Capital Gains Tax in India: A Complete Guide for Property Investors

December 1st, 2024

Discover key insights into capital gains tax India – including tax rates, exemptions, and strategies to save during property sales for both residents and NRIs. This blog can help you stay informed for smarter investments.

Capital gains tax India is a key consideration for property transactions. Understanding its nuances enables property investors and homeowners to manage their tax liabilities effectively.

Table of Contents

What are Capital Gains?

Capital gains refer to the profit earned from the sale of a property, when its selling price exceeds its purchase price. These gains are subject to capital gains tax India, categorised as short-term capital gains (STCG) tax for properties held for 24 months or less, and long-term capital gains (LTCG) tax for those held for more than 24 months.

Rental income is earned from leasing property, and is taxed under the header ‘Income from House Property’. On the other hand, capital gains on property sale in India represent a one-time profit realised from the sale. Rental income provides recurring returns, while capital gains showcase the property’s appreciation over time.

Both forms of income are taxed differently, with separate rules for deductions and exemptions. Recognising these distinctions is essential to navigating capital gains tax and ensuring compliance, while maximising returns.

Types of Capital Gains

In India, capital gains on property sale are classified based on the holding period:

Short-term Capital Gains (STCG): If a property is held for 24 months or less at the time of its sale, the profit earned is categorised as short-term capital gains (STCG) tax.
Long-term Capital Gains (LTCG): If a property is held for more than 24 months at the time of its sale, the profit falls under long-term capital gains (LTCG) tax.

Examples of STCG Scenarios

For instance, if you purchase a residential property and sell it within 18 months, the profit qualifies as STCG and is taxed at higher rates compared to long-term gains.

Tax Rates for Capital Gains on Property Sales

STCG Tax Rates: Short-term capital gains are added to your income and taxed as per your income tax slab rates. For example, higher-income individuals may pay a significant portion of their gains as tax.
LTCG Tax Rates: Long-term capital gains are taxed at a flat rate of 20% – with the benefit of indexation that adjusts the property’s purchase price for inflation, reducing tax on your gains. This makes long-term capital gains tax more favourable for property investors.

Recent Changes and Amendments in Capital Gains Tax Rules

The Finance Bill 2024 introduced notable updates to capital gains tax India:

Revised Holding Periods: The holding period for classifying gains as short-term or long-term has been standardised to 12 months for listed assets such as listed stocks, listed bonds, equity ETFs, gold ETFs, bond ETFs, REITs, and infrastructure investment trusts. However, the period for capital gains on property sale in India is 24 months.
Updated Tax Rates: The LTCG rate has been adjusted to 12.5%, and STCG for certain assets now stands at 20%, while others remain taxed at slab rates.
Indexation Benefit Changes: The removal of the indexation benefit for long-term asset sales post-July 2024 impacts the computation of capital gains tax.

How to Calculate Capital Gains on Property Sales

Calculating Short-Term Capital Gains (STCG)

To compute short-term capital gains (STCG) tax on property sales, follow these steps:

Determine Sale Price: Calculate the total consideration received from the sale of the property
Subtract Purchase Price: Deduct the original purchase price of the property
Account for Improvement Costs: Deduct expenses incurred for property improvements
Subtract Sale-related Costs: Deduct any costs related to the sale, such as brokerage or legal fees

Formula:
STCG = Sale Price – (Purchase Price + Cost of Improvements + Sale-Related Costs)

Example:

Sale Price: ₹60 lakh
Purchase Price: ₹50 lakh
Sale-Related Costs: ₹2 lakh
Therefore, STCG = ₹60 lakh – (₹50 lakh + ₹2 lakh) = ₹8 lakh

This ₹8 lakh will be added to your total income, and taxed as per your income tax slab rate, as per the rules of capital gains tax India.

Calculating Long-Term Capital Gains (LTCG)

To compute long-term capital gains (LTCG) tax, follow these steps:

Determine Sale Price: Calculate the total consideration received from the sale
Index the Purchase Price: Adjust the purchase price using the Cost Inflation Index (CII) formula:
Indexed Purchase Price = Original Purchase Price × (CII in Year of Sale / CII in Year of Purchase)
Deduct Indexed Costs: Subtract the indexed purchase price and indexed improvement costs
Subtract Sale-Related Costs: Deduct any expenses related to the sale

Formula:
LTCG = Sale Price – (Indexed Purchase Price + Indexed Improvement Costs + Sale-Related Costs)

Example:

Sale Price: ₹1 crore
Purchase Price: ₹60 lakh (purchased in 2010, CII: 167; sold in 2023, CII: 348)
Indexed Purchase Price = ₹60 lakh × (348/167) = ₹1.25 crore
In this scenario, long-term capital gains (LTCG) tax will not be applicable, as the indexed purchase price exceeds the sale price.

Key Exemptions and Deductions for Long-Term Capital Gains

Section 54: Reinvest capital gains on property sale in India into another residential property to claim exemption
Section 54EC: Invest up to ₹50 lakh in specified bonds (e.g., NHAI or REC) within 6 months of the sale date, to save on long-term capital gains (LTCG) tax
Capital Gains Account Scheme (CGAS): Use a CGAS account to hold gains temporarily, if reinvestment is delayed

Tax Implications for NRIs Selling Property in India

Applicable Tax Rate: NRIs are subject to 20% LTCG tax and 30% STCG tax, irrespective of their income tax slab in India
TDS Deduction: Buyers are required to deduct TDS on the sale of property by NRIs
Additional Factors: NRIs can claim exemptions under Sections 54, 54F, or 54EC by reinvesting gains as per the rules of capital gains tax India

By understanding the rules for capital gains on property sale in India, including exemptions and TDS requirements, you can manage your tax liabilities efficiently.

7 Special Considerations for Property Investors

While dealing with capital gains on property sale in India, property investors must account for many unique factors. These considerations influence tax obligations, reinvestment strategies, and potential savings on long-term capital gains (LTCG) tax and short-term capital gains (STCG) tax. By proactively understanding the 7 aspects described below, you can optimise returns and remain compliant with tax laws:

Holding Period: The duration for which the property is held determines whether the gains are classified as short-term or long-term, affecting the applicable tax rate
Indexation Benefits: Available for long-term gains, indexation adjusts the purchase price for inflation, lowering your taxable income
Reinvestment for Exemptions: Utilising Section 54 or 54F by reinvesting gains into residential properties can provide substantial tax relief
Capital Gains Account Scheme (CGAS): You can temporarily park gains in a CGAS account, if immediate reinvestment is not feasible
Tax Deducted at Source (TDS): NRI buyers must deduct TDS on the property sale, impacting cash flow
Joint Ownership Implications: When properties are jointly owned, capital gains are divided among co-owners based on ownership proportion
Taxation for Inherited Properties: Gains from selling inherited properties are treated as long-term, regardless of the holding period, with the cost of acquisition being the value on the date of inheritance

Filing Capital Gains Tax in India

Filing for capital gains tax India involves a systematic approach, to ensure accurate reporting and compliance. Proper documentation and timely submission are important to avoiding penalties and optimising tax benefits.

7 Steps to File Capital Gains Tax

Filing capital gains tax on property sale in India accurately, ensures compliance with tax regulations while leveraging available exemptions – to minimise liability.

Step 1: Calculate Taxable Gains
Compute the taxable gains – by subtracting the indexed purchase price, improvement costs, and sale-related expenses from the sale price for LTCG – or using the direct formula for STCG.
Step 2: Gather the Required Documents
Sale deed of the property
Purchase deed and payment proof
Indexation calculation sheet (for LTCG)
Expense receipts for improvements and sale-related costs
Step 3: Choose Appropriate ITR Form
Use ITR-2 for reporting capital gains, if you do not have income from business or profession
NRIs must also use ITR-2 for reporting property sales in India
Step 4: Report Capital Gains
Navigate to the capital gains section in the income tax return form. Enter details of the sale, purchase, and exemptions claimed under Sections 54, 54F, or 54EC.
Step 5: Claim Exemptions
Declare reinvestments in residential properties or specified bonds, to avail tax benefits. If funds are parked in a CGAS account, mention the deposit details.
Step 6: Submit and Pay Taxes
Pay any tax due on capital gains, after adjusting for advance tax or TDS (if applicable)
Submit the return before the due date, to avoid interest or penalties
Step 7: Keep Records
Retain all relevant documents for future reference, as these may be required during assessments or audits.

Common Mistakes and Tips for Property Investors

Navigating capital gains tax India can be complex, especially for property investors. Avoid common pitfalls to ensure compliance, while optimising tax savings. Below are the key mistakes to watch for, and practical tips to stay on track:

Common Mistakes

Misclassifying Gains: Incorrectly categorising gains as short-term or long-term due to unclear understanding of holding periods
Ignoring Indexation: Overlooking the benefit of indexation for long-term capital gains (LTCG) tax, which can significantly reduce your taxable income
Failing to Utilise Exemptions: Not reinvesting gains under Sections 54, 54F, or 54EC to claim exemptions
Delaying Reinvestment: Missing deadlines for reinvestment or failing to park funds in a capital gains account scheme (CGAS)
Improper Documentation: Inadequate records of purchase, improvement, and sale expenses, leading to complications during tax filing
Overlooking TDS for NRIs: Buyers often fail to deduct TDS for NRIs, leading to compliance issues

Tips for Property Investors

Understand Tax Rules: Familiarise yourself with capital gains on property sale in India, including applicable tax rates and exemptions
Plan Reinvestments Early: Strategise investments in residential properties or bonds to maximise tax benefits
Maintain Detailed Records: For accurate tax calculations, keep all documents related to purchase, improvement, and sale costs
Utilise Expert Guidance: Consult a tax professional to optimise exemptions and ensure accurate filing
Monitor Regulatory Changes: Stay updated on amendments in capital gains tax rules 2024, to adapt your investment strategies accordingly

Conclusion

Managing capital gains tax on property sales in India is important for property investors and homeowners seeking to maximise returns and minimise tax liabilities. From understanding the difference between short-term and long-term gains, to leveraging exemptions under Sections 54 and 54EC, strategic planning can lead to significant savings.

Stay informed about recent amendments, maintain proper documentation, and seek professional advice to ensure compliance and optimise your financial outcomes. By avoiding common mistakes and adopting proactive measures, you can navigate the complexities of capital gains tax India effectively, and secure your investment goals.

FAQs

1. How is capital gains tax calculated on the sale of property in India?

Capital gains tax is calculated on the sale of property in India by identifying the holding period. Short-term capital gains (held for less than 24 months) are taxed as per your income tax slab. Long-term capital gains (held for more than 24 months) are taxed at 20% with indexation. The formula for LTCG is: LTCG = Sale Price - (Indexed Purchase Price + Indexed Improvement Costs + Transfer Costs).

2. How much capital gains are tax-free on property?

Capital gains on property are not tax-free, but exemptions under Section 54 (reinvestment in residential property) and Section 54EC (investment in specific bonds) can reduce or eliminate the tax on long-term capital gains.

3. Do senior citizens have to pay capital gains tax in India?

Yes, senior citizens have to pay capital gains tax in India, but they can benefit from higher income exemption limits for short-term gains and can avail exemptions under Sections 54 and 54EC for long-term gains.

4. Which capital gains are exempt from tax?

Long-term capital gains are exempt from tax if reinvested under Section 54 (residential property purchase), 54F (sale of other assets), or Section 54EC (investments in bonds). Short-term capital gains are not exempt from tax.

5. Do you have to pay capital gains tax if you reinvest in property?

No, you do not have to pay capital gains tax if you reinvest in property. Long-term gains are exempt if reinvested in residential property under Section 54 or Section 54F, subject to conditions like reinvestment timeframe and type of property.

6. How can you avoid capital gains tax on inherited property in India?

You can avoid capital gains tax on inherited property in India, by reinvesting the proceeds in a residential property under Section 54 or in specified bonds under Section 54EC.

7. Can I avoid capital gains tax by paying off a home loan?

No, you cannot avoid capital gains tax by paying off a home loan, as only reinvestments in qualifying property or specified bonds provide exemptions.

8. Is it mandatory to declare the sale of property in your income tax return (ITR)?

Yes, it is mandatory to declare the sale of property in your income tax return (ITR); and details such as sale price, purchase price, and exemptions claimed must be reported.

9. Who can claim TDS on the sale of property?

The seller can claim TDS on the sale of property, if it is deducted by the buyer. It is credited to the seller’s PAN and adjusted during ITR filing.

10. How can you save capital gains tax on the sale of property?

You can save capital gains tax on the sale of property, by reinvesting in residential property under Section 54, investing in bonds under Section 54EC within 6 months (limit ₹50 lakh), or using the Capital Gains Account Scheme (CGAS) for temporary parking.

11. What is the cost of acquisition of property for calculating capital gains?

Cost of acquisition of property for calculating capital gains includes purchase price, registration fees, stamp duty, brokerage, and legal costs. For inherited or gifted property, it is the cost paid by the original owner.

12. What is the period of holding for capital gains in the case of a gift?

The period of holding for capital gains in the case of a gift starts from the date the original owner acquired it, determining whether gains are short-term or long-term upon sale.