Budget deals capital gains tax blow to investors

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₹1 lakh to ₹1.25 lakh are extremely poor substitutes for elimination of this cost indexation benefit, which was quite significant. There would be many cases where cost indexation resulted in no taxable gains or minimal gains, and 20% tax on that would have been negligible. The tax now on the entire gains at the lower rate of 12.5% would be far higher.

The cost inflation index was notified each year so as to nullify 75% of the inflation of the preceding year. Therefore, only gains in excess of 75% of inflation were taxable. Inflation has the natural effect of enhancing the value of all assets, such as immoveable property, gold, investments, etc.

The whole objective of indexation of cost was to tax only those gains which were over and above inflation rates, and not to tax the appreciation attributable to 75% of inflation. To illustrate, if you had bought a flat for ₹50 lakh in 2001, which has appreciated today after 23 years to ₹2.50 crore. The indexed cost of the flat would today be ₹1.815 crore, considering the capital gains index of 363 for 2024-25.

If you were to sell the flat now for ₹2.50 crore, you would have to pay capital gains tax at 12.5% of ₹2 crore (ignoring surcharge and cess), amounting to ₹25 lakh. On the other hand, had you sold it before the budget, the tax would have been 20% of ₹68.5 lakh, amounting to only ₹13.70 lakh. Therefore, now the longer you hold an asset, the worse off you are, since you pay tax on the annual appreciation due to inflation.

Again, this provision does not apply only to assets acquired after the amendment – it applies to all assets that you may sell on or after 23 July 2024, irrespective of when you bought the asset. It also applies to assets that you may have inherited. The only