Capital Gains Tax on Real Estate in India

1. What is Capital Gains Tax?

Capital gains tax is the tax levied on profits earned from the sale or transfer of a capital asset, such as land, residential or commercial property, or inherited real estate. In real estate, this tax is crucial for sellers, investors, NRIs, and agents as it directly impacts the net returns from a property transaction. Understanding capital gains tax helps you plan sales, reinvestments, and tax-saving strategies more efficiently.

2. What is Capital Gains Tax in Real Estate?

Definition of Capital Asset in Real Estate A capital asset includes land, buildings, flats, commercial spaces, and rights in property. The definition of capital gains taxes on real estate covers any profit arising from the sale or transfer of such property.

Types of Capital Gains

Short-Term Capital Gains (STCG): If property is sold within 24 months of acquisition, the gain is classified as short-term.

Long-Term Capital Gains (LTCG): If the holding period exceeds 24 months, the gain is classified as long-term.

This holding period rule applies to both self-purchased and inherited real estate.

3. How is Capital Gains Tax Calculated?

The calculation depends on whether the gain is short-term or long-term:
Formula:
Capital Gain = Sale Price – (Cost of Acquisition + Cost of Improvement + Transfer Expenses)
For LTCG, the cost of acquisition and improvement is adjusted using the Cost Inflation Index (CII), a process known as indexation (for properties acquired before July 23, 2024).

For STCG, no indexation is allowed.

Example:
You bought a flat in 2015 for ₹50 lakh, spent ₹5 lakh on improvements, and sold it in 2025 for ₹1.2 crore.
Indexed cost (using CII) and other expenses are deducted to arrive at the taxable gain.

4. Capital Gains Tax Rates in FY 2025-26

STCG: Taxed as per your income tax slab.

LTCG:

For properties acquired before July 23, 2024: 20% with indexation or 12.5% without indexation (whichever is beneficial).

For properties acquired on or after July 23, 2024: 12.5% flat, without indexation.

Surcharge & Cess: Additional surcharge for high-income taxpayers and 4% health & education cess apply.

Summary Table:

Type	Holding Period	Tax Rate (FY 2025-26)	Indexation
STCG	≤24 months	As per income slab (up to 30%)	No
LTCG	>24 months	20% (with indexation, pre-July 2024) / 12.5% (without indexation, post-July 2024)	Yes/No

5. Key Exemptions Under Income Tax Act

A. Section 54 – Sale of Residential Property (Reinvest in Residential)

Exemption if LTCG from sale of a residential property is reinvested in another residential property within 2 years (purchase) or 3 years (construction).

B. Section 54EC – Invest in Specified Bonds (NHAI, REC, IRFC)

Exemption if LTCG is invested in notified bonds within 6 months of sale (max ₹50 lakh per financial year).

C. Section 54F – Sale of Any Asset (Buy Residential)

Exemption for LTCG from sale of any asset (including plots) if entire net sale proceeds are invested in a residential property.

D. Section 54B – Sale of Agricultural Land

Exemption for individuals/HUFs reinvesting capital gains from sale of agricultural land into new agricultural land.

E. Section 10(37) – Compulsory Acquisition of Urban Agricultural Land

Exemption on capital gains from compulsory acquisition of urban agricultural land, subject to conditions.
Note: Most exemptions require reinvestment within a specified time and have a maximum cap (e.g., ₹10 crore for Section 54/54F after Budget 2023-24).

6. Special Cases: Capital Gains Tax Treatment

Inherited/Gifted Property: No tax at inheritance/gift stage. On sale, capital gains tax applies; holding period and cost are based on original owner’s acquisition date and price.

Jointly Owned Property: Capital gains are apportioned as per ownership share.

Under-Construction vs Ready-to-Move: Tax treatment is similar, but date of acquisition may differ.

Agricultural Land: Rural land is exempt; urban land is taxable.

7. Capital Gains Tax for NRIs

TDS: 20% for LTCG, 30% for STCG (plus surcharge and cess) is deducted at source on sale proceeds.

DTAA: Double Taxation Avoidance Agreements may allow NRIs to claim credit/refund for taxes paid in India.

Repatriation: Sale proceeds can be repatriated (up to two properties per year) after paying taxes and submitting Form 15CA/CB.

8. Real-World Examples & Case Studies

Residential Flat Sold After 3 Years: LTCG applies; exemption via Section 54 if reinvested in another house.

Inherited Property Sold by Siblings: Holding period includes previous owner’s tenure; cost is original purchase price (indexed if eligible).

NRI Selling Property: TDS applies; can claim refund if actual tax liability is lower.

Plot Purchased in 2005, Sold in 2025: Full indexation benefit for LTCG if acquired before July 23, 2024.

9. How to Report Capital Gains in ITR

Use ITR-2 or ITR-3 (for individuals/HUFs).

Fill in the ‘Schedule Capital Gains’ section with asset details, sale price, cost, dates, and exemptions claimed.

Attach documents: sale deed, purchase receipts, CII, proof of reinvestment/bond purchase.

For NRIs: File Form 15CA/CB for repatriation, claim TDS refund if eligible.

10. Common Mistakes to Avoid

Missing indexation benefit (for eligible properties).

Delaying reinvestment beyond the allowed time.

Using the wrong ITR form.

Not claiming TDS refund (NRIs).

Not maintaining proof of acquisition/improvement costs.

11. Capital Gains Tax Planning Tips

Plan sales to qualify for LTCG (hold for >24 months).

Time reinvestments to maximize exemptions.

Use family-based planning (gifts, inheritance) to split gains.

Invest in 54EC bonds for risk-free exemption.

Consult a tax advisor for high-value transactions.

12. Tools and Calculators

Use online capital gains tax calculators (e.g., ClearTax, Groww).

Download the latest Cost Inflation Index (CII) table for accurate indexation.

Refer to the[ Income Tax Department portal](https://www.incometax.gov.in/) for forms and guides.

13. Conclusion

Capital gains tax on real estate is a pivotal factor in property sales, impacting your net returns and future investment plans. With recent changes in LTCG rates and indexation rules, sellers must carefully plan transactions, utilize available exemptions, and file taxes accurately. Strategic planning transforms tax from a liability into an opportunity—helping you retain more of your hard-earned gains.