Taxation on Sale of Property in India

In India, the sale of property is subject to tax under Income Tax Act of 1961. The taxation on property transactions primarily revolves around Capital Gains Tax, which applies when there is a sale of a capital asset, such as land, building, or residential/commercial properties.

1.Understanding Capital Gain

When a property is sold, the difference between the sale price and the original purchase price (adjusted for certain costs like improvement expenses) is considered as capital gain. This capital gain is then taxed based on how long the property was held before being sold.

There are two types of capital gains based on the holding period

• Short -Term Capital Gains (STCG)
• Long -Term Capital Gains (CTCG)

2. Short -Term Capital Gains (STCG)

If a property is sold within Two years from the date of purchase, the gain is considered short-term capital gain. STCG is taxed at the rate of 20%.

However, from Total Sale Value of Property one may adjust the Purchase cost (along with Incidental expenses) and Improvement Costs.

Example of STCG:

• If a property was brought for ₹30 lakh and sold for ₹35 lakh within two years, the short-term capital gain would be ₹5 lakh, The taxability would be based on Assessee Slab rate.

3.Long-Term Capital Gains (LTCG)

If the property is sold after holding it for more than Two years, it is considered long-term capital gain. LTCG on sale of property is taxed at 12.5% without indexation benefit and 20% with indexation benefit.

Indexation means adjusting the purchase price of the property with inflation, which effectively reduces the taxable amount of capital gain.

Example of LTCG:

• If a property was bought for ₹30 lakh in 2015 and sold for ₹50 lakh in 2025, the capital gain would be calculated by factoring in the inflation index to reduce the taxable gain, making it more tax efficient.

4.Indexation Benefit

Indexation is an important concept that helps reduce the taxable capital gain by considering inflation. The cost of acquisition and cost of improvement of the property can be adjusted based on the Cost Inflation Index (CII), which is notified by Government of India every year.

For example, if a property was purchased in 2015 and sold in 2025, the purchase price will be multiplied by CII of 2025 and divided by CII of 2015 to account for inflation.

5.Exemptions under Section 54 and Section 54F

Section 54 – Exemption on Sale of Residential Property

If you sell a residential property and invest the proceeds in another residential property, you can claim an exemption on long-term capital gains subject to Section 54. The exemption is subject to following conditions:

• The new property must be purchased within one year before or two years after the sale, or constructed within three years.
• The new property should be a residential property.
• This exemption is available only if you do not own more than one residential property at the time of sale.

Section 54F – Exemption for Sale of Any Property

If you sell any property (other than a residential house) and invest the entire sale amount in purchasing or constructing a new residential house, the capital gains can be exempted under Section 54F. This exemption is available only if you do not own more than one residential property at the time of sale.

6.TDS on Sale of Property

When selling property, the buyer is required to deduct Tax Deducted at Source (TDS) if the sale consideration exceeds ₹50 lakh. The TDS rate is:

• 1% for property sold by a resident individual in accordance with Section 194IA

The deducted TDS is credited to the seller’s account, and the seller can claim it while filing their income tax return.

7.Other Expenses that Can Be Deducted

While calculating capital gains, you can also subtract the following expenses from the sale price to reduce your taxable gain:

• Brokerage fees
• Legal fees
• Stamp duty and charges
• Cost of repairs and improvement

These expenses are considered part of the cost of sale and can be deducted from the sale price, thereby reducing the taxable capital gains.

Conclusion

Taxation on the sale of property in India primarily revolves around capital gains tax, which varies depending on whether the property is sold within two years (short-term capital gains) or after two years (long-term capital gains). By utilizing exemptions such as those under Sections 54 and 54F and leveraging indexation benefits, property owners can reduce their tax liability.

It is crucial to consult a tax professional or financial advisor to ensure that all eligible exemptions are claimed and to correctly calculate the capital gains tax.