Introduction
Selling a property in India can attract capital gains tax, but with proper tax planning and use of exemptions, you can legally reduce your tax liability. Budget 2023 introduced key changes affecting real estate taxation, including a ₹10 crore cap on exemptions under Sections 54 and 54F and revised provisions for deemed let-out property, which now allow homeowners to own two self-occupied properties without attracting notional rent tax.
This guide covers:
How capital gains tax is calculated on property sales
Budget 2025 updates on capital gains tax exemptions
The role of the Cost Inflation Index (CII) in reducing tax liability
Exemptions under Sections 54, 54F, and 54EC
How to handle deemed let-out property taxation
Frequently Asked Questions (FAQs) for home sellers
1. Capital Gains Tax on Property Sales: The Basics
When you sell a property, the profit earned is categorized as capital gains, which are taxed differently based on the holding period:
| Capital Gain Type | Holding Period | Tax Rate |
|---|---|---|
| Short-Term Capital Gains (STCG) | Less than 24 months | Taxed as per individual slab rates |
| Long-Term Capital Gains (LTCG) | More than 24 months | Taxed at 20% with indexation benefit |
Budget 2025 Update:
- ₹10 crore exemption cap under Sections 54 and 54F limits tax benefits for high-value property transactions.
- Deemed let-out property exemption now allows individuals to own two self-occupied houses without paying tax on notional rent.
2. Role of Cost Inflation Index (CII) in Reducing LTCG Tax
To adjust the purchase price for inflation, the Cost Inflation Index (CII) is used, reducing taxable LTCG significantly.
Formula for Indexed Cost of Acquisition:
Indexed Cost = (Purchase Price × CII of Sale Year) ÷ CII of Purchase Year
| Financial Year | CII Value |
|---|---|
| 2024-25 (Current Year) | 363 |
| 2015-16 | 254 |
| 2005-06 | 117 |
Example:
- Property purchased in 2015-16 for ₹50 lakh is sold in 2024-25 for ₹1.5 crore.
- Indexed cost = (₹50 lakh × 363) ÷ 254 = ₹71.5 lakh
- Taxable LTCG = ₹1.5 crore – ₹71.5 lakh = ₹78.5 lakh
- LTCG Tax @ 20% = ₹15.7 lakh
Without indexation, tax would have been ₹20 lakh—a tax saving of ₹4.3 lakh using CII.
3. How to Save Tax on Property Sales (Exemptions Available in 2025)
1. Buying Another House (Section 54)
- If an individual sells a residential property and reinvests the capital gain in another residential property, they can avoid tax on LTCG.
- The new house must be purchased within 2 years or constructed within 3 years of the sale.
- Exemption limit: ₹10 crore (as per Budget 2023).
Example:
- Property sold for ₹2 crore, with LTCG of ₹50 lakh.
- New house purchased for ₹80 lakh within 2 years.
- Entire ₹50 lakh LTCG is tax-exempt.
2. Investing in Capital Gains Bonds (Section 54EC)
- LTCG can be exempt if reinvested in NHAI/REC/PFC capital gains bonds within 6 months of sale.
- Max investment: ₹50 lakh (bonds have a lock-in of 5 years).
Example:
- LTCG of ₹40 lakh from a house sale.
- ₹40 lakh invested in REC Bonds = Zero LTCG tax.
3. Buying a House After Selling Non-Residential Property (Section 54F)
- This applies to sale of any asset (not just residential property) if the entire sale proceeds are used to buy a new house within 2 years or construct one within 3 years.
Example:
- Land sold for ₹80 lakh, with an LTCG of ₹30 lakh.
- New house purchased for ₹60 lakh.
- Entire ₹30 lakh LTCG is tax-free.
Tip: Use Capital Gains Account Scheme (CGAS) if you need time to reinvest.
4. Budget 2025 Update: Deemed Let-Out Property & Notional Rent Tax
Previously, if a taxpayer owned more than one house, the second property was considered deemed let-out, and tax was applied on notional rent (even if it was vacant).
Budget 2025 Change:
- Now, taxpayers can own two self-occupied houses without paying tax on notional rent.
- This benefits individuals who inherit multiple properties or maintain homes in different cities.
Example:
- Before 2025: If a person owned two houses, one was deemed let-out, and tax was levied on estimated rental income.
- After Budget 2025: Both houses can be considered self-occupied, avoiding tax liability.
5. Frequently Asked Questions (FAQs) on Capital Gains Tax
Q1: What is the LTCG tax rate for property sales in 2025?
20% after indexation for properties held for more than 24 months.
Q2: Can I claim both Section 54 and Section 54EC benefits together?
Yes, you can split LTCG across both exemptions to maximize tax savings.
Q3: Is reinvesting in two houses allowed for tax exemption?
Yes, but only once in a lifetime if LTCG is below ₹2 crore.
Q4: Can NRIs claim capital gains exemptions?
Yes, NRIs can claim exemptions under Sections 54, 54F & 54EC, but TDS @ 20% will be deducted at the time of sale.
Q5: Can I buy an under-construction property to claim LTCG exemption?
Yes, but construction must be completed within 3 years.
Q6: What happens if I don’t reinvest the capital gain?
You must pay 20% LTCG tax or invest in NHAI/REC bonds to avoid tax.
Q7: Can I use a home loan for the new house purchase and still claim exemption?
Yes, home loan funds can be used, as long as the property is purchased within 2 years.
6. Key Takeaways: Plan Property Sales Smartly to Save Tax
Use Cost Inflation Index (CII) to reduce taxable gains.
Choose tax-saving options (54, 54F, 54EC) before selling property.
Invest in CGAS if you need time to reinvest.
Declare capital gains in ITR & maintain transaction proof.
Benefit from the deemed let-out exemption for two self-occupied homes.
Proper planning can help avoid unnecessary tax burdens and maximize your post-sale profit.
Related Reads on Stox N Tax:
How to Handle High-Value Transactions & Avoid Tax Scrutiny
ITR vs. AIS: What the IT Department Knows About You
Stox N Tax 
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