Capital Gains Tax on Property: Rates, Calculation & Exemptions

In India, the government levies a tax on the profit or gains earned when you sell a property. This tax is known as the capital gains tax. But is the tax the same for all types of properties and for every individual? How exactly is it calculated?

In this article, we’ll explain everything you need to know about capital gains tax on property in India, including how it is calculated and the exemptions you may be eligible for.

What is the capital gains tax in India?

When you sell a capital asset such as property, stocks, bonds, or other investments, the profit or gain that you earn is called capital gain. The capital gains tax is the tax levied by the government on this profit. There are two types of capital gains: Long-term Capital Gains (LTCG) and Short-term Capital Gains (STCG), depending on the time the asset is held before being sold.

Types of capital gains

Capital gains on property in India are classified based on the holding period of the asset before they are sold. They are long-term capital gain tax on property and short-term capital gain tax on property.

1. Long-term capital gains (LTCG): If you hold a property for more than 24 months before selling or transferring it, the profit or gain that is generated is considered a long-term capital gain.

2. Short-term capital gains (STCG): If you sell or transfer a property within 24 months or less of acquiring it, the profit is classified as a short-term capital gain.

Capital gains tax rates on property

The capital gains tax rate depends on whether the gain is short-term or long-term, as well as the date of acquisition and sale.

• Long-term capital gains: The Union Budget 2024 brought a significant change in the tax applicable on LTCG on property. If the property was acquired and sold on or before 23 July 2024, it will be taxed at 20% with indexation benefit or 12.5% without indexation, whichever is beneficial to the taxpayer. For properties acquired and sold after 23 July 2024, LTCG is taxed at 12.5% without indexation.

• Short-term capital gains: The tax on short-term capital gain on property is based on the income tax slab rates applicable to the individual. For example, if the STCG is ₹6 lakh and you fall in the 30% tax bracket, then you have to pay the short-term gain tax on the property as applicable.

How to calculate capital gains tax on property

The formula to calculate capital gains tax on property is:

• Long-term capital gain

Long-term capital gain = Sale price - (indexed cost of acquisition + indexed cost of improvement + cost of transfer).

Indexed cost of acquisition = Cost of acquisition *(Cost Inflation Index (CII) of the sale year/CII of the purchase year or FY2001-2002, whichever is later.

Indexed cost of improvement=Cost of improvement * (CII of the sale year/CII of the year in which improvement was made.

• Short-term capital gain

STCG = Sale price – (purchase price + cost of improvement + cost of transfer)

Exemptions on capital gains tax on property

Under the Income Tax Act, individuals can claim certain exemptions to reduce their capital gains tax liabilities:

Section 54: Exemption on sale of residential property

An individual can claim exemption under this section if they reinvest the long-term capital gain, subject to the following conditions:

• You must reinvest the long-term capital gain in up to two housing properties.
• You can reinvest only the capital gain earned and not the entire sales proceeds.
• You must purchase another property either one year before the sale or two years after the sale of the property.
• The total capital gains should not exceed ₹2 crore.
• The capital gains can also be reinvested in the construction of a property, but the construction must be completed within three years from the date of sale.
• You can avail of this exemption only once.

Section 54F: Exemption on sale of any asset (other than residential property)

• The capital gains must be from the sale of a long-term capital asset other than a house property.
• You must reinvest the entire sale amount and not just the capital gains to purchase a new residential property.
• The investment must be made one year before the sale or after two years of selling the asset.
• You can use the sale amount to invest in the construction of a property, but the construction must be completed within three years from the date of sale.

Section 54EC: Exemption on sale of house property and reinvesting in specific bonds

• You can claim exemption under this section if you reinvest the capital gains in specific bonds issued by the National Highway Authority of India (NHAI), Rural Electrification Corporation (REC), Power Finance Corporation (PFC), or Indian Railway Finance Corporation (IRFC).
• The investment amount cannot exceed ₹50 lakh.
• The investment should be made within six months of the date of sale.
• The investment amount can be redeemed after five years from the date of sale.

Section 54B: Exemption on sale of land for agricultural purposes

• You must reinvest the capital gains in a new agricultural land (in an urban or rural area) within two years from the date of sale.
• You can sell the new agricultural land, which was purchased to claim capital gains exemption, within three years from the date of its purchase. If not done, the exemption will be revoked.
• The investment should be made before the date of filing taxes in the same financial year.

Conclusion

The profit or gain you earn when selling or transferring a property is called capital gain. However, remember that the capital gains on property come with a price. You have to pay tax depending on how long you hold the property before selling it. The good news is, you can claim exemptions under the Income Tax Act and reduce your tax liabilities. Therefore, before selling your property, it is advisable to have a clear understanding of capital gains tax on property.