Capital Gains on Real Estate: What a Home Buyer needs to know
May 2025
When buying or selling real estate, one term that often confuses home buyers is “Capital Gains Tax”. Understanding capital gains taxation is crucial for buyers, particularly when investing in a second home or planning future resale.
What is Capital Gains Tax?
Capital gains tax is the tax paid on the profit earned from the sale of a capital asset. In simple terms, when someone sells a property at a higher price than what they paid for it, the profit made is called a capital gain, and it is taxable under the Income Tax Act.
Types of Capital Gains
- Short-Term Capital Gain (STCG):
If a property is sold within 2 years of purchase, the gain is treated as short-term. It is added to the seller’s income and taxed as per the normal slab rates. - Long-Term Capital Gain (LTCG):
If the property is sold after 2 years, the gain is considered long-term and taxed at 20% with indexation benefit. Indexation adjusts the purchase cost for inflation, reducing the taxable amount.
New Provision (FY 2024 -25 onwards):
| No. | Particular | LTCG | STCG |
|---|---|---|---|
| A | Transfer took place before 23rd July, 2024 | 20% (with indexation) | Normal Tax Rate (slab Rate) |
| B | Transfer took place after 23rd July, 2024 | 12.5% (without indexation) | Normal Tax Rate (slab Rate) |
Note: If a resident Individual or HUF transfers any immovable property acquired before 23rd July 2024, then the assessee is required to pay tax at 12.5% without indexation or 20% with indexation, whichever is lower.
Why should a buyer care?
- Future tax planning: If you're buying today but plan to sell in the near future, knowing these rules helps you decide when to sell for optimal tax outcomes
- Inheritance or gifted property: If you’re receiving property from parents or relatives, capital gains rules will apply when you sell it, based on their original cost and holding period
- Joint ownership: In the case of co-ownership (e.g., with a spouse), gains are split based on ownership share and taxed accordingly.
- Reinvestment benefits: Section 54 allows you to save tax on LTCG if you reinvest in another residential property within 2 years after or 1 year before or construct one within 3 years; subject to other conditions.
- Capital Gain Account Scheme: If you need time to reinvest the gains, you can park them under the Capital Gains Account Scheme (CGAS) before the tax filing deadline or actual date of filing return whichever is earlier.
Quick Summary:
- <2 years holding = Short-term gain, taxed as per slab
- >2 years holding = Long-term gain
- 20% with indexation (transfer before 23rd July, 2024)
- 12.5% without indexation (transfer after 23rd July, 2024)
- Reinvestment in new property – save LTCG tax under Section 54
- Gifted/inherited property – original cost and period matter
- CGAS – to claim exemption when reinvestment is delayed
Being aware of these tax rules can help you plan better and avoid surprises when you decide to sell or reinvest in property
~ C.A. Sanket Shah
Source: Thane Realty News
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