The Budget 2024 introduced significant changes in the taxation of long-term capital gains (LTCG) from the sale of a capital asset, including land or buildings. Previously, LTCG for these assets was taxed at 20% with the benefit of indexation to adjust for inflation. However, from July 23, 2024, the tax rate on LTCG on property has been reduced to 12.5%, and the indexation benefit has been removed. While these changes simplify tax computations, they may have unintended consequences, especially for taxpayers who are forced to sell property at a loss.

NEW LTCG TAX RULES FOR HOUSE PROPERTY

Under the old capital gain tax regime, LTCG from the sale of land or buildings was taxed at 20%, and taxpayers could benefit from indexation. Indexation adjusted the cost of acquisition and improvements for inflation, which resulted in a lower taxable gain or a higher loss.

The new capital gain tax regime, effective from July 23, 2024, eliminates indexation and sets a uniform tax rate of 12.5% for LTCG on all assets. Without indexation, the cost of acquisition and improvement is not adjusted for inflation, and therefore, the original cost is considered while computing the capital gain. This leads to a higher amount of capital gain or lower loss under the new regime compared to the old capital gains tax regime.

GRANDFATHERING PROVISION FOR LAND OR BUILDING ACQUIRED BEFORE JULY 23, 2024

To help taxpayers adjust to the new capital gain tax regime, the government has introduced a grandfathering provision. This allows taxpayers, being resident Individuals or resident HUFs, to choose between the old and new capital gain tax regimes for property, land or building acquired before July 23, 2024. The provision ensures that taxpayers won't face higher taxes on gains under the new regime compared to the old regime.

WHY GRANDFATHERING WILL NOT HELP IN CASE OF CAPITAL LOSS

The grandfathering provision comes into play when the tax on long-term capital gains from selling a property computed under the new capital gain tax regime is higher than the LTCG tax computed under the old regime with indexation. Thus, it compares the amount of tax payable under the new vis-a-vis the old regime.

There may be scenarios where the LTCG tax under both regimes is 'nil', for instance, if the property is sold for consideration below its purchase cost. In such cases, the loss under the old capital gain tax regime would typically be higher due to the benefit of indexed cost of acquisition and improvement.

Since grandfathering only addresses gains and not losses, taxpayers cannot use the old regime to calculate a higher loss and offset it against other gains or carry it forward to future years. This means the grandfathering provision offers no relief for those facing a reduced loss under the new regime.

IMPACT ON SET-OFF AND CARRY FORWARD OF LOSSES

Long-term capital losses can be offset against long-term capital gains within the same financial year. If the loss cannot be fully set off in the current year, it can be carried forward for up to 8 financial years. This allows taxpayers to reduce their overall tax liability by offsetting losses from one long-term capital asset against gains from another long-term capital asset. However, since the grandfathering provision does not apply where there is a loss both under the old capital gain tax regime as well as the new regime, taxpayers may face higher taxes. Removing indexation under the new regime results in a smaller loss amount, which means that any gains from other assets will be offset by a smaller loss, reducing the potential tax benefit.

For example, Mr. Rajesh purchased a house on September 30, 2015, for Rs. 10 lakh. He sold the house for Rs. 9 lakh on August 1, 2024. The amount of long-term capital loss under the old and new regime will be as follows in his case:

In this scenario, Mr. Rajesh's loss is significantly higher under the old capital gain tax regime due to the indexed cost. Since the grandfathering provision doesn't apply where there is a loss both under the old and new regime, Mr. Rajesh can only set off and carry forward the lower amount of loss of Rs. 1,00,000 under the new regime rather than the higher amount of loss of Rs. 5,29,134, which he could have reported under the old regime.