Capital Gains Tax on Property: A Complete Manual for Beginners!

Investing in an immovable asset, like house or land, is one of the most valuable investments ever. Property is a lucrative investment, but it is associated with tax implications—one of which is Capital Gains Tax (CGT). 

Doesn’t matter if you own a house, invest in real estate, or run a business; knowledge of capital gains tax on property will assist you to maximize profits and eliminate unexpected liabilities. Let’s scroll down to understand in detail!

What is Capital Gains Tax on Property?

Real estate tax refers to a tax applied on selling property at a price higher than the purchase cost. Capital assets are further termed as any property that can be movable or immovable, tangible or intangible, and legally owned. 

Capital gains tax on property is imposed particularly on the monetary profit gained on the transfer or sale of housing assets or lands. These assets are owned by individuals who don’t consider property dealing to be their profession. 

Types of Capital Gains Tax on Property

1. Long-Term Capital Gain Tax on Property (LTCG)

• Long-term capital gain on property is levied when an individual holds an asset for more than a year or 24 months. 
• This is mainly in India. 
• 20.8% tax rate applies to the long-term capital gain on property with indexation. 

Factors to Consider for Calculating Long-Term Capital Gain on Property 

• Full value received for the property deal, i.e. sale or transfer. 
• Indexed expense for acquiring the property. 
• Indexed costs associated with renovations, modifications, or alterations of the specific property.
• Expenses involved while transferring or selling the property.
• Exemptions from taxes. 

Find out the insights of New Union Budget 2025

How to Calculate Long-Term Capital Gain on Property? 

Long-Term Capital Gain = Final Sale Price – (Indexed Cost of Acquisition + Sale Cost + Indexed Improvement Cost)

Where;

Final Sale Price – The original price at which the attribute (property) was sold. If the stamp duty is more than the sale price of the asset, then the duty value is considered for computation. 

Indexed Cost of Acquisition (ICOA) – The purchase price is adjusted for inflation using the Cost Inflation Index (CII). 

Indexed Improvement Cost – Improvement costs of the property like renovations, modifications, etc. 

Sale Cost – Expenses incurred for sale like brokerage fees, stamp duty, or legal charges. 

2. Short-Term Capital Gain on Property (STCG)

• If an asset is sold within 24 months or a year, the profit earned is categorized as short-term capital gain. 
• Short-term capital gain on property is taxed at the individual’s income tax slab rate. 

Factors to Consider for Calculating Short-Term Capital Gain on Property 

• Full consideration or consideration value catering to the property deal, i.e. sale or transfer. 
• Expenses involved in obtaining the asset possession. 
• The expenditures associated with renovation or alterations of the property. 
• Costs involved in the sale or transfer of property. 

How to Calculate Property Gain Tax for Short-Term Capital? 

Short Term Capital Gain on Property = Full Value Consideration – (Cost of Acquisition + Cost of Improvement + Cost of Transfer) 

 Where; 

Full Value Consideration – The cost at which the property is sold

Cost of Acquisition – The actual purchase price of the property 

Cost of Improvement – The expenses involved in property alterations like renovation, structural modifications, etc. 

Cost of transfer– This includes expenses incurred for sale like brokerage charges, legal fees, and stamp duty costs. 

Capital Gains Tax on Property: Exemptions You Should Know!

1. Section 54 

This section caters to exemptions on the purchase of a new residential property. Here are the criteria to avail the exemption on capital gain tax on property: 

• The total return from the capital gains shouldn’t be more than 2Cr. 
• The investment should take place either 1 year before the sale or 2 years after the sale. 
• If you are constructing a new house, it should be completed within 3 years. 
• The amount from capital gains is only allowed for reinvestment. 

2. Section 54F 

This section includes an exemption on the sale of assets excluding residential property. Check out the criteria to fall below section 54F for exemption: 

• Capital gains on property should come from the sale of long-term capital gains on property, not from the housing asset. 
• You should buy the property before 1 year of sale or after 2 years. 
• You can invest in the construction project, which needs to be completed within 3 years. 

For this exemption under capital gain tax on property, the individual needs to reinvest the entire amount of capital gain as consideration. 

3. Section 54EC 

This section caters to investments in specific bonds. Consider the following criteria to avail exemptions. 

• Capital gains achieved from selling the housing asset should be reinvested in specific bonds offered by the National Highway Authority of India (NHAI) and Rural Electrification Corporation (REC).  
• The investment amount should not be more than Rs. 50 Lakh. 
• The individual can redeem the investment amount 5 years later from the date of sale. 
• The investment should be made before tax filing for the specific year or within six months from the date of sale. 

4. Section 54B 

The exemption is only available on sale of land for agricultural activities out of rural cover. 

• The capital gain generated should be reinvested in the agricultural land within 2 years from the date of sale. 
• The exemption will be withdrawn if the newly purchased land gets sold within 3 years of purchase. 
• To be exempt under section 54B, the investment should be made before the tax filing in the same financial year. 

Also, Know about Section 194T Guide to TDS Applied on Partnership Firms!

Let’s Conclude 

Hopefully, you have understood capital gains tax on property, its types, calculations, and exemptions. If you have any other queries, shoot them right here. We will comment on the answer. 

If you want to compute capital gains, leverage our capital gain calculator right away! 

FAQs

1. How much capital gain is tax-free on property? 

The exemption limit of capital gains tax on property is capped at Rs. 10 Cr effective from 1st April 2023. 

2. How do I avoid capital gains tax on the sale of property? 

Capital gains derived from the residential property sale can be exempted from the tax under section 54 of IT act, 1961. But, the condition is the capital gains should be reinvested in constructing another residential asset. 

3. What is the time limit for paying capital gains tax? 

The time period for long-term capital gain tax on property is 1 year for equity-oriented assets and more than three years for non-equity assets.  

4. What is the holding period of property for capital gains? 

For long-term capital gains the holding period is more than 24 months and for short term capital gains it is less than 24 months.