Gopal Nathani – [2025] 178 taxmann.com 477 (Article)
Subject – Request for Revisiting Amendments in Section 112 – Preservation of Capital Loss Set-off under Sections 74 and 80
Respected Madam,
Most respectfully I wish to bring to your kind notice certain unintended consequences that have arisen out of the amendments made in the Finance Bill 2024–25 presented on 23rd July 2024.
The amendment to Section 112 reduced the long-term capital gains (LTCG) tax rate from 20% to 12.5%, along with corresponding amendment in Section 48, which removed the benefit of indexation. While the reduction in tax rate is welcome, the complete withdrawal of indexation has caused widespread concern among taxpayers as most of it is felt now in using the income tax utilities at the time of submitting of returns of income.
In response, a revised formula was hastily inserted in Section 112 to grant limited indexation benefits for land or building or both acquired before 23rd July 2024. Unfortunately, this corrective step, though well-intentioned, has led to serious disruptions in the harmonious functioning of the Act. The new formula in Section 112, by restricting indexation and re-computing gains in a non-standard manner, has thus effectively rendered Sections 74 and 80 dysfunctional and capital losses that taxpayers are otherwise entitled to set-off or carry forward are lapsing into thin air as shown below:
| Particulars | Scenario 1 | Scenario 2 | Scenario 3 |
| Sale price (A) | 5000000 | 4000000 | 3500000 |
| Original cost (B) | 2500000 | 2000000 | 1750000 |
| Indexed cost (C) | 7000000 | 5000000 | 3000000 |
| Capital Gains with Indexation (D=A-C) | (2000000) | (1000000) | 500000 |
| Tax @20% (E) | 0 | 0 | 100000 |
| Capital Gains w/o Indexation (F=A-B) | 2500000 | 2000000 | 1750000 |
| Tax @12.5% (G) | 312500 | 250000 | 218750 |
| Excess of liability under G over E to be ignored | 312500 | 250000 | 118750 |
Notes –
- Where indexation results in a loss, tax liability under 20% regime is NIL.
- In such cases, the 12.5% regime without indexation becomes relevant.
- The taxpayer can choose the method beneficial to him as per amended Section 112 but cannot carry forward losses in scenario 1 and 2 of 2000000 and 1000000. In other words losses too have to be ignored or stand lapsed.
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