Capital Gains Tax on the Sale of Property

Capital gains on property arise when you sell a house, land, or real estate at a profit, and the capital gains tax you pay depends mainly on the holding period of the asset. If the property is held for more than 24 months, the gain is treated as long-term capital gains (LTCG) and taxed at 12.5% without indexation (or 20% with indexation, where applicable). If sold within 24 months, it is classified as short-term capital gains (STCG) and taxed as per your income tax slab rates.

You can also reduce your tax liability by claiming exemptions under Sections 54, 54EC, and 54F on long term capital gains, or by setting off capital losses against gains.

Classification of Capital Assets 

The capital gains tax rate depends on whether the asset transferred is a long-term or short-term capital asset which is determined based on the holding period of the asset. For assets such as gold, silver, house property and land, the holding period for classification is 24 months. 

• Capital assets held for more than 24 months are classified long-term capital assets and the gains are taxed as long-term capital gains. 
• Capital assts held for up to 24 months are classified as short-term capital assets and the gains are taxed as short-term capital gains. 

Long Term Capital Gain Tax Rate on Properties

Any profit on transfer of capital assets such as house, land, or real estate held for more than 24 months are classified as long-term capital gains. The long-term capital gains tax rate on transfer of properties is 12.5% without indexation. However, for properties purchased before 23rd July 2024, the taxpayers have the option to choose between 12.5% without indexation or 20% with indexations depending on whichever is beneficial for the taxpayer.  

Short Term Capital Gain Tax Rate on Properties

The profit on transfer of any capital asset being a house, land, or real estate held for up to Rs. 24 months is classified as short-term capital gains and are taxed at the applicable income tax slab rate of the taxpayer. 

Calculation of  Capital Gains

1. Short-term Capital Gain/Loss from Sale of Property

The following table explains the calculation of Short Term capital gain on sale of property:

Illustration

• Short-term capital gains on sale of property is taxed as per the income tax slab rates applicable to the individual. 
• For instance, if the short-term capital gain is Rs 6 lakh and the person falls in the 30% tax bracket, then Rs. 6 lakh gain will be taxed at slab rates and not a fixed single tax rate. 
• Gain/loss from the sale of the property is calculated by deducting the cost of purchase, cost incurred for improvement of the asset and expenses incurred exclusively in connection with the sale from the sale proceeds of the asset.

2. Long-term Capital Gain/Loss from Sale of Property

While calculating the capital gains on a long-term capital asset, the taxpayer can calculate capital gains by deducting the cost of acquisition from the sale consideration and pay LTCG at 12.5%.

However, if the property was bought before 23rd July 2024, the taxpayer has an option to opt for indexation benefit. Meaning the taxpayer can simply pay 12.5% tax on the difference between selling price and cost of acquisition or opt for indexation benefit and pay 20% tax on capital gains. 

The manner of computation of capital gains when indexation benefit is applicable is as follows:

The calculation of Indexed cost can be done with the help of the following formula:

Indexed Cost of acquisition = Cost of acquisition * Cost Inflation Index (CII) of the year of sale / CII of the year in which the property was first held or FY 2001-2002, whichever is later.

Indexed Cost of Improvement = Cost of improvement * CII of the year or sale / CII of the year in which improvement took place

Example: Mr A bought a residential apartment on 1st Jan 2017 for Rs 20 lakhs. He spent Rs 2 lakhs on interiors on 1st May 2020. Now, on 1st May 2025, he is planning to sell the property for Rs 60 lakhs. Calculate the capital gain on the same.

Answer: 

1. Holding Period: Since the immovable property is held for more than 2 years it will be classified as long-term capital gain.
2. Long-term capital gain computation as follows

Example: If in the above example property is sold in May, 2025

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

• The loss from immovable property also will depend on the classification of the capital gain. 
• The long-term capital loss from the sale of property can be set off with long-term capital gain only and any excess loss can be carried forward for 8 subsequent years.
• The short-term capital loss can be set off with both short-term capital gain and long-term capital gain and excess loss can be carried forward for 8 subsequent years.

Note: It is mandatory to file ITR before the due date to carry forward your losses.

Capital Gains Exemptions For Properties

• Exemption can be claimed on long term capital gains on property if the proceeds are reinvested in specified capital assets, bonds or schemes.
• Exemptions are available under 
  • Section 54 - Sale of residential property and purchased a residential property from the capital gains earned
  • Section 54EC - Sale of immovable property (land and building) and specified bonds purchased
  • Section 54F - Sale of any capital asset other than residential property and purchased a residential property.