How Capital Gains Tax Works in Real Estate: Rates & Exemptions

What Is Capital Gains Tax in India?

Capital gains tax applies when you sell a capital asset, like property, stocks, mutual funds, gold, or jewellery, for more than its purchase cost. The profits realised (i.e., selling price minus cost and improvements) are taxed. The tax treatment depends on the type of asset, how long you held it, and whether recent tax law changes (post-July 23, 2024) affect that sale.

Types of Capital Assets

• Short-Term Capital Assets (STCA):
  • Equity shares or equity-oriented mutual funds held ≤ 12 months
  • Other assets (real estate, debt funds, unlisted shares) held ≤ 24 months
• Long-Term Capital Assets (LTCA):
  • Equity shares or mutual funds held > 12 months
  • Most other assets held > 24 months

Capital Gains Tax Rates (Post-2024 Tax Changes)

Note: Budget 2025 kept these rates largely unchanged and holding periods intact.

Comparison of Tax Rates Before and After Budget 2024/2025

Before July 23, 2024:

• Equity LT gains: 10% (above ₹1 lakh yearly threshold)
• Property LT gains: 20% with indexation only

After:

• Equity LT: 12.5% on gains above ₹1.25 lakh
• Property LT: flat 12.5% without indexation (with the indexed 20% option possible for older assets)

Exemptions on Capital Gains

Long-Term Capital Gains (LTCG) Exemptions under Sections 54 to 54GA:

• Section 54: Reinvest gains from sale of residential home into a new residential property (1 year before sale or 2 years after, or construct in 3 years)
• Section 54F: Similar exemption when any asset (not residential) is sold, reinvesting in residential property
• Section 54EC: Reinvest LTCG within 6 months into NHAI or REC bonds (lock-in 5 years)
• Section 54EE: Investment in specified assets within 6 months
• Sections 54B, 54D, 54G, 54GA: Apply to agricultural land, industrial shifting, etc.

Short-Term Gains: No direct exemptions, but losses and carry-forward provisions help offset gains.

How to Calculate Capital Gains?

1. Short-Term Capital Gains (STCG)

STCG= Full Sale Consideration - (Purchase Price + Improvement Costs + Transfer Expenses)

Tax Payable:

• If equity-oriented (STT paid): 15% (plus surcharge & cess).
• If other assets (real estate, debt funds, gold, etc.): Taxed as per applicable income tax slab.

2. Long-Term Capital Gains (LTCG)

LTCG= Full Sale Consideration - (Indexed Purchase Price + Indexed Improvement Costs + Transfer Expenses)

Where:

Indexed Cost= Original Cost × CII of Sale Year / CII of Purchase Year

Tax Payable:

• Equity-oriented assets (after exemption of ₹1 lakh): 10% (without indexation).
• Other assets (property, gold, debt funds): 20% (with indexation).

How Are Inherited Capital Assets Classified?

Inherited assets are deemed acquired on the date of inheritance and at the cost the previous owner originally paid (for real estate). Holding period is considered to be from the original purchase date for LTCG/STCG classification.

ITR Filing for Capital Gains

• Report capital gains under the Capital Gains Schedule in ITR-2 or ITR-3.
• Enter STCG/LTCG values, deductions claimed under Sections 54–F etc., and TDS/TCS paid.
• Sections 87A rebate may apply, even to STCG, if total income under ₹7 lakh; must be manually applied in ITR due to UI limitations.

New Tax Options for Property Sales

As of July 23, 2024:

• Flat 12.5% without indexation is the default LTCG rate for NRIs and residents.
• For assets purchased earlier, taxpayers can opt for 20% with indexation if it results in lower tax.

Rebate on Capital Gains (Section 87A)

The Ahmedabad ITAT ruled that taxpayers with STCG under the new regime can still claim Section 87A rebate, even if the ITR portal doesn't apply it automatically.

Exemption Sections Overview

Frequently Asked Questions (FAQs)