Tax on property sale in India: How capital gains are taxed and ways to claim exemption

If you have recently sold a house or are planning to do so, understanding the tax treatment of the profit is essential. The gain from the sale will be subject to capital gains tax, though the tax treatment depends on how long the property was held before the sale and the amount of gain.

The income tax law provides several exemptions that can help reduce or even eliminate the tax liability if certain conditions are met. Here's how profits from a home sale are taxed, along with the key exemptions available to property sellers.

How are proceeds from property sale taxed in India?

If a house is sold after being held for more than 24 months, the profit is treated as long-term capital gain (LTCG). The taxable gain is calculated by subtracting the house's cost from its net sale price.

In the Union Budget 2024, the government reduced the LTCG tax rate on most assets from 20% to 12.5% and removed the indexation benefit for property sales made on or after 23 July 2024. Indexation allowed taxpayers to adjust the purchase cost of a property for inflation, thereby reducing taxable gains.

However, to protect existing homeowners, resident individuals and HUFs selling a residential property acquired before 23 July 2024, were given the option to choose between paying tax at 12.5% without indexation or 20% with indexation, whichever results in a lower tax liability.

Meanwhile, if the house is sold within 24 months, the profits are treated as short-term capital gains and taxed at your applicable slab rate.

Deductions and exemptions available on property sale

The tax rate on long-term capital gains from the sale of a house is applicable irrespective of your tax slab. However, resident taxpayers can benefit from the basic exemption limit if they have little or no other income. If a resident individual's total income, excluding long-term capital gains, falls below the applicable exemption limit, the unutilised portion of that limit can be adjusted against the LTCG to reduce the taxable capital gains amount.

Homeowners must also note that the deductions under Chapter VIA, like those available under Sections 80C, 80D, 80G, and more, are not available against long-term capital gains.

On the other hand, there is no option to save tax on such short-term capital gains. You will have to pay tax if your taxable income, including these short-term gains, exceeds ₹2.50 lakh (under the old tax regime). For senior citizens aged 60 years or above but below 80 years, the exemption limit is ₹3 lakh, and for those aged 80 years or above, there is no tax liability if the aggregate total does not exceed ₹5 lakh in a financial year. The amount of taxable income is computed after deducting various deductions, such as payments for life insurance, health insurance, PPF, and bank interest income.

If you opt for the new tax regime, the basic exemption limit applicable is Rs. 4 lakhs, irrespective of your age.

There is another way to save on taxes. Under Section 54 of the Income Tax Act, you can claim an exemption from long-term capital gains tax if you sell a house and purchase another house using the capital gains. Only long-term capital gains on house property sale are exempt under this section, and up to ₹10 crore can be claimed as an exemption, according to ClearTax.