The Income Tax Department has released all the necessary forms for filing an Income Tax Return (ITR). Before filing an ITR, many people want to understand the intricate rules related to income tax returns. They are also curious about which tax regime they should choose. This year, there have been some significant changes in the rules of Long Term Capital Gain Tax (LTCG), which were announced in the budget. If you have also made any long-term capital gain, then you need to know its latest rules related to income tax. This will give the right direction to your financial planning.
‘Latest’ rules of Long Term Capital Gain Tax
The new rules for long-term capital gain have become effective from 23 July 2024. This simply means that while filing ITR, you will have to calculate the long-term capital gain tax before and after 23 July separately. As per the new rule, the rate of long-term capital gain tax has now become 12.5 percent, which was earlier 10 percent. Along with this, the LTCG exemption limit has been increased from ₹ 1 lakh to ₹ 1.25 lakh. This change will have far-reaching effects on investors.
Understand short-term capital gain tax in depth too
If you have short-term capital gain, then before 23rd July you will have to pay tax at the rate of 15 percent. Whereas, after 23rd July, this rate will increase to 20 percent. No tax exemption is available under short-term capital gain. This means, that whether you have a profit of ₹ 100 or ₹ 1 lakh, you will have to pay tax on all at the same rate of 20 percent (flat rate of 20 percent). This rule is especially crucial for those who invest for a short period.
Use indexation benefit in LTCG ‘wisely
Under the government new rules, the government has now reduced the tax rate, but removed the indexation benefit. However, there was a significant turn in this in Budget 2024. Now the government has given the taxpayers the right to choose between the new and old tax systems. This means, that if your capital gains tax at the rate of 12.5 percent with indexation comes out to be less, then you can choose that option. Otherwise, the option of 20 percent tax is available for you. Thus, now LTCG taxation has also included the new and old tax system like income tax. This gives investors the power to choose the best option according to their financial situation.
Know what is the ‘official’ stand
According to the revised proposal, any individual or Hindu Undivided Family (HUF) who has purchased a house before July 23, 2024, can choose to pay tax under the new scheme of 12.5 percent without including the effect of inflation (indexation). Additionally, they will also have the option of 20 percent tax with indexation under the old scheme. Out of these two options, they can pay the option in which less tax is made. This is a major relief for home buyers.
‘Main’ announcement of the budget
In the budget, the government reduced the rate of long-term capital gains tax on the sale of property purchased after 2001 from 20 percent to 12.5 percent. However, the benefit of indexation that was available earlier was removed. Indexation is an index in which the price of assets is adjusted according to inflation. This index is updated every year. For example, if you bought a property in 1970, you would have got the benefit of the fair value of 2001. But under the new proposal, you will not be able to avail the benefit of indexation from 2001 to 2024. This change is significant for property owners who have bought property during this period.
Understand the ‘right’ choice from the example
Earlier, the new system was made mandatory, which benefited some people, but many people also suffered losses! Suppose, you bought a house worth ₹ 50 lakh in 2001, which you sell for ₹ 2 crore during 2024-25! In such a situation, in the new system, you will not get the benefit of indexation and your total profit will be ₹ 1.5 crore. On this, you will have to pay a tax of about ₹ 18.75 lakh at the rate of 12.5 percent.
On the other hand, if you choose the old system of long-term capital gain tax in this case, you will get the benefit of indexation. If indexation is added, the value of your house in 2024-25 will be around ₹ 181.50 lakh. That is, on selling this house for ₹ 2 crores, your long-term gain tax will be considered as ₹ 18.50 lakh. You will have to pay 20 percent tax on this, which comes to around ₹ 3.7 lakh. This means, in this particular case, if you go with the old capital gain tax system, you will get a huge benefit of around ₹ 15.05 lakh. This example will help you choose the right tax system according to your circumstances.
Main Difference between short-term and long-term capital gain
If the holding period for the listed financial assets is more than the 12 months, it is also called long-term capital gain. In contrast, if the holding period is less than 12 months, the profit from it is called short-term capital gain. At the same time, the period of LTCG for unlisted and non-financial assets has been increased to 2 years. Apart from this, capital gains on unlisted bonds, debentures, debt mutual funds, and market-linked debentures are applicable as per the income tax slab of the investor. This classification helps investors understand the specific tax rules applicable to their investments.