When it comes to commercial properties, understanding capital gains tax is crucial for property owners, investors, and business owners. Whether you are selling a commercial property, transferring it, or using it as collateral for a loan against property, capital gains tax plays a significant role in your overall financial planning. This tax is levied on the profits earned from the sale of an asset like real estate and depends on the holding period, tax rates, and exemptions available. If you plan to secure a loan against property, it is important to factor in the potential tax liabilities when making financial decisions. Read on to know the different aspects of capital gains tax on commercial property, including its calculation, exemptions, and the recent changes in tax laws.
What is capital gains on commercial property?
Capital gains on commercial property refers to the profit made from the sale or transfer of a commercial real estate asset. This profit is subject to tax, and the amount of tax owed depends on several factors, such as the length of time the property was held before the sale (holding period), the property's value increase over time, and any exemptions or deductions that might apply. Commercial properties include office buildings, retail spaces, warehouses, and other properties used for business purposes.
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Holding period criteria for commercial properties
The holding period is important for several reasons, with the three key ones being expectations, returns, and execution of the business plan.
First, one of the primary questions a potential investor asks is, “How long will it take to get my money back?” Many investment opportunities set a defined time frame precisely to address this concern, giving investors a clear idea of when they can expect to recover their capital. During this period, the invested funds are typically illiquid and not accessible.
Second, a defined holding period is essential for calculating investment returns. Common time-based metrics include cash-on-cash return, equity multiple, capital gains, and internal rate of return (IRR), all of which rely on a known investment horizon.
Finally, implementing the business plan for a commercial property investment requires time, especially in value-add strategies where improvements or repositioning are necessary to achieve the desired returns.
Tax-saving strategies on capital gains from commercial property
Understand Short-Term vs. Long-Term Gains:
Capital gains on commercial property are classified as short-term (held ≤ 36 months) or long-term (held > 36 months). Long-term gains enjoy lower tax rates and more exemptions.Invest in Capital Gains Bonds (Section 54EC):
Reinvesting gains in specified bonds within six months can exempt long-term capital gains up to ₹50 lakh.Purchase Another Property (Section 54F):
Gains can be reinvested in a new residential property to claim exemption, subject to specific conditions.Indexation Benefits:
Adjust the purchase price of the property for inflation to reduce taxable long-term capital gains.Use Set-Off and Carry-Forward:
Short-term gains can be set off against losses from other assets; unadjusted losses can be carried forward up to eight years.Plan Holding Period Wisely:
Holding property beyond three years often reduces tax liability due to long-term capital gains treatment.
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Tax rates applicable to capital gains on commercial property
The tax rates on capital gains vary based on the holding period of the commercial property. Below is a tabular representation of the tax rates that apply:
| Holding period | Tax rate |
| Short-term (Less than 24 months) | 30% (plus surcharge and cess) |
| Long-term (More than 24 months) | 20% with indexation benefit (plus surcharge and cess) |
Note: These rates may change depending on the country's tax laws, and special provisions may apply depending on the specific circumstances of the property sale. For example, if the property was used for business purposes, it may impact the tax rate.
Calculation of short-term capital gains
Short-term capital gains (STCG) occur when you sell a commercial property before holding it for the required minimum period. These gains are taxed at a higher rate compared to long-term capital gains. The calculation for STCG is straightforward:
Formula:
STCG = Sale Price – (Purchase Price + Expenses Incurred on Sale)
The expenses incurred on the sale include any brokerage fees, legal charges, and other costs associated with the transaction. The gain is taxed at the applicable rate of 30%, plus any additional surcharge and cess.
Additional read: Short-term property gain tax
Calculation of long-term capital gains
Long-term capital gains (LTCG) arise when a commercial property is held for more than 24 months. The calculation of LTCG takes into account the purchase price, the sale price, and the indexation benefit, which adjusts the purchase price for inflation, reducing the taxable gain.
Formula:
LTCG = (Sale Price – Indexed Cost of Acquisition – Expenses Incurred on Sale)
The indexed cost of acquisition is calculated by adjusting the original purchase price using the cost inflation index (CII) provided by the government. This allows for a reduction in taxable gains, as the inflation over the holding period is factored in.
Impact of indexation on long-term capital gains
Indexation plays a vital role in reducing long-term capital gains tax by adjusting the cost of acquisition for inflation. This adjustment leads to a higher cost base for the property, thereby reducing the capital gains and the tax payable. Here are some key points about indexation:
Cost Inflation Index (CII): The government releases the CII each year, which is used to calculate the indexed cost of acquisition.
Inflation adjustment: The longer the holding period, the greater the inflation adjustment and the lower the taxable capital gain.
Indexation thus significantly benefits those who hold commercial properties for longer periods, lowering their tax liability.
Recent changes in capital gains tax laws (FY 2025 - 26)
Revised Tax Rates: Short‑term capital gains (STCG) on equities and similar assets are now taxed at 20%, up from 15%, while long‑term capital gains (LTCG) on listed assets are taxed at 12.5% above the exemption limit.
Higher Exemption Threshold: The annual LTCG exemption limit on certain financial assets has been increased to ₹1.25 lakh, up from ₹1 lakh.
Uniform LTCG Rate for Non‑Residents: LTCG tax for foreign investors on securities has been aligned at 12.5%, creating parity with resident rates effective from April 1, 2026.
Holding Periods: Defined shorter holding periods for classifying gains (e.g., 12 months for many listed assets and 24 months for unlisted assets) affect gain classification.
Cost Inflation Index (CII): The CII for FY 2025‑26 was set at 376, helping adjust cost for long‑term gains computation.
Capital Loss Set‑Off (Proposed): Under the new Income Tax Bill, long‑term losses up to March 2026 may be set off against any capital gains from AY 2026‑27 onward.
Exemptions and deductions available under section 54F
Section 54F of the Income Tax Act allows taxpayers to claim a capital gain exemption on sale of commercial property when the proceeds are reinvested into a residential property. Key points include:
Reinvestment requirement: To be eligible for the exemption, the entire sale proceeds—not just the capital gain—must be invested in a residential property.
Time frame: The new residential property should be purchased within one year before or two years after selling the commercial property, or the construction of the property must be completed within three years.
Tax benefits: This provision helps significantly reduce the tax liability for investors who reinvest the proceeds from commercial property sales into residential real estate.
By leveraging Section 54F, property owners can strategically plan their investments while minimising capital gains tax.
Eligibility criteria for claiming exemptions
To claim exemptions under Section 54F, certain eligibility criteria must be met:
The taxpayer must not own more than one residential property other than the new property being purchased.
The commercial property being sold must be a long-term capital asset, held for more than 24 months.
The taxpayer must reinvest the proceeds within the specified time frame.
Process of reinvesting in residential property to avail exemptions
The process of reinvesting in a residential property to avail exemptions under Section 54F is as follows:
Sale of commercial property: The commercial property is sold, and the capital gains are realized.
Purchase or construction of residential property: The sale proceeds are reinvested in a residential property within the prescribed time frame.
Claim exemption: The exemption is claimed by filing the necessary forms and documentation with the tax authorities.
Why choose Bajaj Finserv Loan Against Property?
When considering the sale or transfer of a commercial property, understanding capital gains tax implications is crucial. An alternative to selling is opting for a loan against property from Bajaj Finance, which allows you to leverage your property's value without relinquishing ownership. Bajaj Finserv Loan Against Property offer funds of up to Rs. 10.50 Crore* with interest rates between 8% and 20% per annum, and repayment tenures up to 15 years. This option provides quick disbursal within 15 years*. Utilising a mortgage loan can help meet financial needs while potentially deferring capital gains tax liabilities associated with selling your property.
Conclusion
Capital gains tax on commercial properties is a significant consideration for investors and property owners. Understanding the different tax rates for short-term and long-term capital gains, the impact of indexation, and the exemptions available under Section 54F can help minimize your tax liability. Moreover, recent changes in tax laws highlight the importance of staying informed and planning ahead when it comes to real estate investments. Whether you are considering selling a commercial property or seeking a loan against property, consulting with a tax advisor can ensure you make the most of available exemptions and deductions, reducing your tax burden and optimizing your investment returns.
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Some Related Taxes and Sections
Along with Section 54F, capital gains from property sales may be affected by other provisions, including Section 48 (computation of capital gains), Section 54EC (investment in bonds), and applicable stamp duty and registration charges. These sections and taxes can influence overall tax planning for property transactions.
