Capital Gains on Selling Property

The tax on a property sale is rarely 12.5 per cent of the difference between the two prices. The law first asks which year the sale falls in, and how long the property was held. It then asks what the price is deemed to be if the stamp authority valued the property higher, what the cost was if the property was bought before 2001, and whether the seller can compare today’s rate with the old rate after indexation. The Union Budget of 23 July 2024 changed the rates and indexation, and the Income-tax Act, 2025 has renumbered every provision. This guide works through the computation in order, under both Acts. The exemptions that can reduce the gain are in the next guide.

Which Act applies

Capital gains are charged in the year in which the transfer takes place (section 45; section 67).

• A transfer up to 31 March 2026 (financial year 2025-26 or earlier) is taxed under the 1961 Act. For 2025-26 it is reported in the return for assessment year 2026-27.
• A transfer from 1 April 2026 is taxed under the 2025 Act, beginning with tax year 2026-27.

When a transfer takes place. “Transfer” includes the extinguishment of rights in the asset. It also includes allowing possession in part performance of a contract under section 53A of the Transfer of Property Act, 1882 (section 2(47)(ii) and (v); section 2(109)(b) and (g)). In Sanjeev Lal v CIT (Supreme Court, 1 July 2014, (2014) 365 ITR 389), the sellers had agreed on 27 December 2002 to sell an inherited Chandigarh house and received Rs 15 lakh as earnest money. A civil court then restrained them from dealing with the house, and the sale deed could be registered only on 24 September 2004. They had bought a new house on 30 April 2003. Measured from the registration date, that purchase fell outside the one-year window in section 54. The Court held that the agreement to sell had extinguished a right of the sellers in the property, so the transfer for section 54 took place on 27 December 2002. The Court stressed the “peculiar facts”: the delay was caused by a court order beyond the sellers’ control. The registration date remains the ordinary starting point.

Short-term or long-term

Land and buildings are short-term capital assets if held for not more than 24 months immediately before the transfer (section 2(42A); section 2(101)(a)). Beyond 24 months the gain is long-term. For inherited or gifted property, the previous owner’s period is included (see Joint, Inherited and Gifted Property).

The computation

The gain is the full value of the consideration, less:

• expenditure “wholly and exclusively in connection with such transfer”, such as brokerage and legal fees; and
• the cost of acquisition and the cost of any improvement

(section 48; section 72(1)). Interest already claimed under section 24(b) on a housing loan, or under Chapter VI-A, cannot be added to cost (proviso to section 48(ii); section 72(3)(a)).

Full value of consideration: the stamp duty rule

If the price is below the stamp duty value of land or building, the stamp duty value is deemed to be the full value of consideration (section 50C; section 78). There are three qualifications:

• The 110 per cent tolerance. If the stamp duty value does not exceed 110 per cent of the consideration, the actual price stands (third proviso to section 50C(1); section 78(1)(b)).
• The agreement date. Where the agreement and the registration are on different dates, the stamp duty value on the date of agreement may be used. This applies only if some consideration was received on or before the agreement date by account payee cheque, draft or electronic mode (first and second provisos to section 50C(1); section 78(1)(a), which uses “specified banking or online mode”).
• Reference to a Valuation Officer. If the seller claims before the Assessing Officer that the stamp duty value exceeds the fair market value, and that value has not been disputed in any appeal or revision, the Assessing Officer may refer the valuation to a Valuation Officer. If the Valuation Officer’s figure is higher than the stamp duty value, the stamp duty value is used (section 50C(2), (3); section 78(2), (3)).

Cost of acquisition

• Property acquired before 1 April 2001. The seller may take the fair market value on 1 April 2001 instead of actual cost. For land or buildings, that value cannot exceed the stamp duty value on 1 April 2001 (section 55(2)(b) and its proviso; section 90(9)(a) and (10)).
• Inherited or gifted property. The cost is the previous owner’s cost (section 49(1); section 73(1) [Table: Sl. No. 1]).
• Cost of improvement means capital expenditure on additions or alterations. For assets held before 1 April 2001, only expenditure on or after that date counts.

The rate: what changed on 23 July 2024

Short-term gains on property are taxed at the seller’s normal rates. Neither Act has a special rate for them.

Long-term gains are taxed as follows.

Transfer	1961 Act	2025 Act
Before 23 July 2024	20 per cent on the gain after indexation (section 112(1); second proviso to section 48)	n/a
On or after 23 July 2024	12.5 per cent on the gain without indexation (section 112(1)(a)(ii)(B); the second proviso to section 48 is limited to transfers “which takes place before the 23rd day of July, 2024”)	12.5 per cent without indexation (section 197(1))

The option for property acquired before 23 July 2024. For a resident individual or HUF selling land or building acquired before 23 July 2024, the second proviso to section 112(1)(a) ignores any excess of tax at 12.5 per cent over the tax computed under the law as it stood before the Finance (No. 2) Act, 2024. That earlier law means 20 per cent on the indexed gain. Section 197(3) of the 2025 Act writes this as a formula:

E = A − B, where A is tax at 12.5 per cent and B is tax “taking the rate as 20% and the capital gains is computed by taking the cost of acquisition as ‘indexed cost of acquisition’ and the cost of improvement as ‘indexed cost of improvement’”.

The seller computes both figures and pays the lower. The option is not available to non-residents, companies, firms or other assessees. Section 72(2) applies indexation for item B only.

Indexation multiplies cost by the ratio of the Cost Inflation Index (CII) for the year of transfer to the CII for the first year the asset was held, or 2001-02 if later (Explanation (iii) to section 48; section 72(8)). The Central Government notifies the CII each year.

The basic exemption. A resident individual or HUF whose other income is below the basic exemption limit may set the shortfall against the long-term gain (first proviso to section 112(1)(a); section 197(2)).

What to have ready

• The sale deed and the agreement for sale, with the dates of each and the mode of any advance received.
• The stamp duty value on the agreement date and the registration date. These come from the deed or the sub-registrar.
• The purchase deed, or proof of inheritance or gift, and the previous owner’s cost and date of acquisition.
• A registered valuer’s report of fair market value on 1 April 2001, if the property was held before that date, and the stamp duty value on that date.
• Bills and payments for improvements, with their dates.
• Brokerage, legal and other transfer costs.
• Form 16B or Form No. 132 from the buyer, and the TDS shown in Form 26AS and the annual information statement (see Reconciling AIS, TIS and Form 26AS).
• Reinvestment details, if an exemption is claimed (see Capital Gains Exemptions).

Reporting the gain

The form. Under the 1961 Act, a salaried or other individual without business income reports the sale in the capital gains schedule of ITR-2. One with business income uses ITR-3. The ITR-2 walkthrough for a residential property sale with a section 54EC claim shows the schedule field by field. For tax year 2026-27 onwards, the return is filed under section 263 of the 2025 Act in the form notified for that year.

Due dates. The return is due by the date in section 139(1), or section 263(1) for the 2025 Act (see Belated and Revised Returns). Tax on the gain is payable as advance tax in the instalments after the sale. Advance Tax and Self-Assessment Tax covers the treatment of capital gains that arise part-way through the year.

Verification. The return is verified electronically or by signed ITR-V, as described in E-Verifying a Return.

Interest, fees and mistakes

• Interest. Interest for deferment or default in advance tax applies to tax on capital gains like any other tax (see Advance Tax and Self-Assessment Tax).
• Late filing fee. A belated return attracts the late filing fee (see Belated and Revised Returns).
• Correcting the return. An omitted or understated gain can be corrected by a revised return within the time allowed. After that, it can be corrected by an updated return (see The Updated Return (ITR-U)).
• Assessment. If the Assessing Officer substitutes the stamp duty value, the seller’s remedy lies in the Valuation Officer reference and in appeal (see Appealing to the Commissioner (Appeals)).

A worked outline

A resident individual bought a flat in 2010 and sells it in tax year 2026-27 for Rs 1.2 crore. The stamp duty value is Rs 1.25 crore.

1. Full value of consideration: Rs 1.2 crore. The stamp duty value does not exceed 110 per cent of the price, so section 78(1)(b) leaves the price intact.
2. Less brokerage and legal costs, and the 2010 cost. The result is the gain at 12.5 per cent without indexation (figure A).
3. Recompute with the cost indexed from 2010-11 to 2026-27 at 20 per cent (figure B).
4. The flat was acquired before 23 July 2024, so the tax payable is the lower of A and B (section 197(3)).

Summary

1. Date the transfer: registration in the ordinary case, or earlier where rights were extinguished or possession given under section 53A.
2. Fix the Act from that date, and classify the gain as long-term if the property was held for more than 24 months.
3. Take the higher of the price and the stamp duty value, subject to the 110 per cent tolerance, the agreement-date rule and a Valuation Officer reference.
4. Deduct transfer costs, cost of acquisition (or 1 April 2001 value, capped at stamp duty value) and cost of improvement.
5. Tax a long-term gain at 12.5 per cent. For a resident individual or HUF with property acquired before 23 July 2024, compare it with 20 per cent after indexation and pay the lower.
6. Pay advance tax after the sale, report the gain in the return’s capital gains schedule, and claim credit for the buyer’s TDS.

The next guide, Capital Gains Exemptions: Sections 54, 54F and 54EC, and the Capital Gains Account Scheme, covers how reinvestment reduces or removes the gain.