Sale of a residential house often results in a substantial capital gain, which may attract income tax. When a sale deed is registered with a Registrar Office of any state government, Registrar office is compulsorily required to report the transaction to the Income Tax Authorities through Annual Information Statement when sale value of property is more than Rupees Thirty Lakhs. When the agreement value is more than Rupees Fifty Lakhs, purchaser is required to deduct TDS at the rate of one percent when making payment to the seller. To claim the tax deducted at source (TDS), seller is required to file tax return and offer the capital gain, if any. Therefore it is essential that one should disclose the transaction in the form of offering capital gain or loss in the tax return. The Income-tax law provides several exemptions that enable taxpayers to reduce or even eliminate the tax liability if proper tax planning is undertaken. With the implementation of the Income-tax Act, 2025, taxpayers should understand the conditions, timelines and investment options available for claiming exemption from capital gains tax. This article explains the taxation of capital gains arising from the sale of a house property and the various methods available for saving tax. 1. What is Capital Gain?Capital gain is the profit arising from the transfer of a capital asset. Depending upon the period of holding, the gain is classified as Short-Term Capital Gain (STCG) or Long-Term Capital Gain (LTCG). Gain arising from sale of residential house held for not more than 24 months before sale is treated as a short-term capital gain. Where the residential house is held for more than 24 months, the gain is treated as a long-term capital gain. Under the present provisions (Section 197) , long-term capital gain on immovable property are generally taxable at 12.5%, subject to the applicable statutory provisions. In the case of house property purchased prior to 23rd July 2024, the benefit of indexation is available under section 72(6) of the Income Tax Act 2025 and tax rate applicable would be 20 per cent. Indexation benefit typically means adjusting the cost of purchase of property as on 1st April 2001 to the current inflated cost price (376 per cent for FY 2025-26) while computing long term capital gain. If the property is purchased prior to 1st April 2001, value of the property as on 1st April 2001 needs to obtained from an income tax approved valuer.2. Ways to Save Capital Gains Tax
The Income-tax law provides several exemptions for long-term capital gains.
A. Purchase of another Residential HouseThe most popular exemption available when an individual or Hindu Undivided Family sells a residential house is to invest the capital gain in another residential house in India. Under the Income-tax Act, 2025, this relief is contained in Section 82 (corresponding to Section 54 of the Income-tax Act, 1961). Purchase must be made within one year before or within two years after the date of sale; or Construct a house within three years from the date of sale.As per the current provisions, if the capital gains does not exceed two crore rupees, the assessee may, at his option, purchase or construct two residential houses in India. This option is available only once in life time.If the cost of new asset exceeds ten crore rupees, the amount exceeding ten crore rupees shall not be taken into account for the purpose of exemption.B. Deposit in Capital Gains Account Scheme (CGAS)Often the taxpayer may not be able to purchase or construct the new house before the due date for filing the return. In such cases, the unutilized amount should be deposited in the Capital Gains Account Scheme (CGAS) before the due date prescribed for filing the return as per Section 82 of the Income Tax Act, 2025. The deposited amount must subsequently be utilized within the prescribed period for purchase or construction of the new residential house. Failure to do so results in the unutilized amount becoming taxable in the prescribed year.C. Investment in Specified Capital Gain BondsIf purchasing another residential house is not feasible, exemption may also be claimed by investing in specified capital gain bonds under the section 84 (earlier Section 54EC) of the Income Tax Act, 2025. Investment can generally be made in bonds issued by notified institutions such as National Highways Authority of India (NHAI), Rural Electrification Corporation Ltd. (REC). Such investment must be made within six months from the date of transfer. Taxpayers frequently lose exemption because they miss the statutory investment deadlines or fail to deposit the amount in the Capital Gains Account Scheme before the due date of filing the return.3. ConclusionCapital gains tax on the sale of a residential house can often be substantially reduced through timely tax planning. Reinvestment in another residential house, investment in specified capital gain bonds and proper use of the Capital Gains Account Scheme are among the most effective methods of saving tax.Since these exemptions are subject to strict conditions and timelines, taxpayers should plan the transaction well in advance and maintain proper documentation. Professional advice before the sale is often far more beneficial than attempting tax planning after the transaction has been completed. A well-planned property transaction not only ensures compliance with the Income-tax law but also helps preserve wealth by legitimately minimizing tax liability.(Author: Venugopal Bhandary is a Senior Audit Officer at C&AG of India (Retd) and a senior tax consultant at Venu’s Income Tax Services, Andheri east, Mumbai. He can be contacted at venusincometaxservices@gmail.com)