Profits earned from selling a property are liable to capital gains tax. When a property is sold within two years of purchase, the profit is treated as short-term capital gain and is taxed according to the applicable income-tax slab rates, with no indexation benefit.
If the property is sold after holding it for more than two years, the profit is considered a long-term capital gain and is taxed at 12.5% without indexation, with certain relaxations available to individuals and Hindu Undivided Families (HUFs).
This guide outlines the tax treatment of capital gains on property sales, covering both short-term and long-term scenarios.
Classification of Capital Assets
Long-Term Capital Asset
A property held for more than 24 months before sale is classified as a long-term capital asset, and the resulting profit is treated as long-term capital gain (LTCG).
Short-Term Capital Asset
A property sold within 24 months of acquisition is treated as a short-term capital asset, and any profit is categorized as short-term capital gain (STCG).
Tax Rates on Capital Gains from Property Sale
The tax rate on capital gains arising from the sale of property depends on how long the asset has been held—whether it qualifies as a short-term capital asset or a long-term capital asset.
Short-Term Capital Gain (STCG)
If a property is sold within two years of purchase, the gain is treated as short-term and is taxed according to the individual’s applicable income-tax slab rates.
Long-Term Capital Gain (LTCG)
- Property acquired and sold before 23 July 2024: Taxed at 20% with the benefit of indexation.
- Property acquired and sold on or after 23 July 2024: Taxed at 12.5% without indexation.
- Property acquired before 23 July 2024 but sold after this date: The taxpayer may choose between 20% with indexation or 12.5% without indexation, opting for the rate that results in a lower tax liability.
Calculation of Capital Gains on Sale of Property
Short-Term Capital Gain/Loss
The computation of short-term capital gain on property is as follows:
| Particulars | Amount |
|---|---|
| Sale Consideration | XXXX |
| Less: Cost of Acquisition | XXXX |
| Less: Cost of Improvement | XXXX |
| Less: Transfer Expenses | XXXX |
| Short-Term Capital Gain | XXXX |
Short-term gains are taxed at the individual’s applicable income-tax slab rates.
Example: If the short-term gain amounts to ₹6 lakh and the taxpayer falls in the 30% bracket, tax will be 31.20% of ₹6 lakh, i.e. ₹1,87,200.
The gain or loss is determined by subtracting the purchase price, any improvement costs, and expenses directly related to the sale from the sale consideration.
Long-Term Capital Gain/Loss
For immovable property sold on or after 23 July 2024 and held for more than two years, the calculation method mirrors that of short-term gains, but the tax rate differs.
- Flat 12.5% tax applies to long-term capital gains.
- Resident individuals may opt for 20% with indexation, if that is more advantageous.
- For property sold before 23 July 2024, indexation applies for all taxpayers, and the gain is taxed at 20%.
Computation when indexation is used:
| Particulars | Amount |
|---|---|
| Sale Consideration | XXXX |
| Less: Indexed Cost of Acquisition | XXXX |
| Less: Indexed Cost of Improvement | XXXX |
| Less: Transfer Expenses | XXXX |
| Long-Term Capital Gain | XXXX |
| Less: Exemption u/s 54/54F/54EC | XXXX |
| Taxable Long-Term Gain | XXXX |
Indexed Cost Formulas
- Indexed Cost of Acquisition = Cost of acquisition × (CII of year of sale ÷ CII of year of purchase or FY 2001-02, whichever is later)
- Indexed Cost of Improvement = Cost of improvement × (CII of year of sale ÷ CII of year of improvement)
Illustration
Mr. A purchased a residential flat on 1 Jan 2017 for ₹20 lakh and spent ₹2 lakh on interiors on 1 May 2020. He plans to sell it on 1 May 2024 for ₹60 lakh.
- Holding period: More than 2 years ⇒ long-term capital asset.
- Indexed Cost of Acquisition: ₹20 lakh × (363 ÷ 264) = ₹27,50,000
- Indexed Cost of Improvement: ₹2 lakh × (363 ÷ 272) = ₹2,66,911
- Long-Term Capital Gain: ₹60,00,000 – ₹27,50,000 – ₹2,66,911 = ₹29,83,089
- Tax @ 20%: ₹5,96,618
If the same property is sold in August 2024, the taxpayer may compare 20% with indexation to the 12.5% without indexation and choose the lower tax liability.
Set-Off and Carry Forward of Losses on Sale of Immovable Property
The treatment of losses from the sale of immovable property depends on whether the gain is classified as long-term or short-term:
- Long-Term Capital Loss
• Can be set off only against long-term capital gains.
• Any remaining loss can be carried forward for up to eight assessment years. - Short-Term Capital Loss
• Can be set off against both short-term and long-term capital gains.
• Any unadjusted loss may also be carried forward for eight assessment years.
Important: To carry forward such losses, the Income Tax Return (ITR) must be filed before the due date specified under the Income Tax Act.
Capital Gains Exemptions
Long-term capital gains from the sale of property may qualify for exemption under the following provisions:
- Section 54 – Applicable when a residential property is sold and the capital gain is reinvested in another residential property.
- Section 54EC – Available when the proceeds from the sale of land or building are invested in specified bonds.
- Section 54F – Applies when any capital asset other than a residential property is sold and the gain is invested in a residential property.
Frequently Asked Questions on Capital Gains
1. Is capital gains tax applicable on the sale of jewellery or gold?
Yes. Capital gains tax applies when you sell jewellery or gold. If the holding period is more than two years, it is treated as a long-term asset and taxed at 12.5% without indexation. If sold within two years, it is considered a short-term gain and taxed according to the individual’s income-tax slab.
2. How can I reduce or avoid capital gains tax on property, shares, or gold?
You can claim exemptions under provisions such as Section 54, Section 54EC, and Section 54F, subject to the conditions specified in the Income Tax Act.
3. What is the long-term capital gains tax on property for NRIs?
For Non-Resident Indians (NRIs), property held for more than 24 months is subject to 12.5% long-term capital gains tax without indexation.
4. What is the long-term capital gains tax on property for senior citizens?
Senior citizens follow the same rules as other taxpayers. Property held for over 24 months is taxed at 12.5% without indexation or, if preferred, 20% with indexation.
5. Which ITR form should be used for reporting capital gains from the sale of property or gold?
If you have capital gains from selling property or gold, file ITR-2. If you also have business income, use ITR-3.
6. Are inherited properties subject to capital gains tax when sold?
Yes. Although inheriting a property itself is not taxable, capital gains tax applies when you sell the inherited property. The cost of acquisition is based on the original owner’s purchase price and date.
7. Is capital gains tax applicable on the sale of agricultural land?
It depends on the location. Rural agricultural land is generally exempt from capital gains tax, while urban agricultural land is treated as a capital asset and taxed accordingly.
8. Can renovation or improvement costs be deducted while calculating capital gains?
Yes. Expenses directly related to improvement or renovation of the property can be added to the cost of acquisition to reduce taxable capital gains, provided valid bills and records are maintained.
9. What happens if the capital gain is reinvested in more than one residential property?
Under certain conditions of Section 54, taxpayers may invest the capital gain in two residential houses and claim exemption, but this option can be exercised only once in a lifetime and is subject to value limits.
10. Are brokerage and transfer charges deductible when computing capital gains?
Yes. Brokerage, stamp duty, and other transfer-related expenses can be deducted from the sale proceeds while calculating the capital gain.
11. How is capital gain calculated if the sale value is lower than the circle rate or stamp duty value?
If the declared sale price is lower than the stamp duty value, tax authorities may adopt the stamp duty value as the sale consideration for capital gains calculation, unless you can justify the lower price.
12. Can capital losses be carried forward to future years?
Yes. Short-term capital losses can be set off against both short- and long-term gains, while long-term losses can only offset long-term gains. Unused losses can be carried forward for up to eight assessment years, provided the ITR is filed before the due date.
