Capital Gain Tax on Sale of Property in India

Capital gains on the sale of property is the profit/gain one makes on the sale of property. As per the Income Tax Act, this profit is considered income and is subject to tax deduction. The tax levied on the sale of property is called capital gain tax. 

Capital gains are taxed differently than regular income, which is taxed at your standard income tax rate. Understanding capital gains tax helps you plan better when selling or buying a property and can significantly impact your net returns.

Long-Term Capital Gain & Short-Term Capital Gain

Based on the holding period, capital assets are classified into 2 types – long-term capital assets and short-term capital assets. 

Short-term capital gain tax on property sale is the profit earned on the transfer of property owned for 2 years or less. 

Long-term capital gain tax on property sale is the profit earned on the transfer of property owned for more than 2 years.

Indexation adjusts the purchase price of the property for inflation. It reduces the overall tax liability on long-term capital gains. The government provides a cost inflation index (CII) that helps calculate the indexed cost. 

Calculation of Short-Term Capital Gain (STGC)

To calculate short-term capital gains, consider the following factors –
• Cost of acquiring the respective property
• Cost of any renovations made to the property
• Expenses related to the sale or transfer of property
• Consideration received in exchange for the sale or transfer of property. 

Calculation of Long-Term Capital Gain (LTGC)

To calculate the long-term capital gain, consider the following factors –
• Full consideration received on the sale or transfer of property
• Indexed cost of property purchase
• Indexed cost of renovations made to the property
• Tax exemptions
• Expenses made while executing the sale or transfer of property

Here’s a hypothetical example of a long-term capital gain tax. 

Mr X purchased a property in 2015 for 10 lakhs. He sold that property for 28 lakhs in 2023. 

As per the Economic Times, the Cost inflation index (CII) in the year 2015 was 254. CII in the year was 348. 

CII = 348/254 = 1.37

Indexed cost of purchase = Cost inflation index * purchase price – 1.37 * 10,00,000 = 13,70,000. 

Long-Term Capital Gain = Sale Price – Indexed Cost – 28,00,000 – 13,70,000 = 14,30,000. 

Tax on LTCG is 20%. Hence, the tax will be 20% of Rs 14,30,000 in this situation. The capital gain on the sale of the property will be 2,86,000. Hence, Mr X is liable to pay 2,86,000 in this situation

What are Tax Exemptions on Capital Gains on Property Sales?

Here are some basic exemptions for short-term capital gains on property:
• The resident or non-resident of India aged below 60 years is exempted from paying STCG is his/her income is below 2,50,000.
• The exemption limit increases for Indian residents between 60-80 years. They can avail tax relief on total income up to 3,00,000 on a property sale. 

Here are the exemptions on long-term capital gains on property:
• Depending on the type of reinvestment, investors can avail of tax exemptions under sections 54, 54F, and 54EC of the income tax of India.

Summary of Capital Gain Tax Exemptions

Let’s look at each exemption in detail:

Section 54

• After the budget 2019, an individual is eligible to get a capital gain exemption if he/she has reinvested the capital gain in a maximum of 2 properties. If there is no reinvestment, the exemption is not applicable. 

• Under section 54, the total return from capital gain should not exceed 2 crore. 

• The investment should be made 1 year before the sale or 2 years after the sale. 

• This exemption is only available to an individual once. 

• Only the capital gain amount is allowed for reinvestment and not the entire sales amount. 

• The capital gain can also be invested in a construction project, however, the construction should take place within 3 years from the date of sale to avail exemption. 

• This exemption can be revoked if the new property is sold within 3 years of purchasing it.

Section 54EC

• The capital gain generated from the sale of property should be reinvested in specific bonds provided by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC). 

• The amount invested should not exceed 50 lakh.

• The invested amount can be redeemed by an individual after 5 years from the date of sale.

• The investment needs to take place before filing tax for that respective year or within 6 months from the date of sale. 

• If an individual is unable to invest the amount from the sale of the property before the tax filing deadline, they can deposit the amount in a PSU bank or any bank listed under the Capital Gains Account Scheme (1988). This deposit allows the individual to claim an exemption on capital gains tax.

• The maximum amount that can be invested in these bonds to claim the exemption is Rs 50 lakhs. 

Section 54F

Under Section 54F, exemption on long-term capital gain from assets other than residential houses is available to individuals and Hindu Undivided Families (HUF). 

• The entire capital gain must be reinvested in 2 housing properties post Budget 2019. 

• Any investment should be made before 1 year of sale or after 2 years. 

• Investment can be made in construction projects as well. However, it needs to be completed within 3 years from the date of sale. 

To avail the exemption on capital gains tax for property, an individual must reinvest the entire amount received from the sale. If the full amount is not reinvested, the exemption is calculated based on the amount invested.

What Is Capital Gain Account Scheme (CGAS)?

If you cannot buy a property immediately after earning capital gains (but want to buy the property soon) then you can put the profit amount in any public sector bank under the Capital Gains Account Scheme (CGAS). You get 3 years of buffer time to reinvest the funds. However, even after 3 years, if you are unable to buy a property, then the capital gain amount will be taxed as a long-term capital gain.

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