Capital gains tax when you sell a property in India: how it works and ways to save tax

General information, not tax advice. Tax rates, holding periods, indexation and exemption limits have changed in recent years and can change again. This page does not quote rates, so it cannot go out of date on them. Confirm the rules for your sale, and for the year you sell, with a chartered accountant or tax adviser.

How is capital gains tax on a property sale calculated?

The gain is the sale price minus what the property cost you to buy and improve, and minus the expenses of selling. The tax is charged on that gain, not on the whole price. Which rate applies depends on whether the gain is short-term or long-term, and that depends on how long you held the property.

• Sale price: the full value you receive, or the government's guideline value if that is higher and the tax rules say it counts.
• Cost of acquisition: what you paid, including stamp duty and registration at the time.
• Cost of improvement: money spent on additions and major improvements, with proof. Routine repairs usually do not count.
• Selling expenses: brokerage and legal costs of this sale.
• Gain = sale price - (acquisition cost + improvement cost + selling expenses).

What is the difference between short-term and long-term gains?

The law sets a holding period. Sell after holding the property for longer than that period and the gain is long-term. Sell before it and the gain is short-term. A short-term gain is generally added to your income and taxed at your normal slab rate, while a long-term gain is taxed at its own special rate. Check the current period and rate for the year you sell.

What is indexation, and does it still apply?

Indexation adjusted the purchase cost upward for inflation, so that a long-term gain reflected real growth rather than inflation alone. The rules on whether it is available, for which purchases and at which rate, have been changed by recent budgets. Do not assume your adviser's last answer still holds. Ask which method applies to a property bought on your date, and whether you are allowed to choose.

How can I save tax on the gain?

The Income Tax Act allows some exemptions on long-term gains if you reinvest the money in specified ways. Each has conditions on time, amount and what you may buy, so the details matter.

• Section 54: for a long-term gain on a residential house, reinvesting in another residential house within the allowed time. Limits and conditions apply, and the new house may not be sold again too soon.
• Section 54EC: for a long-term gain on land or a building, investing in specified bonds within the allowed time, up to a stated limit, and holding them for the required period.
• Section 54F: for a long-term gain on an asset other than a house, investing the sale proceeds in a residential house, with conditions about what else you own.
• Capital gains account scheme: if you have not reinvested before your tax return is due, you can deposit the unused amount in this account so the exemption is not lost.

What records should I keep?

1. The sale deed of your purchase, and proof of the stamp duty and registration you paid then.
2. Receipts and contractor bills for improvements.
3. The sale agreement and deed for this sale, and the bills for brokerage and legal fees.
4. Bank records of the money received and any reinvestment you make.
5. Your adviser's written working of the tax.

If you plan to sell, read how to sell property online in India and prepare the papers using the documents checklist. Costs on the way in matter too: see stamp duty and registration.