Removing Indexation
Union Finance Minister Nirmala Sitharaman’s decision to eliminate indexation aims to simplify the calculation of long-term capital gains.
The move is intended to streamline the tax administration process, making it easier for both taxpayers and the tax authorities.
concerns
Removing indexation can lead to higher tax liabilities because gains will be calculated without adjusting for inflation.
According to a BankBazaar study, Long-Term Capital Gains (LTCG) tax could triple on properties purchased after 2010 without indexation.
The real estate sector might experience reduced investment due to higher effective tax rates on capital gains.
Real-estate investment trusts (REITs) and Infrastructure Funds could face adverse impacts as they typically do not achieve the same high returns as equity markets.
Indexation & How it helps
Indexation is a method used to adjust the purchase price of an asset for inflation, using the Cost Inflation Index (CII)
It helps in calculating real capital gains by accounting for inflationary increases in the asset’s value.
Mechanism of Indexation
Example: If an asset was bought for ₹10 lakh in 2001 and sold for ₹75 lakh in 2021,
And indexation adjusts the purchase price to ₹31.7 lakh
CII for 2021 (that is, 317) would be divided by that for the base year 2001 (100) to derive a number, It would then be multiplied with the purchase price (that is, ₹10 lakh)
Thus reducing the taxable gain from ₹65 lakh to ₹43.3 lakh.
Indexation lowers the taxable gain by adjusting for inflation, thereby reducing the overall tax liability.
Feedback and Reactions
The move has not generated significant enthusiasm, with mixed reactions from various Industrial sectors.
Corporates and industry representatives have expressed concerns about the potential negative impacts on investment and capital gains calculations.
Investors holding assets for longer periods might be more adversely affected by the removal of indexation compared to those selling assets quickly.
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