Capital Gains Tax On Sale Of Property

Selling a property can be a significant financial milestone, but did you know that the profits from the sale may be taxed under capital gains? Under income tax laws, a house property is considered a capital asset, and any profit or loss from its sale falls under the category of Capital Gains Tax.

But how exactly is this tax calculated? And what exemptions can you claim?

In this guide, we break down everything you need to know about capital gains tax on sale of property—so you can make informed financial decisions and optimize your tax liability.

What are Capital Gains Tax on Sale of Property?

Capital gains occur when a property is sold for more than its original purchase price, resulting in a profit, on which an additional tax is imposed. This tax applies to individuals who sell such assets as a personal transaction, meaning they do not consider property sales part of their profession or primary source of income. 

The tax is calculated based on the profit made from the sale, considering factors like the full value of consideration, cost of acquisition, and cost of improvement. If the asset has been held for a long period, indexation is applied to adjust for inflation.

The amount of tax depends on several factors:

Holding Period: The tax rate varies depending on how long the property was owned.

• Short-term capital gains (when the property is held for a short period, typically under 2-3 years) are usually taxed at a higher rate.
• Long-term capital gains (when the property is held for longer periods) are often taxed at a lower rate.

Type of Property: Different types of properties, such as residential, commercial, or agricultural, may have different tax treatments. Some properties may qualify for exemptions or deductions.

Exemptions and Deductions: Specific tax exemptions or deductions (e.g., under sections 54, 54F, 54EC) can help reduce the taxable capital gains. For example, reinvesting the proceeds from the sale of property into another property might allow for tax exemptions.

Calculating Short-Term Capital Gain

To calculate Short-Term Capital Gains (STCG), consider these points:

• Full value consideration: The total amount received from the sale/transfer of the property.
• Cost of acquisition: The price paid to acquire the property.
• Cost of improvement: Any costs associated with improving or renovating the property.

*Formula: Full value consideration – (Expenses + Cost of acquisition + Cost of improvement)

Calculating Long-Term Capital Gain

For calculating long-term capital gain, the following factors are taken into account:

• Full consideration: The total amount received upon the sale or transfer of the property.
• Indexed cost of acquisition: The cost of acquiring the property, adjusted for inflation using the Cost Inflation Index (CII).
• Indexed cost of improvement: The cost of improvements or renovations, also adjusted for inflation using the CII.
• Expenses: Any expenses incurred during the sale or transfer process, such as brokerage or legal fees.

In the case of long-term capital gains, indexation is applied to the cost of acquisition and improvements to account for inflation. The Cost Inflation Index (CII) helps reduce the taxable capital gain by increasing the cost base, ensuring that the gain reflects the actual increase in value, not just inflationary effects. This prevents inflated profit and excessive tax liability.

*Formula: Full value consideration – (Expenses for transfer + Indexed cost of acquisition + Indexed cost of improvement + Deductible expenses directly related to the sale)

New Long-Term Capital Gains (LTCG) Tax Rules on Property (Budget 2024)

The Budget 2024 introduced significant changes in how long-term capital gains (LTCG) from the sale of property are taxed. Here’s an overview of the new rules:

• Tax Rate

The LTCG tax rate has been reduced from 20% to 12.5% but with a crucial change: indexation benefits have been removed for properties bought after July 23, 2024. This means property sellers can no longer adjust their purchase price for inflation, which was previously allowed through the Cost Inflation Index (CII).

For example, Mr. A bought a property in 2002 for Rs. 25 lakh and sold it in 2024 for Rs. 1 crore. Here’s how the taxation would differ under the old and new rules:

Pre-July 23, 2024 Purchases – Investors who bought property before this date can choose between a lower tax rate of 12.5% without indexation or a higher tax rate of 20% with indexation.

Properties Bought Before April 1, 2001 – For these properties, sellers can choose to use either the actual purchase price or the fair market value as of April 1, 2001, whichever results in a lower taxable gain.

Expert Insights on Recent Tax Changes Impacting Capital Gains Tax on Sale of Property

• Choice of Tax Regimes: For long-term capital gains on properties bought before July 23, 2024, taxpayers can opt for either a 12.5% tax rate without indexation or a 20% tax rate with indexation.
• Benefits of the New Regime: The 12.5% rate is beneficial if property values have significantly appreciated, while indexation remains useful for properties with appreciation close to inflation.
• Grandfathering Provision: The new rules preserve tax benefits for properties bought before July 23, 2024, providing taxpayers flexibility in managing their tax liabilities.
• Fair Tax Calculation: The government ensures a transparent tax assessment, allowing property sellers to determine the most suitable tax regime.
• Impact on Real Estate: Lower capital gains tax rates are expected to boost property sales and increase real estate investment.
• Flexibility for Homeowners: Sellers can choose the most beneficial tax option that aligns with their financial planning and long-term investment goals.
• Rollover Benefits Remain: Exemptions under Sections 54, 54F, and 54EC still apply, enabling taxpayers to reinvest gains into new residential properties or bonds to avoid taxes.
• Positive Market Impact: The revised tax policy supports affordable housing and benefits sellers and buyers, making property transactions more tax-efficient.

Tax Exemption on Capital Gains Tax on Sale of Property

Individuals can avail of capital gain tax exemptions under various sections depending on how they reinvest the consideration amount from the sale of long-term capital assets. The exemptions are available under Sections 54, 54B, 54F, and 54EC.

Tax Exemption under Section 54

• Available if the capital gain is reinvested in a maximum of two housing properties (after Budget 2019). Before 2019, only one property was allowed.
• Only the capital gain amount (not the entire sale amount) can be reinvested.
• The total capital gain must not exceed Rs. 2 Crore.
• The reinvestment should happen 1 year before or 2 years after the sale.
• Construction can also be a valid investment if completed within 3 years of the sale.
• Exemption is revoked if the new property is sold within 3 years of purchase.

Tax Exemption under Section 54F

• Available for long-term capital assets other than housing property.
• The sale consideration must be reinvested in two housing properties (post Budget 2019).
• Reinvestment should happen 1 year before or 2 years after the sale.
• Construction investment must be completed within 3 years from the sale.
• If the entire capital gain is not reinvested, the exemption is calculated proportionally:
• Exempted amount = (Capital Gains * Cost of New House) / Net Consideration

Tax Exemption under Section 54EC

• Available for reinvestment in specific bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC).
• The maximum investment is Rs. 50 Lakh.
• The investment should be redeemed after 5 years (previously 3 years).
• The investment must happen before filing tax for that year or within 6 months from the sale date.
• If not done, deposit the amount in a PSU Bank under the Capital Gains Account Scheme (1988) and convert it to an investment within 2 years from the sale date.

Tax Exemption under Section 54B

• Available on capital gains from selling agricultural land outside a rural area.
• Reinvestment must be made in new agricultural land within 2 years of the sale.
• The exemption is revoked if the land is sold within 3 years of purchase.
• The investment must be made before tax filing in the same financial year. If delayed, the amount can be deposited in a bank under the Capital Gains Scheme and converted to investment within 2 years; otherwise, it will be considered a short-term capital gain.

Strategies to Save Capital Gains Tax on Sale of Property

1. Buying a New Property (Exemption under Sec 54)

One of the most common ways to save tax on capital gains from property sales is by reinvesting in another residential property. Under Section 54, you must purchase a new property either one year before or two years after selling the existing one or construct a new one within three years. The exemption is available based on the reinvested capital gains.

2. Investing in Bonds (Exemption under Sec 54EC)

You can save on capital gains tax by investing in bonds issued by NHAI or REC under Section 54EC. The investment must be made within six months of the sale to claim exemption, with a maximum investment limit of ₹50 lakhs.

3. Reducing Selling Expenses

Certain selling expenses, like brokerage fees, legal charges, and renovation costs, can be deducted from the sale price, reducing taxable capital gains.

Example: Mr. A sold his property for ₹60 lakhs but incurred ₹2 lakhs in selling expenses. His taxable capital gain is reduced as the sale price is considered ₹58 lakhs instead of ₹60 lakhs.

4. Joint Ownership

If a property is co-owned, the capital gains are divided among the owners based on their ownership share. Each owner can claim exemptions individually, reducing overall tax liability.

Example: Mr. and Mrs. A sell their jointly owned property for ₹1 crore, splitting the gains equally. They can each claim ₹1.25 lakh exemption, reducing their combined taxable amount.

5. Tax Loss Harvesting

If you have capital losses from shares or mutual funds, you can offset these losses against your property sale gains to lower your taxable income.

Example: Ms. A incurred a ₹3 lakh loss in stocks and earned ₹10 lakhs in property gains. By offsetting the loss, her taxable gain is reduced to ₹7 lakhs.

6. Availing Indexation Benefit

If you hold a property for more than two years, you can use indexation to adjust the purchase price for inflation, lowering the taxable gain amount.

7. Reinvesting Gains into Shares of Manufacturing Companies

Under Section 54GB, reinvesting gains in shares of an eligible manufacturing company can help save on capital gains tax.

8. Buying a New Residential Property (Exemption under Sec 54F)

If you sell a non-residential asset and invest in a new residential property, you can claim an exemption under Section 54F. The new property must be bought within two years or constructed within three years, with conditions on existing property ownership.

9. Investing in Capital Gain Account Scheme (CGAS)

If you cannot reinvest in the property immediately, you can deposit the gains in CGAS and use them within three years to claim an exemption. The Capital Gains Account Scheme (CGAS) is a valuable option for those who cannot immediately reinvest their capital gains in a new property before filing their income tax returns. 

This scheme allows taxpayers to deposit their capital gains in a designated account at a public sector bank, giving them up to three years to reinvest the amount in a new property. If the funds remain unutilized beyond this period, they will be taxed as long-term capital gains at 20% plus a 3% cess.

CGAS offers two types of accounts: Type-A (Savings Deposit Account) and Type-B (Term Deposit Account). Type-A functions like a regular savings account, allowing withdrawals, but any unutilized funds must be re-deposited. Type-B, similar to fixed deposits, offers cumulative and non-cumulative interest options, but premature withdrawals are restricted. Taxpayers can switch between these accounts by paying fixed charges.

This scheme provides flexibility and helps taxpayers defer tax liability while ensuring compliance with exemption rules. It is particularly beneficial for individuals who need additional time to plan and execute their property investment, making it a strategic way to manage capital gains tax effectively.

Summing Up!

So, capital gains tax on sale of property in India depends on the holding period—short-term gains are taxed as per income slabs, while long-term gains attract 20.8% with indexation benefits. However, several strategies can help reduce tax liability, including reinvesting in property under Sections 54 and 54F, investing in specified bonds (54EC), or depositing in the Capital Gains Account Scheme (CGAS). Understanding these exemptions and planning investments wisely can significantly lower tax burdens and maximize financial benefits.

Frequently Asked Questions

What is the capital gains tax on sale of property in India?

For short-term capital gains (STCG), the tax is applied as per your income tax slab. If you hold the property for more than two years, it is considered long-term capital gains (LTCG), which is taxed at 20.8% with indexation benefits.

Are NRIs required to pay tax on property sales in India?

Yes, NRIs are liable to pay capital gains tax on property sales in India. The applicable tax depends on whether the gain is short-term or long-term.

Can I save capital gains tax after selling a property?

Yes, under Section 54 of the Income Tax Act, you can avoid or reduce capital gains tax by reinvesting the proceeds into another residential property.

Do I need to pay capital gains tax immediately after selling a property?

No, but you must pay advance tax before the due date when filing your Income Tax Return (ITR) to avoid interest penalties under Sections 234B and 234C.

What is the short-term capital gains tax on sale of property?

The short-term capital gains tax is calculated per your income tax slab rate for properties held for less than two years. If the property was purchased before 2017, the holding period for LTCG was three years.

Can I invest in the Capital Gains Account Scheme (CGAS) to save tax on property sales?

If you haven’t yet purchased a new property, you can deposit your capital gains in CGAS before filing your ITR. However, you must utilize the funds within three years, or the amount will become taxable.