Selling a property can leave you with a sizable profit, but it can also rake up significant taxes. The amount of tax you pay depends on how long you have owned the property and the capital gains tax rules introduced in the Union Budget 2024 and made effective from July 23, 2024. The changes have altered how long-term gains from property sales are calculated and taxed.
Like before, a property sold within 24 months of purchase is treated as a short-term capital gain (STCG), while a property sold after 24 months is treated as a long-term capital gain (LTCG). What has changed is the way long-term gains are taxed.
No indexation but a lowered tax rate
Earlier, long-term capital gains from property sales were taxed at 20% with indexation benefit. Indexation allowed sellers to increase the original purchase price of the property on paper to account for inflation. Since the taxable gain became smaller after this adjustment, the final tax amount was often lower.
From July 23, 2024, the default rule changed to a 12.5% tax on long-term capital gains without indexation.
However, there is an important exception. Resident individuals and Hindu Undivided Families (HUFs) selling land or buildings bought before July 23, 2024, could choose between:
- The old system of 20% tax with indexation, or
- The new system of 12.5% tax without indexation,
Depending on whichever results in lower tax liability.
For properties bought on or after July 23, 2024, only the new 12.5% tax without indexation applies.
For short-term capital gains, the rules remain unchanged. If a property is sold within 24 months, the profit is added to the seller’s annual income and taxed according to the applicable income-tax slab.
How does it affect you?
The new system makes capital gains tax calculations simpler by removing indexation and lowering the tax rate for long-term gains.
For people who bought property many years ago, the old system with indexation may still lead to lower tax because inflation-adjusted purchase prices can significantly reduce taxable profit.
For those who bought property more recently, the new 12.5% tax rate without indexation may turn out to be more beneficial.
In simple terms, the better option depends on how long ago the property was purchased, how much its value increased over time, and how inflation affected property prices during that period.
Exceptions and available options
Despite the new rules, the Income Tax Act, 1961, still provides ways to reduce or avoid long-term capital gains tax through Sections 54, 54F, and 54EC.
Section 54 applies when an individual or HUF sells a residential house and reinvests the capital gain into another residential property in India. The new house can be purchased one year before or within two years after the sale, or constructed within three years. If the full capital gain is reinvested, the entire gain can usually be exempt from tax. If only part of the amount is invested, the exemption is limited to that portion.
Section 54F applies when an individual or HUF sells a long-term asset other than a residential house — such as land or gold — and uses the sale proceeds to buy or build a residential house. The same timelines apply. Full exemption is available if the entire net sale amount is invested; otherwise, the exemption is given proportionately. Certain conditions apply, including limits on owning multiple houses.
Section 54EC applies when gains from the sale of long-term land or buildings are invested within six months into specified capital gains bonds issued by organisations such as REC, NHAI, PFC, or IRFC. The exemption is capped at Rs 50 lakh, and the bonds usually have a five-year lock-in period.
Exemptions under Sections 54 and 54F are available only to individuals and HUFs, while Section 54EC benefits can also be claimed by companies, firms, LLPs, and other taxpayers.
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