Capital Gains Tax on Property Sale in India: How to Calculate, Save & Report for AY 2026-27

Selling a property in India can result in a significant tax bill if you don't plan ahead. Whether you're selling an inherited flat, upgrading to a bigger home, or liquidating an investment property, understanding capital gains tax on real estate is essential. This guide covers everything you need to know for AY 2026-27 (FY 2025-26) — including the important indexation changes introduced in Budget 2024.

Short-Term vs Long-Term: The 24-Month Rule

The first thing to determine is whether your property sale results in a short-term capital gain (STCG) or a long-term capital gain (LTCG). This depends entirely on how long you held the property.

• Held for 24 months or less → Short-term capital asset → STCG
• Held for more than 24 months → Long-term capital asset → LTCG

The holding period is counted from the date of purchase (or the date of allotment, in the case of under-construction property) to the date of sale.

For inherited property, the holding period includes the time the previous owner held it. So if your father bought a flat in 2010 and you inherited it in 2023, your holding period is counted from 2010 — making it a long-term asset.

How STCG and LTCG Are Taxed

Short-Term Capital Gains

STCG on property is added to your total income and taxed at your applicable income tax slab rate. There is no special rate — it's treated just like salary or interest income.

Example: You bought a plot for Rs 40,00,000 in March 2025 and sold it for Rs 48,00,000 in January 2026. Your STCG is Rs 8,00,000, which gets added to your other income and taxed at your slab rate.

Long-Term Capital Gains

This is where the Budget 2024 changes matter. For AY 2026-27, LTCG on property is taxed as follows:

The option to choose between 20% with indexation and 12.5% without indexation applies only to properties bought before 23 July 2024. For properties bought after that date, the 12.5% rate without indexation is the only option.

How to Calculate Capital Gains on Property

Step 1: Determine the Sale Consideration

This is the actual sale price or the stamp duty value, whichever is higher. If the stamp duty value exceeds the actual sale price by more than 10%, the stamp duty value is deemed as the sale consideration.

Step 2: Determine the Cost of Acquisition

For STCG, use the actual purchase price. For LTCG on properties acquired before 23 July 2024 where you're opting for the 20% with indexation method, apply the Cost Inflation Index (CII) to get the indexed cost.

Indexed Cost of Acquisition = Original Cost × (CII of year of sale ÷ CII of year of purchase)

The CII for FY 2025-26 is 364 (base year 2001-02 = 100).

Step 3: Deduct Costs of Improvement and Transfer

You can deduct:

• Cost of improvement (renovation, construction) — indexed if applicable
• Transfer expenses — brokerage, legal fees, stamp duty paid by the seller

Practical Example

Scenario: Rajesh bought a flat in Mumbai for Rs 50,00,000 in FY 2015-16 (CII = 254) and sold it in FY 2025-26 for Rs 1,20,00,000. He spent Rs 5,00,000 on renovation in FY 2018-19 (CII = 280) and paid Rs 1,20,000 in brokerage.

Option A: 20% with Indexation

• Indexed cost of acquisition = 50,00,000 × (364 ÷ 254) = Rs 71,65,354
• Indexed cost of improvement = 5,00,000 × (364 ÷ 280) = Rs 6,50,000
• Net LTCG = 1,20,00,000 − 71,65,354 − 6,50,000 − 1,20,000 = Rs 40,64,646
• Tax at 20% = Rs 8,12,929

Option B: 12.5% without Indexation

• Cost of acquisition = Rs 50,00,000
• Cost of improvement = Rs 5,00,000
• Net LTCG = 1,20,00,000 − 50,00,000 − 5,00,000 − 1,20,000 = Rs 63,80,000
• Tax at 12.5% = Rs 7,97,500

In this case, Option B saves Rajesh Rs 15,429. The 12.5% rate without indexation works out better here — but this isn't always the case. For properties held for very long periods where inflation has significantly eroded the real value, the 20% with indexation option could be more beneficial.

Section 54: Exemption by Reinvesting in a New Home

Section 54 offers the most commonly used exemption for property sellers. If you sell a residential property and reinvest the capital gains in another residential property, you can claim full or partial exemption.

Key Conditions

• You must purchase the new house within 1 year before or 2 years after the sale date
• Alternatively, you can construct a new house within 3 years of the sale
• The exemption is limited to the capital gain amount or the cost of the new house, whichever is lower
• You can invest in at most two residential properties if the capital gain does not exceed Rs 2 crore
• The new property cannot be sold within 3 years, or the exemption will be reversed

Capital Gains Account Scheme (CGAS)

If you haven't purchased or constructed the new property by the ITR filing due date (31 July 2026 for most individuals), you must deposit the unutilized capital gains in a Capital Gains Account Scheme with an authorized bank. This ensures you retain the exemption while giving you time to find the right property.

Section 54EC: Exemption by Investing in Bonds

If you don't want to reinvest in another property, Section 54EC lets you claim exemption by investing LTCG proceeds in specified bonds issued by:

• National Highways Authority of India (NHAI)
• Rural Electrification Corporation (REC)

Key Conditions

• Investment must be made within 6 months of the property sale
• Maximum investment: Rs 50,00,000 per financial year
• These bonds have a lock-in period of 5 years
• Interest earned on these bonds is taxable

Example: If your LTCG is Rs 35,00,000, you can invest the entire amount in 54EC bonds and pay zero capital gains tax. If the LTCG is Rs 80,00,000, you can only exempt Rs 50,00,000 through this route.

TDS on Property Sale: Section 194-IA

The buyer of your property is required to deduct TDS at 1% of the sale consideration if the property value exceeds Rs 50,00,000. This applies to all property transactions — residential, commercial, and land.

Important Points

• TDS is deducted from the total sale consideration, not from the capital gain
• The buyer must deposit the TDS using Form 26QB within 30 days of the month in which TDS was deducted
• The seller receives a TDS certificate (Form 16B) from the buyer
• This TDS credit appears in your Form 26AS and AIS, which you should verify before filing

If you expect zero or minimal tax liability (because of Section 54/54EC exemptions), you can apply to the Assessing Officer for a lower or nil TDS certificate under Section 197.

Reporting Property Sale in Your ITR

Capital gains from property sale must be reported under the Capital Gains schedule in your income tax return. You'll need to file ITR-2 (not ITR-1) if you have capital gains from property sale.

Key documents to keep ready:

• Sale deed and purchase deed
• Proof of cost of improvement (renovation bills, contractor receipts)
• Proof of transfer expenses (brokerage receipts, legal fee receipts)
• Form 26QB acknowledgment (for TDS verification)
• Investment proof for Section 54EC bonds, if applicable
• Agreement/registration documents for the new property, if claiming Section 54

49Tax supports ITR-2 filing and can help you compute your capital gains accurately — including the comparison between the 20% with indexation and 12.5% without indexation options for properties acquired before July 2024.

Common Mistakes to Avoid

1. Ignoring stamp duty value: If the stamp duty value is more than 110% of your actual sale price, the higher value is deemed your sale consideration — underreporting leads to scrutiny.

2. Miscounting the holding period: Use the date of the purchase agreement or allotment letter, not the registration date, for under-construction properties. For inherited properties, include the previous owner's holding period.

3. Missing the 54EC deadline: The 6-month window for investing in specified bonds is strict. Unlike Section 54, there is no CGAS fallback — miss the deadline and you lose the exemption.

4. Selling the new property too early: If you claim Section 54 and sell the new property within 3 years, the original exemption is reversed and added to your income in the year of the second sale.

5. Not comparing both LTCG options: For properties bought before July 2024, always calculate tax under both the 20% with indexation and 12.5% without indexation methods. The better option depends on your specific purchase year and price appreciation.

Key Takeaway

Property sales can attract substantial capital gains tax, but the law provides generous exemption routes through Section 54 and Section 54EC. The critical step for AY 2026-27 is running the numbers under both LTCG computation methods if your property was acquired before 23 July 2024 — the difference can amount to lakhs. If you're planning a sale, work out your capital gains early, line up your reinvestment strategy, and make sure TDS is correctly deducted to avoid compliance headaches down the line.