If a property is sold in India, the seller often earns a profit over the original purchase price. This profit is known as a capital gain, and it is subject to tax under the Income Tax Act, 1961. Understanding how Capital Gain Tax (CGT) works in India is essential for property owners, investors, NRIs, and even IT professionals who diversify their earnings into real estate.
Whether you are selling a residential home, commercial property, or a piece of land, the capital gain accrued will either be taxed as a short-term capital gain (STCG) or long-term capital gain (LTCG), depending on the holding period
What is Capital Gain Tax?
Capital Gain Tax is the tax levied on the profit earned from the sale of a capital asset such as property, stocks, or mutual funds. In India, property is categorized under immovable capital assets, and its sale can attract substantial tax liability.
There are two types of capital gains based on the period of holding:
- Short-Term Capital Gains (STCG): If the property is sold within 24 months of acquisition, the gains are treated as short-term.
- Long-Term Capital Gains (LTCG): If the property is sold after 24 months, the profit is classified as long-term capital gain.
The classification is crucial because the tax rates and exemptions differ significantly between STCG and LTCG.
How is Capital Gain Calculated?
The calculation of capital gains on the sale of property involves several components:
For Short-Term Capital Gains:
The formula used is:
STCG = Sale Price – (Purchase Price + Cost of Improvements + Transfer Expenses)
Since indexation benefit (adjustment for inflation) is not allowed in STCG, the gain is taxed at the individual’s applicable income tax slab.
For Long-Term Capital Gains:
The formula becomes:
LTCG = Sale Price – (Indexed Cost of Acquisition + Indexed Cost of Improvement + Transfer Expenses)
Indexation helps reduce the impact of inflation and can significantly lower the taxable amount. LTCG on the sale of property is taxed at a flat rate of 20%, plus applicable cess and surcharge.
Exemptions Available Under Income Tax Act
Several exemptions can be claimed under sections 54, 54EC, and 54F to reduce or eliminate LTCG liability:
Section 54
If you reinvest the capital gain in another residential property within a stipulated time, the entire capital gain can be exempted. The new property must be purchased within 1 year before or 2 years after the date of sale or constructed within 3 years.
Section 54EC
You can invest the capital gains (up to ₹50 lakhs) in specified bonds (like REC or NHAI bonds) within 6 months of the sale to claim exemption. These bonds have a 5-year lock-in period.
Section 54F
Applicable if the entire sale proceeds (not just the capital gain) are invested in a residential house and the seller owns no more than one residential house at the time of sale.
Tax Deducted at Source (TDS) on Property Sale
20% on LTCG
30% on STCG
When a property is sold, the buyer is required to deduct 1% TDS if the sale value exceeds ₹50 lakhs. For NRIs, the TDS rate is significantly higher:
This TDS is deposited with the Income Tax Department, and the seller can claim a refund or pay the balance, depending on the actual tax liability.
Capital Gains for NRIs
For Non-Resident Indians (NRIs), the capital gains tax rules are broadly similar, but there are specific nuances:
- NRIs are not eligible for the basic exemption limit unless their income in India is below ₹2.5 lakhs.
- NRIs must pay tax via TDS, and compliance with FEMA and RBI regulations is necessary.
- Indexation benefits are allowed for LTCG.
- NRIs can also claim exemptions under Sections 54, 54EC, and 54F, provided the investments are made in India.
IT Professionals and Property Investment
Many IT professionals invest in property as a secondary income source. When such professionals sell property:
- They often reinvest in real estate or tax-saving bonds to avoid LTCG.
- Passive income strategies are adopted to ensure long-term gains.
- Property transactions are tracked digitally, and IT returns reflect CGT properly.
In recent years, IT systems have been integrated with property registries. Therefore, even unreported sales are being flagged by the income tax department, and notices are being issued where discrepancies are found. It is advised to always declare capital gains correctly to avoid legal complications.
Conclusion
Selling property in India can be profitable, but it comes with tax implications. By understanding the nature of capital gain, tax slabs, exemptions, and legal obligations, sellers can make informed decisions and legally reduce their tax burden.
Whether you are a resident or an NRI, an IT professional or a regular investor, strategic planning and proper documentation can save you significant tax outgo. Use exemptions wisely, invest in eligible instruments, and always file accurate returns to stay compliant with Indian tax laws.
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Frequently Asked Questions (FAQs)
Q1. What is the current rate of long-term capital gains tax on property?
A: It is taxed at 20% with the benefit of indexation.
Q2. Can capital gains be avoided?
A: Yes, by investing in another residential property (Section 54) or in specified bonds (Section 54EC).
Q3. Is TDS deducted on all property sales?
A: TDS at 1% is deducted if the sale value exceeds ₹50 lakhs. Higher TDS rates apply to NRIs.
Q4. What if I sell property within two years of purchase?
A: The profit is treated as short-term capital gain and taxed as per your income slab.
Q5. Are capital gains taxed for NRIs?
A: Yes. NRIs must pay CGT and are also subject to higher TDS rates. However, exemptions can still be claimed under certain sections.
Q6. Can IT professionals show property sale income as business income?
A: No, unless property transactions are a regular business activity. For most individuals, it is treated as capital gain, not business income.
Q7. Is it necessary to file ITR if I have capital gain?
A: Yes. Capital gains must be reported in the Income Tax Return (ITR) even if the gains are exempt under any section.
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