Capital Gains Tax and Real Estate Taxation

Selling property in India can bring significant profits, but it also attracts capital gains tax. Understanding how capital gains tax on property works, along with other aspects of real estate taxation, helps homeowners and investors plan transactions smartly and legally reduce their tax burden.

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Glossary

What is Capital Gains Tax?

Capital gains tax is the tax levied on profits earned from the sale of a capital asset, such as real estate, stocks, or gold.

This tax generates vital revenue for the government and ensures that profits from appreciating assets are fairly taxed.

Capital Assets Covered

Capital assets include land, residential and commercial property, leasehold rights, and inherited property which becomes taxable upon sale.

Types of Capital Gains on Real Estate

Profits from property sales are classified based on the holding period:

Short-Term Capital Gains (STCG): Sale within 24 months; taxed as per income tax slab.
Long-Term Capital Gains (LTCG): Sale after 24 months; taxed at a special rate with indexation benefits.

Holding Period Criteria: STCG applies if sale within 24 months; LTCG if after 24 months.

Capital Gains Tax Rates

STCG: Taxed as per individual income tax slabs (5%-30%).
LTCG: Taxed at 20% with indexation benefits.

The Budget 2024 update retains LTCG tax rate but simplifies reporting and accelerates refund processing.

Indexation Benefits

Indexation adjusts the purchase price for inflation, reducing taxable gains and thereby lowering tax liability.

Exemptions on Capital Gains from Property

Section 54: Exemption if profits reinvested in residential property within prescribed time.
Section 54EC: Investment in specified bonds (NHAI, REC) within six months post-sale to claim exemption.
Section 54F: Exemption available on sale of any asset if proceeds reinvested in residential house.

How to Save on Capital Gains Tax

Reinvest profits in residential property as per Section 54.
Deposit gains in Capital Gains Account Scheme if reinvestment is delayed.
Invest in specified bonds under Section 54EC to claim exemption.

Other Property Related Taxes

Stamp duty and registration charges at 5%-8% of property value.
TDS at 1% on property transactions over ₹50 lakh using Form 26QB.
Annual property tax payable to local bodies; wealth tax abolished since 2015.

Recent Reforms and Digitalization

Budget 2024 introduced simplified reporting and faster refund processing.
Digital filing portals and faceless assessments improve compliance and reduce errors.

Conclusion

Understanding capital gains tax, differentiating between short-term and long-term gains, and leveraging exemptions are vital for any property seller. Smart reinvestment and using schemes like CGAS or Section 54EC bonds legally reduce tax outgo. Staying updated with regulatory changes ensures smooth and compliant transactions. BUSY Accounting Software can help maintain accurate records, file returns, and manage reports efficiently.

Nitin Bansal

Chartered Accountant

MRN No.: 430412

City: Jaipur

I am a Fellow Chartered Accountant (FCA) and LLB graduate with 10 years of experience in corporate auditing, taxation, and financial consulting. My expertise includes corporate audits, income tax planning, HSN code classification, and GST rate advisory. Through my blogs and articles, I aim to simplify corporate taxation, auditing, and GST compliance, making financial matters more accessible for professionals and business owners.

Frequently Asked Questions

What is the holding period for LTCG on property?

A property held for more than 24 months qualifies as a long-term capital asset.
How is capital gains tax calculated on sale of property?

Tax is levied on the sale price minus the indexed cost of acquisition and improvements, less any eligible exemptions.
Can I save tax by reinvesting in another property?

Yes, under Section 54, reinvesting capital gains in another residential property within the specified period provides tax exemption.
What exemptions are available under Section 54?

Exemptions are available when you reinvest in a new residential house within 2 years (purchase) or 3 years (construction) of selling the original property.
Do NRIs also need to pay capital gains tax on Indian property?

Yes, NRIs must pay capital gains tax on property sales in India. TDS is deducted at 20% for LTCG and as per slab rates for STCG.

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