Budget 2017-18 proposed changes in reduction of LTCG tenure to 2 years for immovable properties & shifting the base year to calculate the indexation benefit from 1981 to 2001. It’s simple to understand that, now 24 months for long term holding to get benefits of indexation which was 36 months earlier, but change in base year of indexation is a little complex to understand.
Let me take you through with simple example on how change in base year of indexation could affect your tax liabilities for Long Term Capital Gains (LTCG) as compare to present scenario.
As per Current Rule (FY 2016-17), if any asset was acquired during any financial year, the indexed cost of acquisition was calculated based Cost Inflation Index (CII) for the financial year in which it was acquired. For example, an immovable property was bought on may 1, 1995, then the CII considered at 281 for FY 1995-96 to to arrive indexed cost of acquisition for the actual cost incurred. This indexed cost for acquisition is applicable for asset acquired on or after April 1, 1981. But if the asset was acquired before April 1, 1981, the fair market value as on that date April 1, 1981 or or actual cost will be considered for the purpose of arriving indexed cost of acquisition.
Fair Market Value (FMV): It is an estimate of the market value based on what a buyer would probably pay. It must be assumed that prospective buyers and sellers are reasonably knowledgeable about the asset. Wrt FMV of property, one can find it from sale registration office or through approved property valuers.
As per New Rule (applicable from FY 2017-18): If any asset acquired before April 1, 2001, the fair market value as on April 1, 2001 or actual cost will be considered for the purpose of arriving indexed cost of acquisition.
Now the question is, does this change in base year to calculate indexation benefit increase the tax on gain or reduce? The answer lies with what Fair Market Value has been taken. See below example
Eventually, it all depends on Fair Market Value considered for indexation which might bring higher tax liability or lower or no difference.
Will Change in Base Year Impact Mutual Fund (Non-Equity) Taxation?
At present Non-Equity/Debt mutual funds qualify for long-term capital gains tax of 20.60% with indexation if held for more than three years. Thus, the change in the base year is applicable across all such asset classes. The Fair Market Value ( it will be NAV) as on April 1, 2001 will be considered as cost of acquisition for calculating capital gains.