Capital gains taxation has undergone a radical revamp. CA TG Suresh, Partner, Suresh and Balaji and M P Vijay Kumar, Executive Director & Group CFO, Sify Technologies Ltd., dissect key amendments, buyback implications, and the removal of indexation — spotlighting what individuals and businesses must know before filing returns.
Share Buybacks Take a Hit
M P Vijayakumar
Executive Director & Grou CFO, Sify Technologies Ltd
There’s one amendment in the capital gains taxation that I want to discuss because of its significant impact. And I sincerely hope that either in the next Finance Bill or sometime in the years ahead, this position gets reversed. It’s an amendment that applies for FY 2024–25 and will continue through FY 2025–26, but hopefully not beyond that.
This pertains to capital gains taxation on share buybacks. A good number of companies generate substantial surplus profits, and often they don’t have immediate avenues for reinvestment. So, what do they do? They opt for buybacks—buying back their own shares—as a way to return excess capital to shareholders and optimise their capital structure. It’s a powerful corporate tool. Apart from maintaining the capital base at optimal levels, buybacks also help in correcting or realigning shareholding patterns.
There are instances where companies make windfall gains—say from selling a division or a manufacturing unit—and suddenly find themselves sitting on surplus cash. In such situations, a buyback is an excellent mechanism for capital reduction and efficient use of funds. Companies like TCS and Infosys have routinely used buybacks in a very structured and responsible way.
Now, here’s where the amendment causes a problem. To the best of my understanding, this is how it works: If I buy a share at ₹150 (face value being ₹10) and the company later buys it back at ₹500, the new rule says that the entire ₹500 is to be treated as dividend income and taxed accordingly. The ₹150 that I originally paid becomes a capital loss. Now, unless I have other capital gains to set this off against, I’ll have to carry it forward. Effectively, the law assumes that the entire buyback is funded out of the company’s earned profits, and hence, should be taxed like a dividend.
But here’s the catch—the Companies Act allows buybacks even out of the securities premium account, which is capital, not revenue. So, in cases where the company is returning capital (and not profits), treating the whole amount as dividend income is conceptually flawed, in my view. Let me give you another perspective. Suppose I buy a share for ₹150 and the book value of the company—its net assets—is also ₹150 at the time. In essence, I’ve paid exactly for what the company was worth then. Now, any value addition that happens later comes from revenue profits. So, logically, only the gain beyond ₹150 should be taxable. But under the current provision, I’m taxed on the entire ₹500 as if it’s income, which simply doesn’t sit right with me.
The real fallout? Companies have started completely avoiding buybacks. A sound financial strategy, widely used by responsible firms, has become unattractive almost overnight. There are always some misuses of tax provisions. But should we overhaul an entire provision—one that has genuine use and importance—just because of a few edge cases? That’s where I felt this amendment was a bit harsh. Conceptually, it doesn’t hold well in several scenarios. I truly hope this provision gets revisited.
The Staggering Complexity from Simplification
CA T G Suresh
Partner, Suresh and Balaji
In the Union Budget speech, the Honourable Finance Minister highlighted a significant step towards simplifying the tax regime—especially with regard to capital gains taxation. This is a welcome move on principle, signalling intent to make the system more user-friendly and transparent.
However, as with any major reform, the process of implementation brings its own set of transitional challenges. This year, in recognition of the adjustments required, the deadline for filing income tax returns for FY 2024–25 has been extended to September 15.
In the world of tax laws, the path to simplicity often involves navigating through layers of existing complexity. Yet, each such move lays the foundation for a more streamlined future.
The most disruptive aspect in this new regime is the removal of indexation benefits for assets transferred on or after 23rd July 2024. There is no option for indexation if you transfer your capital asset after that date.
What hasn’t changed is Section 48 of the Income Tax Act. That’s the section which governs how we compute capital gains. The method of computation remains the same, but the tax rate has been reduced from 20% to 12.5%. That sounds reasonable at first glance. But as we’ll see, the implications are not so straightforward.
There was quite a bit of noise about this when the Finance Bill was still in draft form. Eventually, when it passed into law, the government included a provision to soften the blow. For individuals and Hindu Undivided Families (HUFs), in the case of land or building (or both) acquired before July 23, 2024, there is a relief: if the tax computed under the new regime turns out to be more than what it would’ve been under the old regime, you don’t have to pay the excess. That extra tax will be ignored.
But let’s not misunderstand: this safeguard applies only to the tax payable, not to the capital gains computation itself. So, while the tax outgo may be protected in some cases, the method of computing capital gains stays unchanged. This, in effect, means we now have a “new capital gains tax regime”, running parallel to the old one.
The intention behind this move, as stated in the Finance Bill’s memorandum, was to ease the computation of capital gains for taxpayers and tax administrators alike. But I remain unconvinced.
Let me take a minute here to explain this part. Section 48, which deals with how you compute capital gains, hasn’t been amended. The proviso to Section 48—which specifically allows for indexation—is untouched. So, the usual expectation would be that indexation remains available.
But the government made the change somewhere else—in Section 112(1)(a). That’s the section that deals with tax rates on long-term capital gains. So, instead of tweaking the mechanics of capital gains computation, they altered how the final tax is calculated.
This means we now have a situation where the capital gain is computed with indexation (in theory, because the section allowing it hasn’t been removed), but the tax is applied without indexation (because the tax rate is based on a provision that ignores it). It creates confusion not just for taxpayers but even for chartered accountants and software providers. This is exactly why what was meant to be a simplification has become anything but simple.
Asset Holding Period and Tax Status
The treatment of capital gains now varies based on the date of asset sale and its holding period:
- Pre- and Post-July 2024 Transactions: Assets sold before July 23, 2024, are treated under the old regime with indexation benefits, whereas those sold later follow the simplified structure.
- Resident vs. Non-Resident Taxation: The changes affect the tax rates and eligibility criteria for indexation differently for residents and non-residents, making it vital to differentiate tax planning strategies accordingly.
The table below compares the Long-Term Capital Gains (LTCG) calculation before and after the new capital gains tax regime kicks in on 23rd July 2024.
1st July 2024 1st August 2024
(Before Amendment) (After Amendment)
FVC 100 100
ICOA / COA 72.6 20
LTCG 27.4 80
Explanation:
- FVC (Full Value of Consideration): The sale value of the capital asset (e.g., land, building, etc.). In this example, it’s ₹100 in both cases.
- ICOA / COA (Indexed Cost of Acquisition / Cost of Acquisition):
- Before 23rd July 2024 (Old Regime): Indexed cost of acquisition is ₹72.6. This is the original cost adjusted for inflation.
- After 23rd July 2024 (New Regime): Indexation is not allowed. So only the original cost (₹20) is considered.
- LTCG (Long-Term Capital Gain):
- Under the old regime: LTCG = 100 – 72.6 = ₹27.4
- Under the new regime: LTCG = 100 – 20 = ₹80
Interpretation:
- Under the old regime (before 23rd July), you’re allowed to adjust your cost with inflation (indexation). This reduces the taxable gain.
- Under the new regime (after 23rd July), indexation benefit is removed. You must use the actual cost (without inflation adjustment), which results in a much higher taxable gain.
- Even though the tax rate in the new regime is reduced to 12.5% from 20%, the LTCG amount has increased sharply, and hence the tax payable may still be higher depending on your acquisition cost.
This table is a clear illustration of how the removal of indexation drastically increases the taxable LTCG—even if the selling price is the same—highlighting one of the key consequences of the amendment applicable from 23rd July 2024.
Taxation Challenges for Non-Residents and 54EC/54F Provisions
The taxation of capital gains poses several challenges for non-residents, particularly in relation to strategic investments under Sections 54EC and 54F. A key concern is the disparity in treatment—non-residents are required to pay capital gains tax even when they incur losses, whereas residents benefit from indexation and various exemptions. Section 54F provides capital gains exemption for investments in residential property, while Section 54EC allows exemption through investments in specific bonds, though both come with investment limits and compliance hurdles. Property inheritance introduces complexities, as the timing of acquisition significantly impacts eligibility for indexation and the resulting capital gains liability.
Any ambiguity in these dates can lead to legal disputes. Apart from this, converting assets from capital to stock-in-trade before specific cutoff dates introduces further confusion about which tax regime applies.
Short-Term Capital Gains and Loss Adjustments
Strategic handling of short-term capital gains and losses plays a critical role in effective tax planning. Short-term capital losses can be set off against both short- and long-term gains, offering taxpayers an opportunity to reduce their overall tax liability. The timing of asset disposals also matters significantly, as well-planned transactions can influence applicable tax rates and the final tax payable. Given the evolving regulatory landscape, it is essential for both taxpayers and professionals to stay updated and seek expert guidance to ensure compliance and make informed financial decisions.
Capital Gains Filing and CSR Initiatives
The increasing complexity of capital gains reporting has prompted the extension of return filing deadlines, acknowledging the need for accurate computation tools and systems. Capital gains taxation remains a vital component of strategic financial and investment planning for both individuals and businesses. In this context, the active involvement of CFO Forum underscores the critical role financial leadership plays in ensuring compliance, navigating regulatory challenges, and strengthening governance frameworks. Companies must align their tax planning efforts with broader societal objectives by integrating them into their Corporate Social Responsibility (CSR) initiatives.
