Selling real estate in India often yields substantial profits, but it also triggers several tax obligations under the Income Tax Act, 1961. For the financial year 2025–26, recent amendments introduced through the Income Tax (Amendment) Bill, 2025 and Budget 2025 have refined the taxation of capital gains, TDS rules, and available exemptions. Understanding these provisions is essential for property owners to plan effectively and optimize post-tax returns.
1. Nature of Gains: Short-Term vs. Long-Term
The tax on property sales depends on how long the property was held before sale.
- Short-Term Capital Gain (STCG): If the property is sold within 24 months of acquisition, the profit is deemed short-term. It is taxed at the individual’s applicable income tax slab, which could go up to 30% under current rate.
- Long-Term Capital Gain (LTCG): If the property is held for more than 24 months, it qualifies as a long-term asset. LTCG is taxed at 20% with the benefit of indexation. However, under the new Income Tax Bill 2025, sellers of properties acquired post–July 23, 2024, can opt for a 12.5% tax rate without indexation if more beneficial.
2. Calculation of Capital Gains
Capital gains are computed as:
Capital Gain = Full Value of Consideration – (Indexed Cost of Acquisition + Indexed Cost of Improvement + Transfer Expenses)
For long-term assets, indexation (using the Cost Inflation Index) adjusts the purchase cost to reduce the taxable portion of the gain. Expenses such as brokerage, stamp duty, and registration charges are deductible when determining the total gain.
3. Exemptions under the Income Tax Act
Several sections offer tax exemptions on LTCG if taxpayers reinvest proceeds appropriately:
- Section 54 – Exemption on Sale of Residential House Property:
Applies to individuals and HUFs selling a long-term residential house property. Exemption on capital gains arises if the proceeds are reinvested to buy another residential house within 1 year before or 2 years after sale, or construct within 3 years. The exemption is limited to the lesser of the capital gain or cost of the new property. Recent amendments cap the exemption on gains up to ₹10 crore. Selling the new house within 3 years reverses the exemption.
- Section 54EC – Exemption by Investing in Specified Bonds:
Allows exemption of capital gains if invested within 6 months in specified bonds issued by National Highways Authority of India (NHAI), Rural Electrification Corporation (REC), Power Finance Corporation (PFC), or Indian Renewable Energy Development Agency (IREDA). The investment limit is ₹50 lakh per financial year, with a 5-year lock-in period. IREDA bonds are newly included from 2025.
4. Tax Deducted at Source (TDS)
As mandated under Section 194-IA, if the sale consideration exceeds ₹50 lakh, the buyer must deduct 1% TDS on the total transaction value and remit it to the government. The seller should collect Form 16B from the buyer as proof of deduction.
5. GST and Other Considerations
GST is not applicable on the sale of completed properties where the occupation or completion certificate has been issued. Likewise, the sale of land is outside the GST ambit as per Schedule III of the CGST Act, 2017. However, the sale of under-construction properties attracts 1% GST (affordable housing) or 5% GST (non-affordable housing), applicable to the builder for the first sale; resale of such properties post-completion does not attract GST.
6. New Budget 2025 Updates
- The rebate under Section 87A has been increased to ₹60,000 (income up to ₹12 lakh now tax-free) under the new tax regime, but this is not applicable to capital gains.
- Enhanced clarity has been introduced regarding indexation applicability based on the date of property acquisition.
7. Conclusion
The tax implications of selling property in India have evolved under the 2025–26 regime to provide a more structured framework while closing several loopholes. Sellers should carefully evaluate the classification of capital gains, explore exemptions under Sections 54, 54EC, and 54F, and comply with TDS and GST obligations. Timely reinvestment and accurate reporting not only help minimize tax liability but also ensure full compliance with current Indian tax regulations.
