Understanding Long-Term Capital Gains Tax on Residential Property in the 2025 Inc

In the new Income Tax Bill 2025, there are no changes to the taxation of long-term capital gains (LTCG) from residential property. The tax structure for properties acquired before July 23, 2024, remains the same. The tax on LTCG for such properties is determined by whichever is lower: 12.5% (without indexation) or 20% (with indexation), plus any applicable surcharge and cess.

Suresh Surana, a Mumbai-based chartered accountant, points out that existing provisions, including tax rates and the availability of the indexation benefit for resident individuals and HUF (Hindu Undivided Family) taxpayers, remain unchanged.

Long-Term Capital Gains on Property Sale

When a property is held for more than 24 months before being sold, it qualifies as a long-term capital asset, and any gains from its sale are considered long-term capital gains (LTCG).

Parizad Sirwalla, Partner and Head of Global Mobility Services at KPMG India, explains that LTCG is calculated by subtracting the cost of acquisition, the cost of improvements, and expenses related to the sale from the gross sale consideration.

For example, if a property is sold for ?1 crore, with an original purchase price of ?50 lakh, ?10 lakh spent on improvements, and ?2 lakh in sale-related expenses, the total deductions would be ?62 lakh. Thus, the LTCG would be ?1 crore (sale price) minus ?62 lakh (deductions), resulting in capital gains of ?38 lakh.

Understanding Indexation

Indexation is a tax benefit that adjusts the cost of acquisition of a long-term asset for inflation using the Cost Inflation Index (CII). This reduces the taxable capital gain. It applies to assets like real estate, gold, and certain financial instruments.

To calculate the indexed cost of acquisition, you multiply the purchase price by the CII of the sale year, then divide by the CII of the purchase year. This adjustment increases the original cost, lowering the taxable gain.

For instance, if a property was purchased for ?20 lakh in 2010 and is being sold for ?50 lakh in 2024, the indexed cost adjusts for inflation. Using the Cost Inflation Index (CII) values—167 for 2010 and 363 for 2024—the indexed cost of acquisition becomes ?20 lakh × 363 ÷ 167, which equals ?43.53 lakh. Hence, the capital gain would be ?50 lakh (sale price) – ?43.53 lakh (indexed cost) = ?6.47 lakh instead of ?30 lakh, reducing the taxable amount.

This indexation benefit is available only to resident individuals and HUFs, who can decide whether to opt for indexation based on which method results in a lower LTCG tax.

Long-Term Capital Gains Taxes

When a residential property is sold in India, the resulting LTCG is taxed under Section 112 of the Income Tax Act of 1961 (or Section 197 in the 2025 Bill). The tax treatment varies depending on when the property was acquired.

For properties sold before July 23, 2024, LTCG tax is calculated at 20% (with indexation benefits), along with applicable surcharge and cess.

For properties sold on or after July 23, 2024, the tax treatment depends on when the property was acquired:

If acquired before July 23, 2024, the LTCG tax is the lower of 12.5% (without indexation) or 20% (with indexation), plus surcharge and cess.

If acquired on or after July 23, 2024, the LTCG tax is 12.5% (without indexation), plus applicable surcharge.

Example Calculation

Consider the sale of a house purchased on April 2, 2001, for ?10,00,000, and sold on February 24, 2025, for ?50,00,000.

Since the sale occurs after July 23, 2024, but the property was acquired before this date, the LTCG tax would be calculated as follows:

Without indexation:

LTCG = ?50,00,000 – ?10,00,000 = ?40,00,000

Tax at 12.5% = ?40,00,000 × 12.5% = ?5,00,000

With indexation:

Indexed cost = ?10,00,000 × (363 / 100) = ?36,30,000

LTCG = ?50,00,000 – ?36,30,000 = ?13,70,000

Tax at 20% = ?13,70,000 × 20% = ?2,74,000

Since ?2,74,000 is the lower of the two, the LTCG tax payable would be ?2,74,000 (plus surcharge).

-HT