Capital gains tax (CGT) can make a huge chunk out of your income when you sell a property in India, particularly when there has been high capital appreciation of the property. But then what happens when there are legal means of reducing or even cutting that tax burden? Today on this blog, we are going to demystify capital gains tax and most importantly how you can go lower on capital gains tax by using legitimate government-approved methods.
What Is Capital Gains Tax on Property Sales?
Any profit you get when you sell a property in real estate for a price greater than that of which you had bought it with, it is referred to as the capital gain. This gain is taxable under Income Tax Act,1961.
- Short-Term Capital Gain (STCG): If the property is sold within 24 months of purchase, the profit is treated as STCG and taxed as per your income tax slab.
- Long-Term Capital Gain (LTCG): If the property is held for more than 24 months, the gain is considered LTCG and taxed at 20% with indexation benefit.
How Is Capital Gain Calculated?
LTCG = Sale Price – Indexed Cost of Acquisition – Expenses – Exemptions
To calculate indexed cost of acquisition, the Cost Inflation Index (CII) is applied to adjust the purchase price for inflation.
1. Use Section 54 Reinvest in Another Residential Property
What It Offers:
Under Section 54, if you sell a residential property and reinvest the gains into another residential property, the LTCG can be exempted.
Conditions:
- The new property must be purchased within 1 year before or 2 years after the sale, or constructed within 3 years.
- You can invest in up to two residential properties (if LTCG is under ₹2 crores) – allowed only once in a lifetime.
Pro Tip:
Make sure the reinvestment is completed within the timeline. If not, deposit the unutilized amount in a Capital Gains Account Scheme (CGAS) before the income tax return filing deadline.
2. Invest in Bonds Under Section 54EC
If you don’t want to reinvest in real estate, you can still save tax by investing in specified capital gains bonds under Section 54EC.
Eligible Bonds:
- REC (Rural Electrification Corporation)
- NHAI (National Highways Authority of India)
Conditions:
- Maximum investment limit: ₹50 lakhs
- Investment must be made within 6 months of sale
- Lock-in period: 5 years
Advantage:
Entire LTCG can be exempted up to ₹50 lakhs, and you earn interest on the bonds (though it is taxable).
3. Sell After 24 Months to Qualify for Long-Term Capital Gains
If you are close to the 24 months, wait. Selling by two years will attract short term capital gain tax, viable to your income and taxed be governed by your slab (can be leading to 30%).
Pro Tip:
Hold your property until it qualifies for LTCG. Even if you’re in the highest slab, LTCG is still taxed at a flat 20% with indexation.
4. Claim All Deductible Expenses
Before calculating gains, deduct all legal and legitimate expenses related to the sale:
- Brokerage or commission
- Stamp duty and registration charges
- Legal fees
- Cost of improvement (e.g., renovations with bills)
Pro Tip:
Keep proper documentation. Only expenses with proof can be claimed. These reduce your net gain, and therefore, your tax liability.
5. Use the Cost Inflation Index (CII) to Your Advantage
CII helps you adjust the purchase price for inflation, reducing your capital gain.
Example:
Provided you acquired a property in 2010 at a price of 50 lakh rupees and sell it out in 2025 at price of 1.5 crore rupees, with the help of CII your indexed cost may increase to about 1 crore rupees hence cutting the taxable capital gain by half.
Pro Tip:
Use the official CII chart from the Income Tax Department and consult a tax advisor to avoid mistakes.
6. Use Joint Ownership to Split Gains
If the property is jointly owned, capital gains can be split between owners in proportion to ownership. This can help reduce the overall tax burden.
Pro Tip:
Plan ownership structure while purchasing the property. This method also helps in reducing tax liability if co-owners fall in lower tax brackets.
7. Gift the Property Strategically (Before Sale)
Transferring the property to a close relative in a lower tax slab before selling it may reduce the total tax payable.
Caution:
- You must execute a registered gift deed.
- Clubbing provisions may apply if not done properly.
Best Use:
In family succession planning or for elderly parents with low/no taxable income.
8. Use Capital Losses to Offset Gains
If you have any short-term or long-term capital losses from previous investments (like shares or mutual funds), you can set them off against capital gains.
Carry Forward Option:
Unused losses can be carried forward for up to 8 years to set off future gains.
Pro Tip:
Ensure you declare these losses in your ITR timely to be eligible for carry forward.
9. Sell During a Low-Income Year
If your total income in a financial year is low (e.g., due to sabbatical, retirement, etc.), the basic exemption limit (₹2.5L–₹5L) can be used to offset part of your LTCG.
10. Consult a Real Estate Tax Expert Early
Most people consult tax advisors after selling the property, when it’s too late to plan for exemptions.
Pro Tip:
Talk to a professional before listing the property for sale. Early tax planning ensures you can make full use of Sections 54, 54EC, and CGAS.
Capital gains tax may seem unavoidable, but with strategic planning and a strong understanding of the tax laws, you can save a large portion of your profits. These are legal, time-tested methods approved under Indian tax laws.
Whether you’re a homeowner, real estate investor, or farmland seller, the key lies in timing the sale, using exemptions wisely, and documenting every expense.
Looking to Sell Property Smartly?
The Whitelisted Estate helps you with:
- Verified resale support
- Capital gains tax planning
- Expert guidance on Section 54/54EC investments
Get Free Consultancy: Call/WhatsApp us at 7428812398
FAQ,s Frequently asked questions
1. What is capital gains tax on property in India?
Capital gains tax is the tax levied on the profit earned from selling a property. The tax rate depends on the holding period: short-term capital gains (less than 24 months) are taxed at your income tax slab rate, while long-term capital gains (more than 24 months) are taxed at 20% with indexation benefits.
2. How can I reduce capital gains tax legally when selling property?
You can minimize tax by:
- Investing the gains in a new residential property under Section 54.
- Investing in specified bonds under Section 54EC.
- Claiming indexation benefits for long-term capital gains.
3. What is Section 54EC, and how does it help in tax saving?
Section 54EC allows you to invest your long-term capital gains in NHAI or REC bonds within 6 months of sale. The maximum investment allowed is ₹50 lakh, and it exempts that portion of gains from tax.
4. Can reinvesting in a new property completely save me from capital gains tax?
Yes, under Section 54, if you invest the gains from a sold residential property into another residential property in India within the specified period (1–2 years), you can fully or partially exempt your long-term capital gains.
5. Are there any exemptions for first-time home sellers or NRIs?
First-time sellers may benefit from Section 54F if they reinvest in a new property.
NRIs can also claim exemptions under Sections 54, 54EC, and 54F, but they must pay tax via TDS (Tax Deducted at Source) when selling property in India.
