Summary of this article
Long-term capital gains on property (held over 24 months) are taxed at 12.5 per cent without indexation or 20 per cent with indexation, while short-term gains are taxed at slab rates.
Exemptions under Sections 54 and 54EC can significantly reduce tax, but only if strict timelines and procedural requirements are met.
Stamp duty value, missing improvement records, and failure to use the Capital Gains Account Scheme are common errors that increase tax outgo.
A year from now, you could happily walk out of the registrar’s office after selling your flat and then be blindsided by a tax bill you never planned for.
Take an example of Mr A, a 38‑year‑old professional in Mumbai. In 2020, he bought a 1BHK on the outskirts as an ‘investment’. Today, he lives in a rented flat closer to work and claims house rent allowance (HRA). In 2026, he plans to sell his old flat. On the surface, it looks financially smart. In tax terms, this is exactly where many urban professionals slip.
Let Us See How Capital Gains On Property Work
When Mr A sells his old flat, his capital gain will roughly be:
Sale consideration (agreement value or stamp duty value, whichever is higher) (-) cost of purchase and improvements (-) eligible transfer expenses (brokerage, legal fees, etc.).
“If he has held the flat for more than 24 months, the gain is long‑term capital gain (LTCG). It is taxed at 12.5 per cent (excluding surcharge and cess) without indexation, or 20 per cent (excluding surcharge and cess) with indexation of cost, whichever is lower. Indexation is available only to resident individuals and HUFs,” says Dipesh Jain, Partner, Economic Laws Practice.
If the holding period is 24 months or less, the gain is short‑term (STCG) and taxed at slab rates which can go up to 30 per cent (excluding surcharge and cess) with no indexation benefit.
However, using exemptions, Ritesh can save tax by buying another residential property under Section 54, or by investing in specified capital gains bonds under section 54EC.
Also, taxpayers commonly make avoidable mistakes, such as overlooking the stamp duty value (where tax may be computed on the higher government value if the declared sale price is lower) and failing to maintain proper records of improvement costs and transfer expenses, thereby weakening their position.
“Taxpayers also tend to make mistakes while claiming exemptions, such as failing to reinvest in a new asset within the prescribed timelines (within 1 year before or 2 years after the sale for purchase, or within 3 years for construction), not depositing unutilised gains in a Capital Gains Account Scheme before the ITR due date for a Section 54 deduction, or missing the 6‑month window to invest in specified bonds for a Section 54EC deduction,” informs Jain.
The TDS angle adds another layer of complexity for taxpayers. On property sales above the prescribed threshold to a resident buyer, the buyer is required to deduct 1 per cent TDS under Section 194 IA and deposit it with the government. Failure to deduct or deposit correctly can attract interest and penalties. For the seller, any mismatch or non-reflection of TDS in Form 26AS / AIS can complicate tax credit claims and delay refunds.
So, lesson for the sellers here is that they must actively ensure that PAN details are correctly shared, TDS is deducted, deposited, and supported by a valid TDS certificate and should never treat TDS as a ‘buyer’s headache’.
Moving To Urban Renters, The Key Question Remains: HRA or Home Loan?
In big cities like Mumbai, Bengaluru, and Delhi, the rent vs home loan debate never dies down. For many salaried urban professionals under the old tax regime, claiming House Rent Allowance (HRA) often means better short-term cash flow than home-loan tax benefits.
“HRA generally works best for those with a high HRA component and steep monthly rent. A home loan, on the other hand, helps build a long-term asset while offering tax deductions on interest (up to Rs 2 lakh under Section 24(b)) and principal (up to Rs 1.5 lakh under Section 80C) but such principal is available only under the old tax regime and not under the new tax regime,” observes Jain.
Over the past 2-3 years, the government has steadily sweetened the new tax regime with lower slab rates, making the choice more nuanced. Taxpayers should compute liability under both regimes and pick the one that results in lower tax outgo, thereby optimising their taxes.
In the end, smart capital gains planning begins the day you buy a house, not when you put it on the market. Selling property is less about a lucky deal and more about timing and tax strategy.
