Capital gains tax on property

Capital Gains are profits earned from selling capital assets like land, buildings, jewellery, or even Virtual Digital Assets like crypto currencies. After Budget 2024, Long-Term Capital Gains are taxed at a flat 12.5%, without the benefit of indexation. If the capital assets sold are listed equity shares, long term capital gains arising out of that sale is eligible for exemption of Rs.1.25 lakhs. 

What is capital gains tax on sale of property?

CGT is a tax levied on the profit earned from selling a property that has appreciated in value since its purchase. This tax applies to various types of properties, including residential homes, commercial buildings, land, and even inherited properties.

Types of capital gains on property

In property transactions, capital gains are categorized into short-term capital gains (STCG) and long-term capital gains (LTCG), each with its distinct tax implications.

• Short-term Capital Gains (STCG): Arise from property sales within three years of acquisition, taxed at regular income tax slab rates.
• Long-term Capital Gains (LTCG): Occur when property is held for more than three years before sale, taxed at a flat rate of 20% with indexation benefits.

Calculation of capital gains tax on sale of property

The computation of CGT involves a specific formula, enabling taxpayers to determine their tax liability accurately.

Capital gain = Selling price − (purchase price + improvement costs + transfer costs)

How to calculate the short-term capital gain?

To calculate the short-term capital gain (STCG) on the sale of property in India, follow these steps:

1. Determine sale price: Identify the full value of consideration received from the sale of the property.
2. Subtract acquisition cost: Deduct the original cost of acquisition of the property.
3. Deduct improvement costs: Subtract any expenses incurred for improvements on the property.
4. Subtract transfer costs: Deduct expenses related to the transfer, such as legal fees and brokerage.

The formula is:

STCG = Sale Price - (Acquisition Cost + Improvement Costs + Transfer Costs)

Tax rate for sale of property

Particulars	STCG on property	LTCG on property
Tax rates	Slab rate	(i) 20% with indexation (If sold before 23rd July, 2025) (ii) 12.5% without indexation (If sold on or after 23rd July, 2025) For sale of land and building after 23rd July, 2025, taxpayer has either of the above options to opt (However, this option is restricted for purchase made on or before 22nd July, 2025)

When is a property capital gain considered long-term?

Under the Income Tax Act, 1961, a property is treated as a long-term capital asset if it is held for more than 24 months. Any gain from its sale is therefore taxed as long-term capital gain (LTCG).

However, determining the exact date of acquisition has long been a challenge, as the Act does not clearly define how to identify this date for every situation. This becomes particularly complicated in the case of under-construction properties, where allotment dates, agreement dates, and possession dates may differ.

Despite several court rulings over the years, the question of the correct acquisition date continues to be debated in many tax assessments even today.

Comparison of LTCG and STCG rates for 2025-26

Here is a quick comparison of the short-term and long-term capital gain tax rules before and after the recent changes.

Product	Before: holding period	Before: short term tax rate	Before: long term tax rate	After: holding period	After: short term tax rate	After: long term tax rate
Equity Oriented Mutual Fund (MF) Units	More than 12 months	15%	10%	More than 12 months	20%	12.50%
Specified Mutual Funds (More than 65% in debt)	More than 36 months	Slab rate	Slab rate	More than 24 months	Slab rate	Slab rate
Equity Fund of Funds (FoFs)	More than 36 months	Slab rate	Slab rate	More than 24 months	Slab rate	12.50%
Overseas Fund of Funds (FoFs)	More than 36 months	Slab rate	Slab rate	More than 24 months	Slab rate	12.50%
Gold Mutual Funds	More than 36 months	Slab rate	Slab rate	More than 24 months	Slab rate	12.50%

 

Comparison of LTCG and STCG rates for 2024-25

Here is a quick overview of how long-term capital gains tax applies for the 2024-25 financial year.

Tax Type	Condition	Applicable Tax
Long-Term Capital Gains Tax (LTCG)	Sale of: - Listed equity shares (with STT paid on purchase and sale) - Units of equity-oriented mutual funds (with STT paid on sale)	10% on gains exceeding ₹1 lakh
	Sale of other long-term capital assets	20%
Short-Term Capital Gains Tax (STCG)	When Securities Transaction Tax (STT) is not applicable	As per applicable income tax slab
	When STT is applicable	15%

 

How is capital gains tax calculated on sale of property​?

Capital Gains Tax on the sale of property is calculated based on the duration of ownership and the profit earned from the sale. If the property is held for more than 24 months, it qualifies as a long-term capital asset, and Long-Term Capital Gains (LTCG) tax applies at 20% with indexation benefits. Indexation adjusts the purchase price for inflation, reducing the taxable amount.

For properties held for 24 months or less, Short-Term Capital Gains (STCG) tax applies. These gains are added to the seller's total income and taxed as per the applicable income tax slab rates.

The capital gain is calculated using this formula:
Capital Gain = Sale Price - (Indexed Cost of Acquisition + Cost of Improvement + Transfer Expenses)

Certain exemptions under sections like 54, 54EC, or 54F may apply if the capital gains are reinvested in specified assets, helping reduce the overall tax liability.

Exemptions and deductions

To mitigate CGT liability, taxpayers can leverage exemptions and deductions:

• Indexation benefit: Long-term capital gains are adjusted for inflation using the Cost Inflation Index (CII), resulting in a lower taxable amount.
• Exemption under Section 54: Individuals can claim exemption from long-term CGT if the proceeds are reinvested in purchasing or constructing another residential property within a specified period.
• Exemption under Section 54F: This exemption applies to long-term capital gains from the sale of any asset other than a residential house. The proceeds must be reinvested in purchasing a residential property within the prescribed time frame.
• Exemption for agricultural land: Capital gains arising from the sale of agricultural land in rural areas are entirely exempt from tax.

Tax exemptions on long term capital gains on property

LTCG on property is taxed at 20%, but the Income Tax Act allows several exemptions if you reinvest your capital gains. These options help reduce or fully eliminate your tax liability.

1. Section 54: Reinvest in Residential Property
You can claim exemption by reinvesting LTCG from a residential property into up to two new homes (allowed once in a lifetime and only if gains are under Rs. 2 crore).
Key conditions:

• Buy the new property 1 year before or 2 years after sale

• Or construct it within 3 years

• Exemption applies only to the capital gain amount

• Selling the new house within 3 years reverses the exemption

2. Section 54EC: Invest in Specified Bonds
Instead of buying property, you can invest up to Rs. 50 lakh of capital gains in notified bonds such as NHAI or REC.
Key conditions:

• Invest within 6 months of sale

• Bonds have a 5-year lock-in

• You must invest before filing your tax return

3. Section 54B: For Agricultural Land
If you sell agricultural land used for farming in the last 2 years, you can claim an exemption by buying new agricultural land within 2 years.
Key rules:

• New land must not be sold for 3 years

• If you cannot buy land immediately, deposit gains under the Capital Gains Account Scheme (CGAS) before filing returns

These exemptions help significantly reduce LTCG tax, so always evaluate which section applies before calculating your final tax liability.

Tax implications on sale of land vs. other property

Distinct tax implications apply to land sales compared to other property types:

• Sale of land: Typically considered a long-term capital asset if held for over three years, taxed at 20% with indexation benefits.

• Other property: Residential and commercial properties share similar tax implications as land, with variations in indexation benefits based on type and usage.

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