Introduction:
Sold a Property Recently? Here’s What You Need to Know About Capital Gains Tax
Selling a property can prove to be financially profitable, but tax burdens come along with it. If you’ve gained profit from the sale, you’re subject to paying capital gains tax on that amount under the Income Tax Act, 1961.
Most property owners get this section puzzled, and you are certainly not the only one. Whether you have sold your property or are considering doing so, you must know how capital gains tax operates and how it influences your profits. Here in this article, we have explained the tax implications on the sales of property and explained what can be expected.
What is capital gain?
Knowing Capital Gains Tax on Property Sales in India
When you dispose of a property for more than the amount that you originally paid for it, the profit gained is referred to as a capital gain. Such profit is taxable income according to the Income Tax Act, 1961. Property capital gains tax is only levied on residential property or plots sold by individuals who are not primarily engaged in the business of real estate transactions.
Types of Capital Gains on Property
Capital gains earned on the sale of property are of two types, depending on the period of holding:
- Short-Term Capital Gains (STCG)
- Long-Term Capital Gains (LTCG)
This distinction is responsible for how much you pay in taxes.
Short-Term Capital Gains (STCG)
If you sell a property within 24 months from the date of acquisition, the gains are short-term. These are added to your total income and taxed as per your applicable income tax slab.
Long-Term Capital Gains (LTCG)
If the property is sold after 24 months of ownership, the gains fall under long-term capital gains. LTCG offers different tax rates and the benefit of indexation, which adjusts the purchase price for inflation.
| Particulars | STCG on Property | LTCG on Property |
| Tax Rate | As per the income tax slab | (i) 20% with indexation (for property sold before 23 July 2024) (ii) 12.5% without indexation (for property sold on or after 23 July 2024) |
| Holding Period | Less than 24 months | More than 24 months |
| Indexation Benefit | Not applicable | Optional, depending on the purchase/sale date |
| Tax Calculation | Based on gross total income | Taxpayers can choose between indexed and non-indexed calculations (based on eligibility) |
For example, if you sold a property after 18 months, the gain would be added to your annual income and taxed as per your slab. However, if sold after 30 months, you’d have the option to calculate LTCG with or without indexation, depending on when the property was purchased and sold.
Capital Gains Tax on Property
Capital Gains Tax Is Applicable When:
- You are selling a capital asset like
- Real property (land, house, apartment)
- Equity or mutual fund investments
- Jewellery or gold
- Plant and machinery, patents, trademarks, etc.
- There is a gain, i.e., the sale price is more than the cost price.
- Asset is not excluded under the Income Tax Act (a few assets, like agricultural land in rural areas, might be exempt).
- The transfer is finished, and capital gains are taxed within the year when the asset is transferred, even though payment is received later.
Computation of Capital Gains on Sale of Property
- Capital Gain = Sale Price – Indexed Cost of Acquisition
- Sale Price: The proceeds from the sale of the property.
- Indexed Cost of Acquisition: The initial cost of acquisition increased by inflation, as calculated by the Cost Inflation Index (CII) released by the Income Tax Department.
Formula:
Indexed Cost = Purchase Price × (CII of Sale Year / CII of Purchase Year)
Example:
- If a property purchased in 2005 for ₹10 lakhs was sold in 2024 for ₹50 lakhs:
CII for 2005-06 = 117
CII for 2024-25 = 348
Indexed Cost = ₹10,00,000 × (348 ÷ 117) = ₹29,74,359
Capital Gain = ₹50,00,000 – ₹29,74,359 = ₹20,25,641
Tax Treatment for Inherited/Gifted Properties
- No capital gains tax at the time of inheritance or gifting.
Tax only when the property is sold by the recipient.
Important: The Previous owner’s cost and holding period at the time of original purchase are taken into account while determining capital gains.
- Therefore, if sold:
Capital gain = Selling price – Indexed cost (computed on the acquisition year of the previous owner)
Tax is charged as LTCG (if the holding period is more than 24 months from the date of original purchase), usually 20% with indexation.
How to Save Capital Gains Tax on the Sale of Residential Property
Selling a residential property? You can legally reduce your capital gains tax using a few smart strategies:
- Reinvest under Section 54 – Buy or construct another residential property to claim exemption on long-term capital gains.
- Invest in 54EC Bonds-Park up to ₹50 lakh in REC/NHAI bonds within 6 months to save tax.
- Use Section 54F – Reinvest gains from other capital assets into a residential property.
- Open a Capital Gains Account (CGAS) – Use this if you need more time to reinvest.
- Set Off Capital Losses – Adjust gains with existing capital losses to lower liability.
- Use HUF or Joint Ownership – Split gains among co-owners to reduce individual tax.
- Time the Sale Smartly – Hold for 24+ months to qualify for LTCG with indexation.
- Deduct Selling Expenses – Claim legal, brokerage, and improvement costs.
Invest in Section 54GB – Reinvest in an eligible SME/startup for tax relief.
Capital Gains Tax Filing and Documentation
How to File ITR 2 with Capital Gains
Individuals and HUFs not earning from business/profession but having income from salary, property, capital gains, or foreign assets must file ITR Form 2. To report capital gains:
- Log in to incometax.gov.in.
- Go to e-File > Income Tax Returns > File Returns.
- Select the correct AY and ITR Form 2.
- In ‘Schedule Capital Gains’, add details of STCG (taxed at 15%) and LTCG (taxed at 10% beyond ₹1 lakh).
- Enter sale, purchase, and ISIN details for LTCG.
- Preview, validate, and verify your return within 120 days.
Key Points to Remember
- Reinvest in residential property to claim exemption under Section 54.
- Invest in capital gains bonds (e.g., under Section 54EC) for tax savings.
- Use exemptions under Sections 54, 54F, and 54GB to reduce capital gains tax.
- Plan the timing of your property sale strategically to optimize tax liability.
- Use tools like capital gains tax calculators for accurate planning.
- Tailor strategies based on your financial situation with professional guidance.
Stay updated with current tax laws to ensure compliance and maximum benefit
Conclusion
Knowledge of capital gains tax is critical for those selling property in India. Regardless of whether your gains are short-term or long-term, the tax rates that apply, exemptions, and modes of calculation can make a huge difference to your returns. By utilizing provisions such as Sections 54, 54F, 54EC, and 54GB, and utilizing the services of tools such as the capital gains calculator, you can plan better and legally minimize your tax burden. Submitting ITR 2 correctly and on time is equally critical. Always consult a tax expert to align strategies with your financial goals and stay updated on evolving tax rules to maximize benefits.
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