The removal of indexation of cost of acquisition and cost of improvement incurred on a capital asset by the assessee is a very drastic step initiated by the Ld. Finance Minister and has huge repercussions. The said change is also going to have a major impact on the tax outflow of the assessee with respect to capital gains arising from long term capital assets. Primarily, persons holding assets for long time say 20 years or 30 years or even more than that are going to be affected by withdrawal of indexation benefit which has been in the statute for a very long time. On the contrary, the changes made would be beneficial for a person who has been holding the capital asset for comparatively shorter period, for example a period of 4 to 5 years. In such cases, the disadvantage of withdrawal of indexation will be offset by a reduction in the rate of tax from 20 to 12.5%. There was a rationale for introduction of indexation in the statute with respect to long-term capital asset and for continuing the same for so many years. The said rationale has probably been overlooked and the provision has been done away with resulting in major effect on persons holding capital asset for long durations.

The said change with respect to indexation of assets has become applicable immediately, which is arbitrary and debatable. It is resulting in applying the law without completing the process of enacting the same by Parliament, ascent by the President & its notifications as per the law. It needs to be seen whether a provision can be applied in this manner without the bill having been approved by the parliament or without going through the legal process of enactment of a law. In any case, the Finance Bill, 2024 proposes the same. This also results in an anomaly wherein a person selling a long-term capital asset on 23rd of July, 2024 has huge disadvantage as compared to the same property having been disposed of a day or two earlier. Moreover, a number of transactions which are in pipeline would also be hit by the said withdrawal.

The finance bill also proposes to do away with all the different timelines for different assets to qualify to be a long-term capital asset. It is proposed that all assets will be treated as long term capital asset in case they are held for a period of more than 24 months except for listed securities which would get the benefit of long term capital asset in case they are held for a period of more than 12 months. Reduction of tax rate from 20% to 12.50% may be beneficial in some cases however the same will not be sufficient to offset the additional burden due to removal of indexation.