What is Capital Gain on Sale of Property?

As per Income Tax Act, 1961, Capital Gain Tax is applicable on sale of any residential property in India. This rule applies to both Resident Indians as well as NRIs. It is computed based on whether it falls under the category of short-term or long-term capital gains which, in turn, depends upon the period of holding of the residential property.

Short-term Capital Gains

When a property is sold within two years of purchasing it, the gain arising from the sale is classified as short-term capital gain. Short-term capital gains are taxed as per the income tax slab of an individual. Short-term capital gain is calculated as follows - 

Sales Consideration - Cost of Acquisition

Long-term Capital Gains

When a property is sold two years after purchasing it, the gain arising from the sale is classified as long-term capital gain. Long-term capital gains are taxed at 20% with indexation benefit. Long-term capital gain is calculated as follows - 

Sales Consideration – Indexed Cost of Acquisition

Current Cost Inflation Index for computation of Indexed Cost of Acquisition-

Can you save tax on Capital Gains?

Good News is, YES. 

Both Residents and NRIs are allowed to claim exemptions on long-term capital gains rising from the sale of residential property in India under section 54 and Section 54EC of Income Tax Act. There is no exemption in case of short-term capital gains.

Exemption under Section 54 

Under Section 54, the following can be done to get exemption on long-term capital gains- 

• Invest in a ready-to-move-in residential property within a period of two years. The new residential property so purchased needs to be held for at least three years. Allocate the capital gains amount against any residential property bought within a year prior to the sale. Here again, the new residential property so purchased needs to be held for three years. 

• Invest in an under-construction residential property which should be ready within a period of three years. Such a purchase may have happened even a year prior to the sale. Again, the new residential property so purchased needs to be held for three years.

There is no restriction on the number of residential properties already owned.

Exemption Section 54 EC

Long-term capital gains tax can be saved by investing in certain capital gain bonds. Bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) have been specified for this purpose. Few points worth nothing -

• Although a period of six months from the date of sale of residential property) is allowed for making this investment, it is worth noting that this investment must be done before the return filing date. 

• Maximum amount of investment permissible in these bonds for claiming exemption is Rs. 50 lakhs. 

• These are redeemable after 5 years. 

In the above cases, the capital gains portion needs to be invested. In case, the value of the new residential property purchased or capital gain bonds purchased is lower than the amount of capital gains made, then the difference will be considered as long-term capital gains and tax, as applicable, will need to be paid.    

Neha Agrawal - Co-Founder, OPENMINDS

nehaagrawal@openminds.co.in | +91 9820402693 | www.openminds.co.in

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