Capital Gains on the Sale of Property: Updated Rules and Tax Implications
Riya Thawani
Riya Thawani is a Chartered Accountant and the founder of CA Riya Thawani & Company. With strong expertise in taxation, GST compliance, and business advisory, she assists individuals and startups with financial planning and legal compliance. She is passionate about simplifying tax laws for professionals and entrepreneurs through insightful articles and workshops.
Real estate remains one of the most preferred avenues for investment in India. While property transactions create opportunities for wealth generation, they also trigger tax liabilities under the Income-tax Act, 1961. Profits earned from selling land, buildings, or houses are categorized as capital gains, which are taxable. With the Union Budget 2024, India witnessed significant changes in the computation and taxation of capital gains from immovable property.
This article explains the concept, classification, computation, new tax rates, exemptions, and practical nuances related to capital gains on property transactions, updated to reflect the latest rules.
Understanding Capital Gains
Capital gains refer to the profit arising when a capital asset (such as land, a house, or a building) is sold for an amount exceeding its cost of acquisition. Unlike income from rent or business, capital gains are taxed only at the time of transfer. Transfers can occur through sale, exchange, relinquishment of rights, or even compulsory acquisition by the government.
Classification of Capital Gains
1. Short-term Capital Gain (STCG):
a. If property is held for 24 months or less before transfer, the profit is treated as STCG.
b. STCG is taxed at normal slab rates applicable to the seller.
2. Long-term Capital Gain (LTCG):
a. If property is held for more than 24 months, it is classified as LTCG.
b. The Budget 2024 introduced major reforms in LTCG taxation on property.
Revised LTCG Tax Rates (Post 23 July 2024)
The taxation regime now works as follows:
- For property acquired before 23 July 2024:
Resident individuals/HUFs may choose the 20% rate with indexation if it results in lower tax than 12.5% without indexation. - For property acquired and sold after 23 July 2024:
Only 12.5% without indexation applies. - STCG remains unchanged: Taxed at applicable slab rates.
Surcharge and 4% health & education cess are applicable on the tax. This shift marks a significant departure from the earlier system, where LTCG on property was uniformly taxed at 20% with indexation.
Computation of Capital Gains
The formula depends on the classification of gain:
For STCG:
Sale Consideration – (Transfer Expenses + Cost of Acquisition + Cost of Improvement)
For LTCG (post 23-07-2024):
- Without indexation: Sale Consideration – (Transfer Expenses + Cost of Acquisition + Cost of Improvement) → taxed @12.5%
- With indexation (only for pre-23-07-2024 acquisitions, optional):
Sale Consideration – (Transfer Expenses + Indexed Cost of Acquisition + Indexed Cost of Improvement) → taxed @20%
Key Rule on Sale Price vs Stamp Duty Value (SDV):
- If the difference between declared sale consideration and SDV is ≤10%, no substitution.
- If it exceeds 10%, the stamp duty value (SDV) may be deemed the sale consideration under Sections 50C or 43CA.
- Buyers may also incur tax liability under Section 56(2)(x) if the consideration is lower than the SDV by more than 10 percent and the difference exceeds ₹50,000.
Exemptions from Capital Gains
The law continues to provide relief where gains are reinvested in specified assets. Updated provisions include:
1. Section 54 – Investment in Residential House
a. Exemption available if long-term capital gains from the sale of a residential property are invested in another residential house.
b. New rule (from AY 2024-25): The exemption is capped at ₹10 crore of the new house’s cost. Any excess investment is ignored.
c. Time limit: Purchase within 2 years, construction within 3 years of transfer.
2. Section 54F – Investment in Residential House (other assets sold)
a. Applies when a long-term asset other than a house (say, land or shares) is sold, and the net consideration is invested in a house.
b. Same ₹10 crore cap introduced from AY 2024-25.
c. Exemption is proportionate if only part of the consideration is reinvested.
3. Section 54EC – Bonds Investment
a. Exemption if LTCG from property is invested in specified bonds (NHAI/REC/PFC/IRFC).
b. Investment limit: ₹50 lakh across the current FY + next FY combined.
c. Time frame: Within 6 months from transfer.
d. Lock-in period: 5 years.
4. Capital Gains Account Scheme (CGAS):
a. If the reinvestment cannot be completed before filing the return, the amount must be deposited into CGAS to retain exemption eligibility.
Example Illustration
Mr. B bought land in 2016 for ₹40 lakh. He sold it in August 2024 for ₹1.5 crore, incurring ₹2 lakh as brokerage.
- Option 1 (New 12.5% rule, no indexation):
Capital Gain = ₹1.5 crore – (₹40 lakh + ₹2 lakh) = ₹1.08 crore
Tax @12.5% = ₹13.5 lakh approx. - Option 2 (Old 20% with indexation, available since acquired pre-23-07-2024):
Indexed cost = ₹40 lakh × (CII of 2024 ÷ CII of 2016) ≈ ₹75 lakh (approx)
LTCG = ₹1.5 crore – ₹75 lakh – ₹2 lakh = ₹73 lakh
Tax @20% = ₹14.6 lakh
Here, opting for the new 12.5% rate results in lower tax, so Mr. B will choose that.
Planning Considerations
- Evaluate both options (20% with indexation vs 12.5% flat) if the property was acquired before July 2024.
- Reinvestment caps (₹10 crore) must be factored into large-value transactions.
- Invest prudently in Section 54EC bonds, considering the combined investment limit of ₹50 lakh and the five-year lock-in period.
- Taxpayers should remain cautious of SDV differentials, as these may create additional tax liabilities for both the seller and the buyer.
- Keep documentation for the cost of acquisition, improvement, and transfer expenses to justify claims.
Conclusion
The Budget 2024 reforms simplify capital gains taxation on property by offering a flat 12.5% rate without indexation while preserving flexibility for older acquisitions. At the same time, capping exemptions under Sections 54 and 54F and tightening anti-abuse provisions reflect the government’s intent to balance relief with revenue needs.
For property owners, careful evaluation of tax options, reinvestment strategies, and compliance with the revised limits is essential. Ultimately, sound planning can transform a property sale from a tax-heavy burden into a step toward strategic wealth creation.
For any clarifications or queries, please feel free to reach out to us at admin@fintracadvisors.com
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