Capital Gains Tax on Property: Calculation, Exemptions & Rules

When you sell a property, the profit you make is called a capital gain. In India, this profit is taxed under Capital Gains Tax. The amount of tax you pay depends on how long you have owned the property. If you sell it within 2 years of buying it, it's considered a short-term capital gain (STCG). If you sell it after 2 years, it's a long-term capital gain (LTCG). The tax rates and exemptions differ for STCG and LTCG. This article will explain how to calculate these taxes and the exemptions available under sections 54, 54B, 54F, and 54EC.

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Capital Gains Tax Explained in India

Capital Gains Tax in India is a tax that you pay when you sell a property or an asset and make a profit. The tax you pay depends on how long you have owned the property. If you sell the property after less than 2 years, it is considered a short-term gain, and if you hold it for more than 2 years, it is considered long-term. The tax rates for Short-Term Capital Gain (STCG) and Long-Term Capital Gain (LTCG) are different. The tax on STCG is generally higher than the tax on LTCG. The government allows certain exemptions to reduce the tax you owe, especially if you invest the gain in specific ways. Let’s explore how this tax works and the exemptions available.

Short-Term vs. Long-Term Capital Gains

The primary difference between STCG and LTCG lies in the holding period of the asset:

• Short-Term Capital Gain (STCG): If you sell an asset within 2 years of purchasing it, the profit is considered short-term. The tax rate on STCG is typically 20% on assets like listed securities that are subject to Securities Transaction Tax (STT). For other assets, the tax rate is based on your applicable income tax slab.
• Long-Term Capital Gain (LTCG): If you sell an asset after 2 years, the profit is considered long-term. The tax rate on LTCG is generally 12.5% for property sales. However, for assets like listed securities, the tax rate is 20% with the benefit of indexation, which adjusts the purchase price for inflation.

Understanding the distinction between STCG and LTCG is crucial, as it directly impacts the amount of tax you will owe upon selling an asset.

Calculating Short-Term Capital Gain

To calculate STCG, use the formula:

STCG = Sale Price – (Purchase Price + Expenses)

For example:

• Purchase Price: ₹20,00,000
• Sale Price: ₹25,00,000
• Expenses: ₹1,00,000

STCG = ₹25,00,000 – (₹20,00,000 + ₹1,00,000) = ₹4,00,000

If your income tax slab rate is 20%, the tax payable is:

Tax = 20% of ₹4,00,000 = ₹80,000

Calculating Long-Term Capital Gain

To calculate LTCG, use the formula:

LTCG = Sale Price – (Indexed Purchase Price + Expenses)

The Indexed Purchase Price is calculated using the Cost Inflation Index (CII). For properties sold after July 23, 2024, you can choose between:

• 12.5% tax rate without indexation, or
• 20% tax rate with indexation.

For example:

• Purchase Price: ₹10,00,000 (in FY 2002-03)
• Sale Price: ₹50,00,000 (in FY 2025-26)
• Expenses: ₹2,00,000
• CII for FY 2002-03: 105
• CII for FY 2025-26: 376

Indexed Purchase Price = (CII for FY 2025-26 / CII for FY 2002-03) × Purchase Price

Indexed Purchase Price = (376 / 105) × ₹10,00,000 = ₹35,76,190

LTCG = ₹50,00,000 – (₹35,76,190 + ₹2,00,000) = ₹12,23,810

If you choose the 20% tax rate with indexation, the tax payable is:

Tax = 20% of ₹12,23,810 = ₹2,44,762

Exemptions Available for Capital Gains

The Indian government provides various exemptions for Long-Term Capital Gains (LTCG) to encourage reinvestment of the gains into new assets or properties. These exemptions are available under different sections of the Income Tax Act, and they can help reduce the taxable amount you owe on your capital gains.

Here are the key exemptions available:

1. Section 54 - Profit on Sale of Residential Property:

   1. If you sell a residential property and use the proceeds to buy another residential property, you can claim an exemption on the capital gains from the sale.
   2. The new property must be purchased either 1 year before or 2 years after the sale of the old property.
   3. The exemption is available only for properties used for residential purposes.
   4. For example, if you sell your old house and use the profits to buy a new one, you won’t have to pay tax on the capital gains if the conditions under Section 54 are met.

2. Section 54B - Capital Gain on Transfer of Agricultural Land:

   1. Under Section 54B, if you sell agricultural land and use the proceeds to purchase another agricultural land, you can get an exemption on the capital gains.
   2. This exemption is available only to individuals and HUFs (Hindu Undivided Families).
   3. For instance, if you sell an agricultural land plot and buy a new one within a specified period, you can claim tax exemption on the capital gains from the sale.

3. Section 54F - Investment in Residential House:

   1. Section 54F provides an exemption on the sale of any asset other than a residential property (such as land, commercial property, etc.) if the proceeds are invested in a new residential property.
   2. This section is particularly useful when selling non-residential assets and reinvesting in a residential house.
   3. The exemption is allowed only if the entire proceeds from the sale are reinvested in the new residential property.
   4. For example, if you sell a plot of land and buy a new house with the entire proceeds, you can claim the exemption.

4. Section 54EC - Investment in Specified Bonds:

   1. Under Section 54EC, if you reinvest the capital gains from the sale of property into specified bonds like NHAI (National Highway Authority of India) Bonds or REC (Rural Electrification Corporation) Bonds, you can claim an exemption on the capital gains.
   2. The maximum amount you can invest in these bonds for claiming the exemption is ₹50 lakh.
   3. The investment must be made within 6 months of the sale of the property, and the bonds must be held for at least 3 years.
   4. For example, if you make a capital gain of ₹20,00,000 from selling a property and invest it in NHAI bonds within 6 months, you can claim an exemption on the capital gain.

Understanding capital gains tax and the available exemptions can help you plan your property sale and reduce your tax burden. By holding your assets for a longer period and utilizing the exemptions provided under sections like 54, 54B, 54F, and 54EC, you can significantly lower your tax liability on capital gains. Always keep track of the holding period of the property and the available exemptions to make the most out of your real estate investments.