Capital Gains Tax on the Sale of Property

Gains from sale of property are subject to capital gains taxation. Short term capital gains occur when the property is sold within 2 years of purchase and is taxed under applicable slab rates, without any indexation benefits. 

On the other hand, long term capital gains occur when the property is sold after 2 years from the date of purchase. Long term capital gains are taxed at 12.5%, without indexation benefit, relaxation available to individuals and HUF.

This article explains in detail, the capital gains implications on sale of property, both short term and long term.

Long Term and Short Term Capital Assets 

Capital Gains are divided into two categories:

Long-term Capital Asset

• If you sell the property after holding it for more than 24 months, they are categorized as long term capital assets.
• The profit will be classified as long-term capital gains (LTCG). 

Short-term Capital Asset

• If the property is sold within 24 months of its acquisition,  they are categorized as short term capital assets. 
• Gains from transfer or such assets are classified as short-term capital gain (STCG). 

Tax Rates 

The tax rate on capital gains from the sale of property is determined based on the holding period of the asset i.e., long-term capital asset or short-term capital asset. 

The tax rate is as follows:

Short-term Capital Gain Tax Rates on sale of Property

Property sold within 2 years of purchase are classified under short term and Taxed at applicable slab rates.

Long-term Capital Gain Tax Rates on sale of Property

• Acquired and sold before 23rd July 2024: 20% with indexation benefit
• Acquired and sold after 23rd July 2024: 12.5% without indexation

Note: If the property was acquired before 23rd July 2024 and sold after the said date, the taxpayer can compute tax either at 20% with indexation or 12.5% without indexation, whichever is beneficial to the taxpayer.  

Calculation of  Capital Gains

Short-term Capital Gain/Loss from Sale of Property

The following table explains the calculation of Short Term capital gain on sale of property:

Illustration

• Short-term capital gains on sale of property is taxed as per the income tax slab rates applicable to the individual. 
• For instance, if the short-term capital gain is Rs 6 lakh and the person falls in the 30% tax bracket, then he/she has to pay 31.20% on Rs 6 lakh, i.e. Rs 1,87,200. 
• Gain/loss from the sale of the property is calculated by deducting the cost of purchase, cost incurred for improvement of the asset and expenses incurred exclusively in connection with the sale from the sale proceeds of the asset.

Long-term Capital Gain/Loss from Sale of Property

• For sale of immovable property made on or after 23rd July 2024 after 2 years of purchase, the capital gains calculation is similar to short term capital gains.
• Long term capital gains on sale of property is taxed at flat 12.5 %. However, resident individuals have the option to claim indexation benefit on capital gains calculation, with a tax rate of 20%
• If the property is sold before 23rd July 2024, indexation benefit is applicable for all the taxpayers. And the capital gains are taxed at 20%. 

The manner of computation of capital gains when indexation benefit is applicable - is explained below:

The calculation of Indexed cost can be done with the help of the following formula:

Indexed Cost of acquisition = Cost of acquisition * Cost Inflation Index (CII) of the year of sale / CII of the year in which the property was first held or FY 2001-2002, whichever is later.

Indexed Cost of Improvement=Cost of improvement * CII of the year or sale / CII of the year in which improvement took place

Example: Mr A bought a residential apartment on 1st Jan 2017 for Rs 20 lakhs. He spent Rs 2 lakhs on interiors on 1st May 2020. Now, on 1st May 2024, he is planning to sell the property for Rs 60 lakhs. Calculate the capital gain on the same.

Answer: 

1. Holding Period: Since the immovable property is held for more than 2 years it will be classified as long-term capital gain.
2. Long-term capital gain computation as follows

Example: If in the above example property is sold in August, 2024

Set Off & Carry Forward of Losses on Sale of Immovable Property

• The loss from immovable property also will depend on the classification of the capital gain. 
• The long-term capital loss from the sale of property can be set off with long-term capital gain only and any excess loss can be carried forward for 8 subsequent years.
• The short-term capital loss can be set off with both short-term capital gain and long-term capital gain and excess loss can be carried forward for 8 subsequent years.

Note: It is mandatory to file ITR before the due date to carry forward your losses.

Capital Gains Exemptions

• Exemption can be claimed on long term capital gains on property.
• Exemptions are available under 
  • Section 54 - Sale of residential property and purchased a residential property from the capital gains earned
  • Section 54EC - Sale of immovable property (land and building) and specified bonds purchased
  • Section 54F - Sale of any capital asset other than residential property and purchased a residential property.