Capital Gains Tax on Property Sales in India: Your Essential Guide

Selling property is a major financial decision, and understanding the tax implications is crucial for anyone involved in real estate. Under the Income-tax Act, 1961, capital gains tax can significantly affect your profits. 

Whether you’ve recently sold a property or are planning to, it’s important to know how these taxes work.

In this article, we’ll break down the key tax consequences of selling property, especially with the new changes proposed in Budget 2024, effective from FY 24-25. These changes simplify how assets are classified as long-term or short-term based on revised holding periods.

If you’re confused about capital gains tax after selling your property, you’re not alone. Our goal is to clarify these complexities and help you navigate your tax obligations effectively. Let’s get started!

What are Capital Gains on the Sale of Property?

Capital gains on the sale of property refer to the profit you make when selling a property for more than what you paid for it. 

In India, these gains are classified into two categories based on how long you’ve held the property:

• Short-term Capital Gain (STCG): If you sell the property within 24 months of buying it, the profit is considered short-term.
• Long-term Capital Gain (LTCG): If you hold the property for more than 24 months before selling, the profit is classified as long-term.

Understanding Capital Gains Tax Rates for Property Sales

The tax rates for short-term capital gains (STCG) and long-term capital gains (LTCG) are different, making it essential to classify your gains accordingly.

Here’s how the tax rates for STCG and LTCG on property sales compare:

For example, if you sell a property you’ve owned for less than 24 months, the gain will be added to your total income for that year and taxed according to your slab rate. Conversely, if you’ve held the property for over 24 months, a 20% tax will apply, adjusted for inflation through indexation.

Understanding these distinctions can help you plan effectively for your tax obligations when selling property.

Calculating Short-Term and Long-Term Capital Gains Tax

Short-term Capital Gain/Loss

Short-term capital gains are taxed according to the individual’s income tax slab rates. For example, if the short-term capital gain is ₹5 lakh and the person is in the 30% tax bracket, they would pay 31.20% on ₹5 lakh, resulting in a tax of ₹1,56,000.

Tax Calculation for ₹5 Lakh Gain:

• Taxable Amount: ₹5,00,000
• Tax Rate: 30%
• Tax Payable: ₹5,00,000 × 30% = ₹1,50,000
• Total Tax Payable (including surcharge and cess): ₹1,56,000 (approximately 31.20% including additional charges)

To calculate the gain or loss from the sale of property, subtract the following from the sale proceeds:

1. Cost of purchase
2. Cost of improvements made to the asset
3. Expenses directly related to the sale

Short-term Capital Gain Calculation format:

Long-Term Capital Gain/Loss

For the sale of immovable property on or after July 23, 2024, classified as long-term capital assets, the calculation of capital gains will be similar to short-term gains (i.e., without indexation), and the applicable tax rate will be 12.5%.

For properties sold after July 23, 2024, the tax rate is 12.5% without indexation. However, if the property was acquired before this date, taxpayers can choose between a 12.5% tax rate without indexation or a 20% tax rate with indexation benefits.

Long-term capital gains are taxed at 20.8% (including health and education cess of 4%) when using indexation. Indexation adjusts the asset’s cost for inflation, lowering your taxable gains. This means that those in the 30% tax bracket can benefit from the lower 20% rate.

The calculation for long-term capital gains follows the same steps as for short-term gains, but you will use the indexed cost of acquisition and improvement instead of the original costs.

Long-term Capital Gain Calculation:

Formula for Indexed Cost:

Indexed Cost of Acquisition = Cost of Acquisition × (CII of Sale Year / CII of Year Property Was First Held)

Note: If the property was acquired before April 1, 2001, you can use either the actual cost or the fair market value (FMV) as of that date as your cost of acquisition.

If you acquired immovable property before April 1, 2001, get a valuation from a registered valuer as of that date. This can increase your cost of acquisition and help reduce your capital gains tax.

Indexed Cost of Improvement Formula:

Indexed Cost of Improvement = Cost of Improvement × (CII of Sale Year / CII of Year of Improvement)

Note: Do not consider improvement costs incurred before FY 2001-02.

Example Calculation

Scenario: Mr. A bought a residential apartment on January 1, 2017, for ₹30,00,000 and spent ₹3,00,000 on interiors on May 1, 2020. He plans to sell the property on May 1, 2024, for ₹71,00,000.

Long-term Capital Gain Calculation:

Holding Period: The property is held for more than 2 years, so it qualifies as a long-term capital gain.

Alternate Scenario

If the property is sold in August 2024:

Set Off & Carry Forward of Losses on Sale of Immovable Property

The treatment of losses from the sale of immovable property depends on the type of capital gain.

• Long-term Capital Loss: This can be set off against long-term capital gains from any other asset. If there’s an excess loss, it can be carried forward for 8 years and only offset against long-term capital gains.
• Short-term Capital Loss: This can be set off against both short-term and long-term capital gains. Any excess loss can also be carried forward for 8 years to offset future short-term or long-term capital gains.

Note: To carry forward your losses, it is mandatory to file your Income Tax Return (ITR) by the due date.

Also Read: How is the sale of listed equity shares taxed in India

Frequently Asked Questions (FAQs)

Which ITR form should I file for capital gains from the sale of property?

If you’ve earned capital gains from selling property, you need to report this in your income tax return (ITR).

• ITR-2: This form is specifically designed for individuals and Hindu Undivided Families (HUFs) who have income from sources other than business or profession. If your only income is from capital gains (along with other sources like salary or rental income), you should file ITR-2.
• ITR-3: If you have business income in addition to capital gains, you should opt for ITR-3. This form is intended for individuals and HUFs who have income from a proprietary business or profession, allowing you to report both your business income and capital gains in a single return.

In summary, use ITR-2 for capital gains if you don’t have business income. Choose ITR-3 if you do have business income, as it accommodates both types of earnings.

How do I determine the cost of acquisition for ancestral property?

When selling ancestral property, the cost to the previous owner is your cost of acquisition. If the property was bought before April 1, 2001, the fair market value on that date will be considered, but it cannot exceed the stamp duty value from that date.

How can I save on capital gains tax from the sale of property?

You can reduce your capital gains tax by claiming exemptions under certain provisions of the Income Tax Act:

• Section 54: Exempts capital gains from the sale of a residential property if you reinvest the proceeds into another residential property within a specified period.
• Section 54EC: Allows you to invest capital gains in specified bonds (like those from the National Highway Authority of India) to claim an exemption. The investment must be made within six months of the sale, with a maximum limit.
• Section 54F: Offers an exemption when you sell any long-term asset (not just residential property) and reinvest the entire proceeds into a residential property, provided you don’t own more than one residential house at the time of sale.

Utilizing these sections can significantly lower your tax liability, so consider consulting a tax advisor for tailored advice.

What is the long-term capital gains tax on property for senior citizens?

Senior citizens face the same long-term capital gains (LTCG) tax rules as other taxpayers. LTCG on property held for more than 24 months is taxed at 12.5% without indexation or 20% with indexation, depending on the taxpayer’s choice.

What is TDS on Sale of Property?

Tax Deducted at Source (TDS) is a method of collecting income tax directly at the source of income. 

When a property is sold in India, the buyer must deduct tax (TDS) under Section 194IA before payment, ensuring taxes are collected upfront and minimising tax evasion.

Key Points:

• Buyers must deduct TDS at 1% of the sale price if it exceeds ₹50 lakhs (₹5 million) for both residential and non-residential properties.
• The buyer deducts TDS at payment and must obtain the seller’s PAN; if unavailable, TDS is deducted at the highest rate.
• The deducted TDS must be deposited within 30 days of the end of the month in which it was deducted, and TDS returns (Form 26QB) must be filed with the Income Tax Department.
• The buyer must issue a TDS certificate (Form 16B) to the seller.
• The seller can claim credit for the deducted TDS when filing their income tax return, offsetting their tax liability.