Capital Gains Tax on Property
Capital gains tax on property is charged at 12.5% once the property has been held for more than 24 months. Most pages still describe a flat 20% with indexation. That was the position before July 2024 and it is no longer the rule. What survives is narrower and works differently from how it is usually explained: for a resident individual or Hindu undivided family selling land or a building bought before 23 July 2024, the law does not offer a choice between two rates. It computes the 12.5% figure, compares it with the 20%-with-indexation figure, and ignores the excess.
Dhanvantri Capital Services Private Limited, known as Dhanvantree, is an AMFI-registered mutual fund and Specialised Investment Fund distributor, ARN-194216, and a distributor of portfolio management services registered with APMI, APRN10201. We are not registered investment advisers and we are not tax advisers. This page explains how a tax is computed. The choice is yours.
- Holding period: more than 24 months makes the gain long-term
- Long-term rate: 12.5% under Section 197(1)(b) of the Income-tax Act 2025
- Short-term: added to income and taxed at the seller’s slab rate
- The cap: Section 197(3) ignores tax above the 20%-with-indexation figure, for land or a building bought before 23 July 2024 by a resident individual or HUF
- Cess: 4% health and education cess on the tax, with surcharge separate
- TDS: 1% deducted by the buyer where the consideration is ₹50 lakh or more
- Exemptions: Sections 82, 85 and 86, the successors to 54, 54EC and 54F
How the holding period sets the capital gains tax on property
Holding period is the first thing to establish. Land, a building or both held for more than 24 months before transfer produce a long-term gain. Held for 24 months or less, the gain is short-term. The two are taxed under different rules, and nothing else about the sale changes that split.
A short-term gain is not taxed at a special rate. It is added to the seller’s total income for the year and taxed at whatever slab applies. A seller already in the highest slab therefore pays the highest rate on the whole gain.
A long-term gain is taxed separately at 12.5% under Section 197(1)(b) of the Income-tax Act 2025, which replaced the Income-tax Act 1961 on 1 April 2026. The gain does not join the rest of the income for rate purposes.
One adjustment applies to smaller incomes. Section 197(2) covers a resident individual or HUF whose total income, after taking out the long-term gain, falls below the basic exemption limit. The gain is reduced by that shortfall, and only the balance is taxed at 12.5%.
The 24-month count runs from the date of acquisition to the date of transfer. Where a property was inherited or received as a gift, the previous owner’s holding period is included. Our page on capital gains covers how the gain itself is computed.
Capital gains tax on property: the 12.5% rate and the cap
Section 197(1)(b) sets a single long-term rate of 12.5%, calculated without indexation. Section 197(3) then adds a protection for older holdings. It applies to a resident individual or Hindu undivided family transferring land, a building or both, acquired before 23 July 2024.
The protection is not phrased as an option. Section 197(3) sets out a formula, E = A − B, where A is the tax at 12.5% without indexation and B is the tax at 20% on the gain computed with indexed cost of acquisition and indexed cost of improvement. The excess, E, is ignored.
The practical effect is a ceiling. Where the indexed computation produces a lower figure, that lower figure is what is payable. Where the 12.5% computation is already lower, it stands and nothing is ignored. The seller is not asked to elect anything, and nothing is lost by failing to claim it.
Three limits are worth being precise about.
- The protection covers land and buildings only. Other long-term assets are taxed at 12.5% with no equivalent comparison.
- It covers a resident individual or HUF. A company, a firm or a non-resident does not get it.
- The property must have been acquired before 23 July 2024. Anything bought on or after that date is taxed at 12.5% with no comparison.
Indexation therefore has not disappeared from the statute. It survives inside this one computation, which is why the notified Cost Inflation Index still matters. Our page on cost inflation index carries the table and how it is applied.
A worked example of both computations
Both computations have to be run before the tax is known. The 12.5% figure is calculated on the plain gain. The 20% figure is calculated on the gain after indexing the cost. Whether the cap in Section 197(3) actually helps depends entirely on how much the property rose in value.
The Cost Inflation Index for FY 2026-27 is 384, notified by the CBDT under Notification No. 85/2026. For FY 2014-15 it is 240. A cost from 2014-15 is therefore indexed by 384 ÷ 240, a factor of 1.6. Our page on cost inflation index carries the full table.
Case 1: the cap reduces the tax
A resident individual buys a flat in March 2015 for ₹60,00,000 and sells it in June 2026 for ₹1,20,00,000.
| Calculation | A: 12.5%, no indexation | B: 20%, with indexation |
|---|---|---|
| Sale consideration | ₹1,20,00,000 | ₹1,20,00,000 |
| Cost taken | ₹60,00,000 | ₹96,00,000 |
| Gain | ₹60,00,000 | ₹24,00,000 |
| Tax | ₹7,50,000 | ₹4,80,000 |
The indexed cost is ₹60,00,000 × 1.6 = ₹96,00,000. E is ₹7,50,000 − ₹4,80,000 = ₹2,70,000, and that excess is ignored.
Case 2: the cap changes nothing
Same dates, but the flat was bought for ₹40,00,000 and sold for ₹1,20,00,000.
| Calculation | A: 12.5%, no indexation | B: 20%, with indexation |
|---|---|---|
| Sale consideration | ₹1,20,00,000 | ₹1,20,00,000 |
| Cost taken | ₹40,00,000 | ₹64,00,000 |
| Gain | ₹80,00,000 | ₹56,00,000 |
| Tax | ₹10,00,000 | ₹11,20,000 |
Here A is lower than B, so there is no excess to ignore. The tax is ₹10,00,000, plus 4% cess of ₹40,000, giving ₹10,40,000.
When the cap actually helps
The two cases differ only in the purchase price. On a 2014-15 cost and a 2026-27 sale, the indexed computation produces the lower tax while the sale price stays below roughly 2.6 times the cost. Above that, the 12.5% figure is already lower and the comparison has no effect.
That multiple is not a rule in the Act. It falls out of the index ratio for these two years, and it moves with the index and with the year of purchase. Both examples assume no surcharge, no exemption claimed, and no cost of improvement or transfer expenses.
Reinvesting in a residential house
Section 82 of the Income-tax Act 2025 carries forward the exemption previously in Section 54. It applies where a residential house is sold and the gain is put into another residential house in India. The exemption is the lower of the gain and the cost of the new house.
The timing is fixed. The new house must be bought within one year before or two years after the date of transfer, or constructed within three years of it. Where the money has not been used by the income tax return due date, it has to be deposited under the Capital Gains Account Scheme to keep the claim alive.
Two further limits apply. The exemption is capped at ₹10 crore. The new house cannot be sold within three years, and if it is, the exemption already taken is withdrawn and brought to tax.
Capital gains bonds under Section 85
Section 85 carries forward the exemption previously in Section 54EC. It applies to gains from land or a building, invested in specified bonds within six months of the transfer. The bonds are issued by the National Highways Authority of India and the Rural Electrification Corporation, and are redeemable after five years.
The cap is ₹50 lakh, and it is applied so that the limit cannot be doubled by splitting an investment across the year of transfer and the following year. The bonds carry a five-year lock-in. Selling them, converting them into money, or even taking a loan or advance against them within that period brings the exempted gain back to tax as a long-term capital gain in the year it happens.
The interest on these bonds is fully taxable as income. The exemption applies to the capital gain, not to what the bonds subsequently earn.
Selling an asset other than a house
Section 86 carries forward the exemption previously in Section 54F. It applies where a long-term asset other than a residential house is sold, such as a plot of land, and a residential house is bought with the proceeds. The condition is stricter than Section 82.
Under Section 86, the net sale consideration has to be reinvested, not just the gain. Reinvest part of it and the exemption is proportionate. The seller must also not own more than one residential house, other than the new one, on the date of transfer.
The timing matches Section 82: one year before or two years after for a purchase, three years for construction. The ₹10 crore cap and the three-year lock-in apply here too. Section 86 carries further conditions on owning and later buying residential houses, so the section itself has to be read before a claim is made.
TDS when a property is sold
Tax is deducted at source by the buyer, not the seller. Section 393(1) of the Income-tax Act 2025 carries forward the rule previously in Section 194-IA. The rate is 1%, charged on the higher of the transfer consideration and the stamp duty value, where either figure reaches ₹50 lakh.
Two points catch people out. The deduction is not always 1% of the price agreed. Where the stamp duty value is higher than the price, the stamp duty value is the base.
The threshold is also tested on the aggregate, not on each person’s share. Two buyers each paying ₹30 lakh for a property worth ₹60 lakh are both within the rule, even though neither payment on its own reaches ₹50 lakh.
The 1% is not the tax. It is an advance against whatever the final liability turns out to be, and it is credited when the return is filed. Rural agricultural land is outside the rule. Where the seller is a non-resident, a different provision applies and the rate is not 1%.
A seller whose actual liability is lower than the amount deducted claims the difference back through the return. Our page on income tax sets out how the filing fits together.
Common Questions
Long-term gains are taxed at 12.5% under Section 197(1)(b) of the Income-tax Act 2025. For a resident individual or HUF selling land or a building acquired before 23 July 2024, the tax cannot exceed the 20%-with-indexation figure, because Section 197(3) ignores the excess. Section 197(2) reduces the gain further where other income is below the basic exemption limit.
Only inside the Section 197(3) comparison. It is not a general deduction any more. It is used to compute the comparison figure for land or a building acquired before 23 July 2024 by a resident individual or HUF.
More than 24 months from acquisition to transfer. Where the property was inherited or gifted, the previous owner’s holding period counts toward the 24 months.
The gain can be exempt rather than avoided, under Section 82, if a residential house is bought within one year before or two years after the sale, or built within three years. The exemption is capped at ₹10 crore and the new house carries a three-year lock-in.
₹50 lakh, under Section 85, within six months of the transfer. The limit cannot be doubled by splitting the investment across two tax years, and the bonds carry a five-year lock-in.
The buyer deducts 1% under Section 393(1), calculated on the higher of the consideration and the stamp duty value, where either reaches ₹50 lakh. It is an advance against the seller’s final liability, not the tax itself.
Disclaimer: The views expressed here are of the author and do not reflect those of Dhanvantree. Mutual funds are subject to market risks, please read the scheme documents carefully before investing.