9911796707
TMI BlogReforming Long-Term Capital Gains Taxation : Clause 197 of the Income Tax Bill, 2025 Vs. Section 112 of the Income-tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... uals, Hindu Undivided Families (HUFs), companies, and non-residents. The changes proposed in Clause 197 reflect a significant policy shift, particularly in terms of tax rates, indexation benefits, and the treatment of different classes of assets. This commentary provides an in-depth analysis of Clause 197, explores its objectives and implications, and offers a comprehensive comparative analysis with Section 112 of the Income-tax Act, 1961. The focus is on the structural changes, the rationale behind legislative choices, and the practical consequences for stakeholders. Objective and Purpose The primary objective of Clause 197 is to rationalize and simplify the taxation of long-term capital gains, aligning the tax structure with contempora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is intended to simplify calculations and reduce the overall tax burden on LTCG, making India's capital gains regime more competitive internationally. Relief for Individuals and HUFs Below Exemption Limit Clause 197(2) provides relief for resident individuals and HUFs whose other income (i.e., total income excluding LTCG) falls below the basic exemption threshold. The mechanics are as follows: * The LTCG is reduced by the shortfall between the exemption limit and the other income. * Tax is then computed at 12.5% on the balance LTCG. This ensures that the benefit of the exemption limit is fully utilized, and LTCG is only taxed to the extent total income exceeds the threshold. This mirrors the relief mechanism in Section 112, thereb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "indexed cost of acquisition," and "indexed cost of improvement." These definitions are harmonized with the Securities Contracts (Regulation) Act, 1956, and relevant sections of the Bill, ensuring consistency across the statute. Scope and Exclusions It is specifically clarified that Clause 197 does not apply to equity shares in a company, units of an equity-oriented fund, or units of a business trust. These continue to be governed by separate provisions, reflecting the policy of concessional or exempt treatment for equity-oriented investments. Practical Implications For Individuals and HUFs The reduction in tax rate to 12.5% (from 20%) for most LTCG will lower the effective tax liability for a large number of taxpayers. The continued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied excluded assets), streamlining the rate structure. The shift to a flat 12.5% rate under Clause 197 eliminates the need to distinguish between types of assets and taxpayers for most cases, reducing complexity. 2. Indexation Benefit * Section 112: Allowed indexation for most assets, except for certain categories (e.g., unlisted shares for non-residents). For listed securities and zero-coupon bonds, a choice between 10% without indexation and 20% with indexation was available. * Clause 197: Generally removes indexation, except for transitional relief for land/building acquired before 23rd July 2024 (where excess tax due to withdrawal of indexation is ignored). The new regime is simpler but may increase the effective tax on real gain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d only on gross total income excluding LTCG. This maintains the same substantive position. 7. Definitions and Clarity * Section 112: Definitions provided, but scattered and sometimes ambiguous due to frequent amendments. * Clause 197: Consolidates definitions, explicitly referencing the Securities Contracts (Regulation) Act, 1956, and internal definitions for indexation terms. 8. Provisions for Companies and Non-Residents * Section 112: Contains detailed sub-clauses for domestic companies, non-residents, and foreign companies, with specific rates and exceptions. * Clause 197: The main text focuses on individuals and HUFs, with companies and non-residents apparently addressed elsewhere or by implication. This could be an area for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld lead to interpretational disputes unless addressed elsewhere in the Bill. * Indexation Withdrawal: The withdrawal of indexation for most assets may be challenged as regressive in high-inflation periods. * Transitional Relief Scope: Limiting transitional relief to land/building (and not other assets) may be seen as arbitrary. * Overlap with Other Provisions: The exclusion of equity shares and units requires careful cross-referencing to ensure no double taxation or unintended exemption. Conclusion Clause 197 of the Income Tax Bill, 2025 represents a significant overhaul of the long-term capital gains tax regime, aiming for simplicity, lower rates, and greater predictability. While the reduction in the LTCG rate to 12.5% is a welcom ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
