Selling property in India isn’t just a financial decision—it’s a tax event. Whether you’re disposing of a residential flat, commercial space, or inherited land, capital gain tax on the sale of property plays a crucial role in determining your net profit. Understanding the rules, rates, and exemptions is essential, especially with rising property values and stricter compliance norms.

For homeowners, investors, and NRIs, knowing the tax implications of selling investment property helps avoid surprises and optimize tax savings. For NRI sellers, TDS on property transactions applies regardless of capital gains, making it essential to understand both the tax liability and the TDS deducted upfront.

What Is Capital Gain Tax on Sale of Property?

Capital gains tax is the tax levied on the profit earned when you sell a property. The Income Tax Act divides capital gains into two categories:

Short-Term Capital Gain (STCG)

If the property is sold within 24 months of purchase, the gain is classified as short-term. STCG is added to your income and taxed according to your income slab.

Long-Term Capital Gain (LTCG)

If the property is held for more than 24 months, the gain becomes long-term. LTCG enjoys lower tax rates and indexation benefits.

Property type also affects taxation. Commercial properties, rental properties, and inherited assets follow the same STCG/LTCG structure, but exemptions differ in applicability.

How Capital Gain Is Calculated

Many sellers search online for guidance on calculating capital gains tax on property, especially when multiple components influence the final figure. Here’s a simplified formula for LTCG:

Capital Gain = Full Sale Value – (Indexed Cost of Acquisition + Indexed Cost of Improvement + Transfer Expenses)

Key Components

• Sale Price: The amount you receive from the buyer.
• Cost of Acquisition: The original purchase price.
• Indexed Cost: Adjusted for inflation using the Cost Inflation Index (CII).
• Improvement Expenses: Renovations, additions, or structural upgrades.
• Transfer Costs: Brokerage, legal fees, stamp duty, etc.

Capital Gain Tax Rules You Must Know

Before paying the tax, you must first determine eligibility and compliance:

Holding Period Requirements

• Less than 2 years → STCG
• More than 2 years → LTCG (eligible for indexation and exemptions)

Reporting Requirements

You must report gains in ITR-2 (for individuals) and disclose all supporting documents.

Documentation Needed

• Purchase & sale agreements
• Payment proofs
• Renovation bills
• Brokerage receipts
• Encumbrance & valuation certificates

Failure to maintain records may lead to scrutiny or disqualification of exemptions.

Capital Gain Tax Rates

The capital gains tax rates for homeowners depend on whether the gains are short-term or long-term.

Short-Term Capital Gain (STCG)

STCG from property is taxed at your individual income tax slab rate, which may range from 5% to 30%.

Long-Term Capital Gain (LTCG)

LTCG is taxed at 20% with indexation.

Impact of Residency

• Residents: Taxed normally.
• NRIs: LTCG at 20% + surcharge and cess; TDS is deducted at source.
• Income Bracket: Affects only STCG, not LTCG.

Short-Term vs. Long-Term Capital Gains

Capital gains on property are classified based on the asset’s holding period. As per the Union Budget 2024 (effective FY 2024–25), the following revised rules apply:

Updated Holding Period Rules

• India now follows only two holding periods: 12 months and 24 months.
• Listed securities: >12 months = Long-Term
• All other assets (including immovable property): >24 months = Long-Term
• Thus, immovable property held for more than 24 months is considered long-term.
• Properties held for 24 months or less fall under Short-Term Capital Gains (STCG).

Updated Taxation Rules

• STCG continues to be taxed at slab rates.
• LTCG on non-financial and financial assets is now taxed at 12.5% (reduced from 20%).
• Indexation benefits are removed for properties sold on or after 23 July 2024.

This shift substantially changes how sellers calculate LTCG, since indexation previously reduced taxable gains significantly.

Capital Gains Tax on Property: Available Exemptions

To reduce tax liability, the Income Tax Act provides four key exemptions depending on how the seller reinvests the capital gain. These exemptions apply only to LTCG, not STCG.

1. Section 54 – Reinvestment in Residential Property

Available when:

• You sell a residential property
• You reinvest the capital gain into one residential property in India
• Purchase must be completed within 2 years, or construction within 3 years

This exemption allows the seller to offset tax liability substantially.

2. Section 54F – Sale of Non-Residential Asset, Purchase of Residential Property

Applicable when you sell land, commercial property, gold, etc., and reinvest in a new residential home.
To claim a full exemption, the entire net consideration must be reinvested.

If only part of the sale proceeds are reinvested, the exemption is calculated as:

Exempted Amount = (Capital Gains × Cost of New House) ÷ Net Consideration

3. Section 54EC – Investment in Specified Bonds

This exemption applies when the seller invests capital gains (not the full sale amount) into government-approved bonds, such as:

• NHAI
• REC

Conditions:

• Investment must be made within 6 months
• Maximum investment allowed: ₹50 lakh

If reinvestment cannot be done immediately, the amount may be temporarily deposited under the Capital Gains Account Scheme (CGAS).

4. Section 54B – Sale of Agricultural Land

Available when:

• Agricultural land (non-rural) is sold
• The seller reinvests the capital gain into new agricultural land
• The land must have been used for agricultural purposes for at least 2 years before transfer

This exemption supports continuity of agricultural activity.

Capital Gains Account Scheme (CGAS)

If the seller cannot reinvest before the income-tax filing deadline, they may deposit the required amount under the Capital Gains Account Scheme, 1988. However:

• The deposited amount must be utilized within 2–3 years, depending on the exemption claimed
• Unused funds after the deadline are treated as short-term capital gains in the year of expiry

Final Thoughts

Capital gain tax significantly influences the profitability of selling property in India. Whether it’s your primary residence, a rental unit, or commercial real estate, understanding the rules, rates, and exemptions ensures you maximize returns while staying compliant. Make use of exemptions, plan strategically, maintain proper documentation, and evaluate all tax-saving opportunities.

If you’re planning a sale, knowing the nuances of capital gains tax on real estate sales and how to leverage legal deductions can make a substantial difference in your final profit.