Understanding the new 12.5% tax rate for Long-Term Capital Gains (LTCG)

The Finance Act (No.2), 2024 made a significant change to the way LTCG is taxed. This article outlines the key changes, available options and how the g randfathering relief operates.

A flat rate 12.5% rate was introduced under section 112 of the Income Tax Act, 1961 to tax all LTCG – these rates kick in for transfers made after 23 July 2024. Also, a provision was brought in where resident individuals and Hindu Undivided Families (HUFs) have been given the option of choosing between 20% tax with cost indexation or 12.5% without cost indexation, only for land or buildings acquired prior to 23 July 2024 (the option is available only for assets brought before 23 July 2024 and transferred after 23 July 2024).

The Government realized that there could be situations where some taxpayers could be adversely impacted by this change. To mitigate this, a grandfathering provision was introduced. It makes for some interesting reading – the provision says that for resident individuals/HUFs, where the tax computed on LTCG (land/building) under the new rate of 12.5% exceeds that computed under the old rate of 20%, then such excess will be ignored.

Let us try to understand this with an example:

Y, an individual, purchased a building on 18 July 2010 for ₹ 16,00,000. She sold this asset on 20 October 2024 for ₹ 50,00,000. Since the holding period is 10 years, any gains would be long term in nature. The computation of capital gains for Y will be as follows:

(Amount in ₹)

Particulars	New Tax rate (12.5%)	Old Tax rate (20%)
Sale Consideration [A]	50,00,000	50,00,000
Cost of acquisition / Indexed cost of acquisition [B]	16,00,000	34,77,844 (16,00,000*363/167)
LTCG [C] = [A] – [B]	34,00,000	15,22,156
Tax on LTCG (12.5%/20%) [D]	425,000	304,431

The tax as computed under the new rate is higher than the one under the old rate. The higher tax of ₹ 120,569 will be ignored and Y can show capital gains at ₹ 15,22,156 when filing her return of income.

The new provision only talks about tax differential – it protects the taxpayer from paying higher taxes but does not allow them to take advantage of higher losses. Therefore, where there is a loss when computing capital gains under the 12.5% rate, the grandfathering provisions will not come into play and the computed loss will be carried forward.

As most property sales after 23 July 2024 are likely to involve assets acquired well before that date, this provision will impact many taxpayers. It is essential to compute LTCG under both the 12.5% and 20% options. This ensures that the lower tax liability is chosen, and the benefits of the grandfathering provision are correctly applied. Careful evaluation is crucial to avoid overpayment or misreporting of gains and losses.

This article is for informational purposes only. For specific advice based on your case, consider consulting a qualified tax professional.