Short-Term vs Long-Term
Capital gains on property sale are classified as short-term (property held for 24 months or less) or long-term (held for more than 24 months). Short-term capital gains are added to your regular income and taxed at your applicable income tax slab rate. Long-term capital gains are taxed at a flat rate of 12.5% (as per the latest budget). The holding period is calculated from the date of purchase (registration) to the date of sale (registration).
Calculating Capital Gains
For long-term gains, the calculation previously used cost inflation indexation (CII) to adjust the purchase price for inflation, but recent changes have simplified the calculation. The basic formula is: Sale Price minus Purchase Price (with or without indexation depending on applicable rules) minus Transfer Expenses (brokerage, legal fees) equals Capital Gain. The sale price for calculation purposes is the higher of the actual sale price or the Ready Reckoner value.
Section 54 Exemption
Section 54 provides a significant exemption: if you reinvest the long-term capital gains in purchasing or constructing another residential property within the prescribed timeframe (2 years for purchase, 3 years for construction), the gains are exempt from tax. The new property must be in India. If only a portion of the gains is reinvested, proportionate exemption is available. Alternatively, Section 54EC allows investing gains in specified bonds (NHAI, REC) within 6 months of sale for exemption up to ₹50 lakh.
TDS on Property Sale
The buyer is required to deduct TDS at source on property sales. For resident sellers, TDS is 1% of the sale value if it exceeds ₹50 lakh. For NRI sellers, TDS rates are higher: 12.5% for long-term capital gains and applicable slab rates for short-term gains on the entire sale consideration. NRI sellers can apply for a lower TDS certificate under Section 197 by filing Form 13 with the Income Tax department to reduce the upfront tax burden.
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