Capital Gains Tax on Property — LTCG, STCG & Exemptions 2026

Selling a house, a plot or a commercial unit almost always triggers a capital gains event, and the tax outcome depends on a handful of decisions made before and immediately after the sale — not at filing time. This guide explains how property capital gains are classified and computed, which exemptions are available, what the buyer must deduct, and where sellers most often go wrong. For the actual computation on your numbers, use the TAXAJ capital gains filing service, which applies the rates and rules in force for your year of sale.

Short-term versus long-term

The single most important classification is holding period. Immovable property held beyond the prescribed threshold is treated as a long-term capital asset; property sold before that is short-term. The distinction matters enormously:

• Short-term gains are added to your total income and taxed at your applicable slab rate.
• Long-term gains are taxed at a special rate and — critically — are the only category eligible for the reinvestment exemptions.

The holding period runs from the date of acquisition to the date of transfer. Where property was inherited or gifted, the previous owner’s holding period is generally counted alongside yours, which frequently converts what looks like a short-term sale into a long-term one.

How the gain is computed

The starting point is full value of consideration — but the law does not simply accept your sale deed figure. Where the stated consideration is below the stamp duty value adopted by the state authority, the stamp duty value is substituted, subject to a tolerance band. This is why the circle rate matters so much in a property sale; our guide on circle rate versus market value covers that interaction in detail.

From that consideration you deduct:

• Cost of acquisition
• Cost of improvement — capital additions, not repairs or repainting
• Expenditure wholly and exclusively in connection with the transfer, such as brokerage and legal fees

For long-term assets, the treatment of indexation — adjusting historic cost for inflation — has been the subject of significant recent amendment, with different options available depending on when the property was acquired and who is selling. Because this materially changes the outcome, confirm the current position for your specific acquisition date rather than assuming the old indexation method still applies.

Exemption on reinvesting in a residential house

Section 54 allows an individual or HUF selling a long-term residential house to claim exemption by reinvesting the gain in another residential house in India, within the prescribed windows — a period before the sale, or a longer period after it for purchase, with a separate extended window for construction. The exemption is proportionate: reinvest the whole gain and the whole gain is exempt; reinvest part and only that part is.

Section 54F operates similarly but applies where the asset sold is any long-term asset other than a residential house — a plot of land, for instance. It is more restrictive: it works on net consideration rather than gain, and is denied if you own more than a specified number of residential houses on the date of transfer.

Both sections carry a lock-in. Sell the new house within the specified period and the exemption previously claimed is withdrawn and taxed in the year of that later sale.

The Capital Gains Account Scheme

Timing is the practical trap. If your reinvestment window extends past the due date for filing your return, you must deposit the unutilised amount into a Capital Gains Account Scheme account with a designated bank before that due date to preserve the exemption. Funds simply left in a savings account do not qualify, however genuine your intention. Amounts not eventually used within the permitted period become taxable at that point.

Exemption through specified bonds

Section 54EC offers an alternative for long-term gains on land or buildings: invest in specified bonds issued by notified infrastructure entities within a short window from the date of transfer. The investment is subject to an annual ceiling and the bonds carry a lock-in period. This route suits sellers who do not want to buy another property but want to shelter the gain, at the cost of accepting a modest fixed return for several years.

TDS the buyer must deduct

Where the seller is resident, the buyer deducts tax under section 194-IA on consideration above the prescribed limit and reports it in Form 26QB. No TAN is required for this. Where the seller is a non-resident, the position is entirely different — section 195 applies, the deduction is on the gain-bearing sum at rates linked to the nature of the gain, and the buyer needs a TAN. Sellers in that position should consider applying for a lower deduction certificate before the transaction, since deduction on gross consideration can lock up a large amount of cash until the refund is processed. The TDS rate finder is a useful starting point for confirming which provision governs a given transaction.

Set-off, carry forward and joint ownership

A capital loss on property can be set off against capital gains subject to the statutory ordering rules, and unabsorbed losses may be carried forward for a specified number of years — but only if the return is filed within the original due date. Missing that deadline forfeits the carry-forward permanently.

For jointly owned property, gain is apportioned according to each co-owner’s share in the asset, and each co-owner claims exemptions independently in their own return. Document the ownership ratio and the funding trail clearly, since assessing officers routinely test whether the declared split reflects who actually paid for the property.

Common mistakes to avoid

• Treating routine repairs as cost of improvement without capital-nature evidence
• Missing the Capital Gains Account Scheme deposit deadline
• Ignoring the stamp duty value substitution and under-reporting consideration
• Overlooking the previous owner’s holding period on inherited property
• Failing to retain purchase deeds, improvement bills and brokerage invoices for the full assessment window

Property sales are one of the most heavily data-matched transactions in the system — the registrar reports them, and they surface in your annual information statement. Reconciling that record against your return before filing avoids most notices. If your return also involves business income or a company structure, the capital gains filing support can be coordinated alongside your other filings.

Frequently asked questions

Can I claim exemption if I buy a house abroad?

No. The reinvestment exemptions under sections 54 and 54F require the new residential house to be situated in India.

What if I sell the new property soon after claiming the exemption?

Selling the new house within the statutory lock-in period reverses the benefit — the exemption previously claimed is brought back to tax in the year of that subsequent sale.

Do I pay capital gains tax on inherited property?

Inheritance itself is not a transfer and attracts no capital gains tax. Tax arises only when you subsequently sell, and the cost and holding period of the previous owner are generally carried over to you.

Can I claim both section 54EC bonds and a house purchase?

Yes, the exemptions can be combined against the same long-term gain, subject to each section’s own conditions and ceilings. Total exemption cannot exceed the gain itself.