Long-Term Capital Gains (LTCG) Tax on Property

Q: How to find the long-term capital gains on the property I sold?

To calculate the long-term capital gains on a property , deduct the indexed (or regular, in case indexation benefits are not available) costs of acquisition and improvement from the sale value of the property.

Accounting for the capital gains earned is one of the most important aspects of selling a property. With the Union Budget 2024 bringing in changes to how long-term capital gains (LTCG) on a property are identified and taxed, it becomes increasingly necessary to understand this crucial concept — especially if you own a commercial or residential property.

Want to know all about what capital gains and LTCG are and how this kind of income is calculated and taxed? In this article, we’ll cover all these details and more.

What are Capital Gains on a Property?

Capital gains are the profits earned from the sale or transfer of a capital asset. A capital asset can be land, building, gold, stocks or bonds. When you sell these assets, the profits you earn are categorised as capital gains under the Income Tax Act and subject to tax accordingly.

The rate of tax on LTCG on a property depends on whether the profits earned are short-term capital gains or long-term capital gains. This, in turn, depends on the holding period involved. Let us take a closer look at what the term ‘long-term capital gain on a property’ means.

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Short-Term vs Long-Term Capital Gains on a Property

If you sell any property you own within 24 months of acquiring it, the profits are considered short-term capital gains. However, if the holding period is 24 months or more, the profits are considered LTCG on a property.

For example, say you purchased a house on April 1, 2020, and sold it on August 31, 2021. In this case, the holding period is only around 17 months — which is less than 24 months. So, the profits earned on your sale will be short-term capital gains. However, say you sell the house property on October 31, 2024. Here, since the holding period exceeds 24 months, you will earn long-term capital gains on the property (if sold at a profit). You will then have to compute and pay the long-term capital gains tax on real estate as per the Income Tax Act.

How to Calculate the Long-Term Capital Gains on a Property Sale?

The calculation of the long-term capital gains on a property is quite simple if you know a few basic details about the asset. More specifically, these are the key parameters you need to calculate the long-term capital gains on a property.

The sale value of the property
The cost of acquisition
The indexed cost of acquisition
The cost of improvement
The indexed cost of improvement
The transfer expenses

Once you have these values, you can calculate the long-term capital gain on a property using the formula shown below:

Long-term capital gain = Sale Value — Indexed Cost of Acquisition — Indexed Cost of Improvement — Transfer Expenses

The concept of indexation was introduced to account for inflation. However, as per the amendments included in the Finance Bill following the Union Budget 2024, indexation is no longer available for certain specific transactions. Let’s check out the details further.

Indexation in Long-Term Capital Gains on a Property

Indexation involves adjusting the cost of acquiring or improving a property for inflation. This means the original cost or expense is modified (or increased) using the Cost Inflation Index (CII). The formula for the indexed cost of acquisition or improvement is as follows:

Indexed Cost of Acquisition or Improvement = (CII for the Year of Sale ÷ CII for the Year of Purchase or Improvement) x Cost

For example, say you purchased a house property in FY 2008-09 for ₹40,00,000, improved it to the tune of ₹10,00,000 in FY 2015-16 and sold it for ₹1,00,00,000 in FY 2020-21. In this case, the indexed cost of acquisition will be:

Indexed Cost of Acquisition:

= (CII for the Year of Sale ÷ CII for the Year of Purchase) x Cost

= (301 ÷ 137) x ₹40,00,000

= ₹87,88,321

Indexed Cost of Improvement:

= (CII for the Year of Sale ÷ CII for the Year of Improvement) x Cost

= (301 ÷ 254) x ₹10,00,000

= ₹11,85,039

To calculate the long-term capital gain on the property, you can use the formula discussed earlier. This would lead us to the following calculation of the long-term capital gain on the property.

Long-term Capital Gain:

= Sale Value — Indexed Cost of Acquisition — Indexed Cost of Improvement — Transfer Expenses

= ₹1,00,00,000 — ₹87,88,321 — ₹11,85,039

= ₹26,640

Know More AboutWhat is Capital Gain Tax?

Taxation of the LTCG Under the Income Tax Act

Now that you know how indexation works and how to calculate the long-term capital gain on a property, we can delve into how LTCG taxation works and what the recent amendments to LTCG taxation on properties in India are.

As per the Union Budget 2024, the benefit of indexation was removed for certain property transfers or made available as an option for other kinds of transfers, depending on the date of the sale. The rates of tax on the long-term capital gain on a property are as follows:

Property Purchased and Sold Before July 23, 2024

The long-term capital gains on these properties were taxed at 20% with the benefit of indexation.

Property Purchased Before But Sold on or After July 23, 2024

For these properties, taxpayers can choose any one of the following options: 20% with the indexation benefit, or 12.50% without the indexation benefit

Property Purchased and Sold After July 23, 2024

The LTCG on the property in this case will be 12.50% without the indexation benefit.

Tax Exemptions For LTCG on a Property

You can reduce the tax burden by claiming any of the specific deductions or exemptions from LTCG on properties available in the Income Tax Act, 1961. These exemptions come into effect if you invest the long-term capital gains on properties in specific assets mentioned in sections 54, 54D, 54EC, 54G and 54GB. Check out the table below for the details of the benefits under these sections.

Section Name	54	54D	54EC	54G	54GB
Asset Sold	Residential property	Land or building that is part of an industrial undertaking and has been compulsorily acquired	Immovable property like land or building	Land or building (or other capital assets) that are part of an industrial unit, sold for the purpose of transferring the industrial unit from an urban to a non-urban area	Residential property
LTCG Reinvested In	Purchasing or building a residential property	New land or building that is also part of an industrial undertaking	Specified capital gains bonds issued by the Rural Electrification Corporation (REC), Power Finance Corporation (PFC), National Highway Authority of India (NHAI) and Indian Railway Finance Corporation (IRFC)	New land or building (or any other capital asset) required for the industrial unit shifted to the non-urban area	Equity shares of eligible MSME companies engaged in manufacturing, in which the assessee has over 25% voting rights or capital after the reinvestment
Investment Period or Time Frame	Purchase a new property 1 year before or 2 years after the sale, or build a new property within 3 years of the sale	Within 3 years from the date of the transfer or acquisition	Within 6 months from the date of the sale or transfer	1 year before or 3 years after the transfer or sale date	Before filing the Income Tax Return (ITR) for the relevant financial year
Threshold	₹10 crore	NA	Total investment amount should be at least ₹50 lakh	NA	₹50 lakh

Conclusion

This sums up everything you need to know about long-term capital gains tax on real estate. If you have any kind of property and plan to sell it in the near future, ensure that you compute the potential gains, tax liabilities and exemptions available to you to find the option that optimises your tax dues. This way, you can retain the majority of the capital gains and also acquire new capital assets in the process.