more cost effective. Reduction of duty on certain inputs on labour intensive industries such as leather and textiles will boost job creation and address duty inversion issues which are prevalent in the textile sector, Sitharaman said.

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The minister sought to defend India’s direct tax regime, saying that shifting the tax obligation on dividends from the company to shareholders meant that dividends are taxed in the hands of tax payers as per their income levels.

“This effectively meant that the richer shareholders will pay tax on dividend at 39% rate, whereas in contrast, small and middle-income taxpayers will pay tax on dividends at even less than 10%, which is the effective income tax rate,” Sitharaman said.

Those earning more than ₹5 crore a year, pay a surcharge of 25% on income above this threshold, which makes their effective tax rate on such income 39%.

“Every time we present a budget, during the recess when the standing committees are working on the proposals department-wise, I have gone round the country to various destinations with the budget, met up with professionals, taxpayers, consultants, industry and traders, taken their viewpoint, come here and brought in government amendments so that budget will be representative of the common people's aspirations,” Sitharaman said.

Experts welcomed the restoration of the indexation benefit.

“There may be many taxpayers who entered into agreements to sell their property before 23 July 2024 and the registered deed was entered after 23 July Budget. They will get clarity now since they can compute the taxes as per the old regime and new regime of capital gains and pay lower of them with no additional burden,” said Amit Maheshwari, tax partner at AKM Global, a tax and consulting firm.

Maheshwari also said that it is important to note that this change is not applicable to non-residents, partnership firms and LLPs.

Also, as per the amendments to the bill approved on Wednesday, non-residents selling unlisted shares held for long term will not be able to get foreign exchange fluctuation benefit now while computing their capital gains.

In the case of sale of unlisted shares, whether it is by residents or non-residents, tax is to be paid at 12.5% on the long term capital gains without indexation and foreign exchange fluctuation benefit after 23 July. In other words, capital gains due to foreign exchange fluctuation shall also be taxed in the hands of non-resident.