How to Save Capital Gain on Property Tax?

Following are example of capital assets:

1. Automobiles: Cars, motorcycles, and other vehicles that are used for personal or commercial purposes.
2. Residential properties: Houses, apartments, or any property used for residential purposes.
3. Gold: Physical gold in the form of Jewellery, bars, coins, or ornaments.
4. Buildings: Commercial or industrial buildings used for business operations or rental purposes.
5. Equity-oriented funds: Mutual funds or investment schemes primarily investing in stocks or equity-related instruments.

1. Land plots: Vacant land or plots that can be used for various purposes like construction, farming, or development.
2. Equity shares: Ownership shares of a company or corporation held by individuals as investments in the stock market.

If selling and purchasing capital assets is an individual's primary mode of income, the profits generated from such activities are considered "Income from business or profession." Capital gain tax on property is specifically applicable to the monetary profit obtained from the sale or transfer of residential properties or lands by an individual who does not consider it a profession or whose primary source of income is not from such activities.

What are the Types of Capital Gains?

There are two types of capital gains that depend on the duration of ownership of the asset: long-term capital gain and short-term capital gain:

Short-term capital gain or STCG

If any asset is held by the owner for less than two years or 24 months and or lesser than this, then the profit earned from selling that property is known as short term capital gain. The rate of tax on capital gain strictly depends on whether it is short-term or long-term capital gain. After 31st March 2017, if a property is sold within 24 months of acquiring, the gain is considered a short-term capital gain. It is added to the individual's existing income and taxed as per the applicable income tax slab.

How is the Short-term capital gain or STCG calculated?

Here is the formula for calculating the short-term capital gain is:

Short Term Capital Gain = Sale value of the property – (cost of acquisition + expenses incurred during sale of property + cost of asset improvement).

Where, the following are the points that

1. The sale value of property is the amount received by the owner or the seller or the investing while selling the property.
2. Acquisition cost is the original price of the property that the seller pays while purchasing the property for the first time. This comprises of all the expenses that include legal formalities, brokerage, and other costs associated with the purchase of property.
3. Asset improvement cost is the cost of the improvement done by the owner to the property which may be any type of modification or repair and it includes cost of expansion of a property, repair and construction costs, etc.
4. There are some other expenses that are related to the sale of property, including legal formalities and other fees related to trading.

There are certain special cases where the holding period of some capital assets is reduced to 12 months. While holding period of immovable properties like houses, land remains 24 months, holding period of capital assets like equity shares of stock exchanges listed companies, UTI units, zero coupon bonds & equity based mutual funds are considered a STCG on a holding period of 12 months.

Note: The tax rate for short-term capital gains is typically higher than that of long-term capital gains.

Long-term capital gain or LTCG

Effective from financial year, 2017-2018, any asset that exceeds the threshold of 24 months, is considered a long-term capital asset. For instance, if an individual sells a housing property after holding it for 24 months or more, profits from such a transaction will be classified as long-term capital gains.

Only for assets like equity shares in listed companies, listed government securities, securities like bonds, debentures, units of UTI, equity oriented mutual funds (listed or unlisted) and zero coupon bonds, capital gains are classified as LTCG if they are sold off after 12 months.

How to calculate long-term capital gains

When calculating long-term capital gains, it's important to consider all of these factors to arrive at an accurate figure for tax purposes.

1. Consideration received: This refers to the total amount of money received in exchange for the property.
2. Indexed cost of acquisition: The original cost of acquiring the property is adjusted for inflation using the Cost Inflation Index (CII) to reflect the current value of the property.

1. Indexed cost of improvements: If any improvements, renovations, or alterations were made to the property, their costs are adjusted for inflation using the CII.
2. Expenses during sale or transfer: Any expenses incurred during the process of selling or transferring the property, such as brokerage fees or legal fees, are taken into account.
3. Tax exemptions: Depending on the circumstances, certain exemptions may apply to reduce the tax liability on capital gains. For example, holding the property for a specific period may make you eligible for a long-term capital gains tax exemption.

It is important to note that different tax rates applied to long-term capital gains for property sales before 31 March 2017. For example, in some cases, the tax rate was zero, while in others, it was based on an indexed cost of acquisition. Additionally, there were different tax rates based on the type of property sold and the period of holding. For example, if a property is sold after 24 months, it is considered a long-term capital gain and is taxed at a flat rate of 20%. 

The differentiation between short- and long-term capital gains is important because both of these are treated differently in terms of taxation. The tax rates and tax benefits which are applicable on the reinvestment of these two types of gains vary.

Latest key ITR changes Impacting Capital Gains

Given below are latest important ITR changes for AY 2025–26 that directly affect capital gains:

1. Simplified Filing for Equity Gains: Individuals with LTCG up to Rs.1.25 lakh can now use simpler ITR-1 or ITR-4 forms instead of the complex ITR-2 (Note: there must be no carried forward losses).

1. Gain Segregation based on Transaction Dates: Latest updates ITR forms require capital gains to be reported separately for transactions before and after July 23, 2024, to apply the new tax rates correctly.

1. Buybacks Taxed as Dividends: Share buyback proceeds received after October 1, 2024, are now taxed as "Income from Other Sources". The cost of acquisition can be claimed as a capital loss and carried forward to 8 years.

1. Improved ITR-7 Reporting: Trusts and NGOs filing ITR-7 must also separate their capital gains disclosures before and after 23 July 2024 for accurate taxation processes.

1. Higher Limit for Reporting Assets: The limit for reporting assets and liabilities in ITR-2 has been raised to Rs.1 crore to reduce the compliance burden for taxpayers.

Capital Gain Tax on Property: Exemptions

Exemptions from Capital Gain Tax on Property can be availed by individuals based on the type of reinvestment they make after receiving the consideration from long-term capital gain.

The following are the conditions to avail exemption on capital gain tax on property sale:

1. If a property is inherited from parents and there is no reinvestment in a new residential property for two consecutive financial years, then there will be exemptions on capital gain tax.
2. The sale of agricultural land is exempt from capital gain tax as agricultural land is not considered as capital asset.

Here is the list of exemptions on capital gain tax:

Section 54

Under Section 54 of the Income Tax Act, individuals can claim a tax exemption on capital gains from the sale of a property, subject to certain conditions. Here are the key details:

1. Reinvestment in housing properties: Individuals can reinvest the capital gain from the sale of a property in a maximum of two housing properties. Previously, only one property could be invested in.
2. Reinvestment amount: Only the amount of capital gain is eligible for reinvestment, not the entire sales consideration. The total capital gain should not exceed Rs.2 crores.

1. Timeframe for reinvestment: The investment should be made either one year before the sale or within two years after the sale. This exemption can only be claimed once by an individual.
2. Construction project investment: Capital gain can also be invested in a construction project. However, the construction must be completed within three years from the date of the sale to avail the exemption. If not completed within this period, the exemption will be revoked.
3. Selling the new property: If the newly purchased property is sold within three years of acquisition, the earlier tax exemption will be revoked, and capital gains tax will be applicable on the sale.

It's important to meet these conditions to avail the tax exemption on capital gains from the sale of a property.

Section 54B

The tax exemption provided by Section 54B of the Income Tax Act applies to individuals who have earned capital gains from the sale of agricultural land located outside of a rural area. It's important to meet these conditions and guidelines to avail the tax exemption on capital gains from the sale of agricultural land used for agricultural purposes outside of a rural area. Here are the key details:

1. Definition of rural area: A rural area is a place situated at least 2 km beyond the local limits of a municipal corporation or cantonment board. It should have a population of at least 10,000 but less than 1 lakh.
2. Reinvestment in agricultural land: To avail the exemption, the taxpayer must reinvest the capital gain in purchasing another agricultural land within two years from the date of sale.
3. Exemption on capital gain: The exemption is available only on the amount of capital gain and not on the entire sale consideration. The amount of exemption is calculated based on the reinvestment made in the new agricultural land, subject to certain limits.
4. Exemption limitations: This exemption is specifically applicable to the purchase of agricultural land and not residential properties or other assets.

1. Selling the new land: If the newly purchased agricultural land is sold within three years from the date of its purchase, the exemption will be revoked, and the capital gains will become taxable.

Section 54EC

Under Section 54EC of the Income Tax Act, individuals can avail tax exemption on capital gains from the sale of a housing property by reinvesting the gains in specific bonds issued by the NHAI or REC. Here are the key details:

1. Maximum investment amount: The maximum amount that can be invested in these bonds to claim the exemption is Rs.50 lakhs.

1. Redemption period: The investment in these bonds can be redeemed after a period of 5 years from the date of sale. Previously, this period was 3 years before the Financial Year 2018-19.
2. Timing of investment: The investment needs to be made before filing taxes for the respective year or within six months from the date of sale.
3. Depositing the amount: If an individual is unable to invest before filing taxes, they can deposit the amount in a PSU bank or any other bank listed under the Capital Gains Account Scheme (1988).
4. Conversion of deposit: If the deposit is converted into an investment within 2 years from the date of sale, the exemption on capital gain tax will be considered valid. 
5. Unconverted deposit: However, if the deposit remains unconverted after 2 years, it will be treated as a short-term capital gain in the year of lapse.

Section 54F

Under Section 54F of the Income Tax Act, individuals can claim tax exemption on capital gains generated from the sale of long-term capital assets, excluding housing property. Here are the key details:

1. Eligibility: This exemption applies to the sale of long-term capital assets other than housing property.
2. Reinvestment in housing properties: To avail the exemption, the entire amount received as consideration from the sale of the asset must be reinvested in a maximum of two housing properties. This change was implemented after the Budget 2019.

1. Timeframe for investment: The investment should be made one year before the sale of the asset or within two years after the sale.
2. Investment in construction project: Alternatively, the capital gain can be invested in a construction project, which must be completed within three years from the date of sale.
3. Exemption based on investment: To claim exemption on the entire amount of capital gain, the individual must reinvest the entire consideration amount. If the entire amount is not reinvested, the exemption will be calculated based on the amount invested.

By following these guidelines, individuals can claim tax exemption on capital gains from the sale of long-term capital assets by reinvesting the proceeds in housing properties or a construction project within the specified timeframes mentioned in Section 54F.

How to Save on Capital Gains Tax while Selling your Property?

There are several cases under which Long-term capital gains are exempted from taxation (under Section 54 of the Income Tax Act, 1961) for individuals and Hindu Undivided Families on the sale of a house property if:

1. Usage of funds: If the capital gains are used to purchase or construct another house.
2. Time limit for purchase: If the new house is purchased one year before or two years after the sale of the old house.
3. Time limit for construction: If the new house was constructed within three years after the sale of the old house.
4. Number of properties: Only one additional house property is purchased/constructed.
5. Geographical restriction: The property being bought/developed is within India’s national borders.
6. Holding period: If you don't sell the new house for three years after taking possession of it.
7. Exemption & residual gains: If the cost of the new property is lesser than the sale amount, the exemption then only applies proportionately. The remaining money can be re-invested under Section 54EC in under six months.

How can I Save Capital Gains on My Property?

Some of the ways through which you can save on capital gains tax on your property are:

Capital Gain Losses

Here is everything that you need to know regarding how to save capital gain tax by setting of your capital gain losses:

1. The losses incurred must be from previous date to set off your capital gain losses.
2. You can set your long-term losses only against long-term gains. However, you can set your short-term capital losses against both short term and long-term gains.
3. You can file your unadjusted long-term losses against your long-term gains with the stipulation to carry it forward for eight years.

Note: you must file your income tax before the final date.

 Capital Gains Account Scheme (CGAS)

Here are some of the details regarding how to save capital gain tax by investing in CGAS: 

1. One of the ways to save on your capital gains tax is to invest in the Capital Gains Account Scheme (CGAS). This scheme is suitable for those who cannot invest in a new property before filing their income tax returns. The tenure for investing in this scheme is for three years.

1. If you can't construct a house immediately after benefitting from a capital gain (but plan to do so sometime in the near future), then you can put the profit amount in any public sector bank under the Capital Gains Account Scheme (CGAS). If you do this, you have three years to get your property construction started. If not, the capital gain amount will be taxed as a long-term capital gain (at 20% plus a 3% cess).

1. Under the CGAS scheme, there are two types of accounts that you can deposit your money in, Savings deposit accounts (called Type-A accounts) and term deposit accounts (called Type-B accounts). Type-B accounts are cumulative or non-cumulative interest options.

1. You can transfer money between the two by paying the fixed charges, but you can only withdraw money from Type-A accounts if you submit a declaration that the money will be used to construct a house within 60 days. Any un-unutilised funds will have to be re-deposited.

Investing in Bonds

Here are the details regarding how you can save capital gain tax by investing in bonds:

1. One of the ways to save on your capital gains tax is to invest in bonds within six months of the trading of the property and receiving the gains.
2. On investing in bonds, you can claim a tax exemption under Section 54EC of the Indian Income Tax Act, 1961.
3. Keep investing for three years and not beyond that, as you will not earn any interest or transfer these bonds to another party.
4. The bonds in specific are issued by the Rural Electrification Corporation and NHAI (the National Highways Authority of India).
5. Capital gain tax will be charged if you transfer or take loan against these bonds for three years.
6. You can invest only Rs.50 lakh in these bonds every financial year.
7. The sale of farmland is not taxed under capital gains, unless it's within the limits of (or up to 8 km away from) a municipality, municipal corporation, town committee, cantonment board or any other civic body which has a population of (or over) 10,000.

Set Off and Carry Forward of Losses on Sale of Immovable Property

Here are some of the details that you must remember about setting off and carry forward of losses on sale of immovable property:

1. If an immovable property is held for more than 24 months and losses incurred while selling the property, then the loss is classified as Long-Term Capital Loss (LTCL).
2. LTCL can be offset against Long-Term Capital Gains on property, according to income tax regulations governing the set-off and carry forward of losses.
3. Remaining loss can be carried forward for up to eight years and set off only against LTCG during this period as per the provision.
4. If an immovable property is held for up to 24 months and incurs loss, then it is classified as a Short-Term Capital Loss (STCL).
5. STCL can be set off against both Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG).
6. Remaining tax can be carried forward for eight years and can be set off against STCG and LTCG only during this period.