Capital Gain Tax on Sale of Property

In simple words, capital gain tax on residential property refers to the profit or gains made via the transfer or sale of a property. When selling a property, understanding Capital Gains Tax (CGT) is crucial to avoid unexpected tax liabilities. Whether you sell land, residential, or commercial property, the profit (or gain) you earn is subject to taxation.

The tax rate depends on how long you've held the property before selling it. This guide provides a complete breakdown of short-term and long-term capital gains tax (STCG & LTCG), exemptions, calculation methods/ examples, and ways to reduce tax liability legally.

Want to save on the profits made by selling your property? Keep reading!

Table of Contents:

• ⇾ Short-Term Vs Long-Term Capital Gains on Property
• ⇾ Calculation of Capital Gains Tax on Property
• ⇾ 1. Short-Term Capital Gains Calculation
• ⇾ 2. Long-Term Capital Gains Calculation
• ⇾ Capital Gains Tax on Property for STCG & LTCG
• ⇾ Long Term Capital Gains (LTCG) for Property Sale
• ⇾ Short Term Capital Gains (STCG) for Property Sale
• ⇾ Exemptions for Capital Gain Tax on Property
• ⇾ Exemption Under Section 54
• ⇾ Exemption Under Section 54B
• ⇾ Exemption Under Section 54D
• ⇾ Exemption Under Section 54EC
• ⇾ Exemption Under Section 54EE
• ⇾ Exemption Under Section 54F
• ⇾ Exemption Under Sections 54G & 54GA
• ⇾ Tips to Save on Capital Gains Tax When Selling Your Property
• ⇾ Frequently Asked Questions

Short-Term Vs Long-Term Capital Gains on Property

In India, the taxation on capital gains from property sales is determined by the duration for which the asset was held before sale. These are divided into Short Term Capital Gains (SCTG) and Long Term Capital Gains (LTCG).

Let’s have a look at each of them:

• Short-Term Capital Gains (SCTG): SCTG refers to the profit earned when a property is sold within 24 months of acquisition. It is added to the seller's total income and taxed according to the applicable income tax slab rates.
• Long-Term Capital Gains (LTCG): LTCG refers to the profit wherein the property is held for more than 24 months before sale.

Calculation of Capital Gains Tax on Property

Let’s understand the calculation of Short-Term and Long-Term Capital Gains Tax with examples from below:

1. Short-Term Capital Gains Calculation

The calculations for short-term capital gain are done as follows:

2. Long-Term Capital Gains Calculation

The calculations for the long-term capital gain (LTCG) are done as follows:

The above table represents the process of calculating LTCG tax.

Capital Gains Tax on Property for STCG & LTCG

The capital gains tax on property for short-term and long-term are as follows:

Long Term Capital Gains (LTCG) for Property Sale

• Tax exemption on long-term capital gains has increased up to ₹1.25 lakh per year.
• The LTCG tax rate on financial and non-financial assets is now 12.5%.

Also In LTCG, there are 2 types of taxation options, check the indexation benefit details from below:

Short Term Capital Gains (STCG) for Property Sale

• The STCG on specific financial assets is charged at 20%.
• The SCTG on non-financial assets is taxed at applicable slab rates.
• Mutual funds, unlisted bonds, etc, will be taxed on capital gains at applicable rates regardless of their holding period.

Exemptions for Capital Gain Tax on Property

Taxpayers can avail exemptions on capital gains tax from property sales by reinvesting the proceeds into specified assets which are subject to certain conditions. These are:

Exemption Under Section 54 – Sale of Residential Property

This exemption applies to individuals and Hindu Undivided Families (HUFs) who sell long-term residential property. To claim the exemption, the capital gains must be reinvested in purchasing another residential house within 2 years or constructing one within 3 years. If the capital gain is ₹2 crores or less, two properties can be purchased. The maximum exemption is capped at ₹10 crores.

Exemption Under Section 54B – Sale of Agricultural Land

Individuals or HUFs selling agricultural land used for at least 2 years before the sale can claim this exemption. The capital gain must be reinvested in purchasing new agricultural land within 2 years. If the new land is sold within 3 years, the exemption is reversed.

Exemption Under Section 54D – Compulsory Acquisition of Industrial Land/Building

Suppose industrial land or buildings used for at least 2 years are compulsorily acquired. In that case, the exemption is available if the compensation is reinvested in purchasing land or a building for re-establishing the industry within 3 years.

Exemption Under Section 54EC – Investment in Bonds

Any taxpayer selling land or a building (LTCG) can invest in NHAI or RECL bonds within 6 months of the sale to claim exemption. The investment is capped at ₹50 lakhs, and the bonds must be held for at least 5 years.

Exemption Under Section 54EE – Investment in Specified Funds

For long-term capital assets, taxpayers can invest in government-notified funds within 6 months to claim exemption. The investment limit is ₹50 lakhs, and the units must be held for at least 3 years.

Exemption Under Section 54F – Sale of Non-Residential Capital Assets

Individuals or HUFs selling any long-term asset (except residential property) can claim an exemption if the sale proceeds are used to buy or construct a residential house. The exemption is revoked if the new property is sold within 3 years, and the taxpayer cannot own more than two house properties.

Exemption Under Sections 54G & 54GA – Shifting Industrial Undertakings

If an industrial undertaking shifts from an urban to a rural area (Section 54G) or to a Special Economic Zone (Section 54GA), capital gains are exempt if reinvested in purchasing land, buildings, or machinery within 3 years. The exemption is reversed if the new asset is sold within 3 years.

Tips to Save on Capital Gains Tax When Selling Your Property

Below are some of the legal ways to minimize capital gains tax when selling your property:

• Avail Exemptions Under Section 54:
• Reinvest capital gains in another residential house within 2 years of purchase or within 3 years of construction.
• If capital gains are ₹2 crores, you can invest in up to two properties.
• The exemption is capped at ₹10 crores.
• Leverage Section 54F (Sale of Non-Residential Property):
• If you sell a long-term asset (except a house), you can save tax by using the sale amount to buy a residential house within the given time.
• However, you must not own more than one other house on the date of sale.
• Invest in Capital Gains Bonds (Section 54EC):
• Investing in bonds issued by the National Highways Authority of India (NHAI) or the Rural Electrification Corporation (REC) within 6 months from the date of transfer can provide an exemption on long-term capital gains. The lock-in period is for 5 years.
• The maximum investment permissible is ₹50 lakhs.
• Deposit in Capital Gains Account Scheme (CGAS):
• If you are unable to invest the capital gains in the specified asset before the due date of filing your income tax return, depositing the gains in a Capital Gains Account Scheme ensures the exemption remains available.
• The deposited funds must be utilized within the stipulated period (2 or 3 years) for purchasing or constructing the new asset.
• Capital Gains Against Capital Losses:
• Capital gains can be offset against capital losses with respect to certain conditions which reduces the taxable amount.
• Consider Property Gifting:
• Property gifting is exempted from capital gains tax for the person giving the gift. However, the recipient may incur a tax liability upon its sale.
• Opt for Joint Ownership:
• Joint ownership of property can distribute the capital gains among co-owners and lower the individual tax burden.