Capital gains on property: planning before you sell

For many families, a house or plot is their largest asset, and selling it can trigger their largest tax bill. The good news is that most of the planning has to happen before the sale, which means there is usually time to get it right.

Short-term or long-term?

Land and buildings held for more than 24 months are long-term capital assets. Gains on property held for 24 months or less are short-term and are added to your income and taxed at your slab rate.

How long-term gains are taxed today

For transfers on or after 23 July 2024, long-term capital gains on property are taxed at 12.5% plus surcharge and cess, without indexation. For land or buildings acquired before 23 July 2024, resident individuals and HUFs can compare this with the earlier method, 20% with indexation, and pay the lower amount. Non-residents do not get this choice.

Exemptions worth planning for

• Section 54: if you sell a residential house and buy or build another residential house within the specified time, the gain invested can be exempt, subject to a cap of ₹10 crore.
• Section 54F: a similar exemption when you sell a long-term asset other than a house, such as a plot, and invest the net sale proceeds in a residential house, subject to conditions.
• Section 54EC: investing up to ₹50 lakh of the gain in specified bonds within six months of the sale can exempt that amount. The bonds have a five-year lock-in.
• Capital Gains Account Scheme: if you cannot reinvest before your return is due, depositing the amount in this scheme can preserve the exemption while you complete the purchase.

Other points to check

• The buyer must deduct TDS. For resident sellers, it is generally 1% where the consideration is ₹50 lakh or more; for non-resident sellers the rate is much higher and is based on the gain. NRIs can apply for a lower deduction certificate.
• If the sale price is below the stamp duty value beyond a tolerance limit, the stamp duty value may be treated as the sale price.
• Keep records of the purchase cost, improvement costs and transfer expenses; they reduce the taxable gain.
• Joint owners are each taxed on their share of the gain.

Plan the sale, not just the tax

The right answer depends on what you intend to do with the money. Reinvesting in another home, putting the gain into 54EC bonds, or simply paying the tax and investing freely can each be sensible. Comparing these options before you agree a price usually saves the most.