A guide to calculating capital gains on property sale

When you sell a residential property for a profit, the gains are taxable. Here’s how you need to calculate the gains and pay the taxes

Kavya Balaji Jan 13, 2020

Capital gains tax on propertyBuying a property is everyone’s dream. While many buy their dream home to occupy it, there are many others who buy a property as an investment. If you sell the property for a price that is higher than the price at which you bought it, then, you incur a capital gain. In simple words, the gain or profit that you make when you sell assets such as a property is termed as capital gain. Since these are not recurring income (e.g. your salary), the taxation may not be as per your tax slab if it is a long-term gain. Read on to find out more about capital gains and taxation.

What are capital gains on property

The difference between what you paid while purchasing the asset and what you received on selling the asset is your capital gain. This will include all transfers of a capital asset. Capital assets include property, gold, shares, metal funds, et al.

When it comes to capital gains made on selling property, it is of two types. One is Short Term Capital Gains (STCG) and the other is Long Term Capital Gains (LTCG). The number of years you held the asset will decide whether the capital gain you incurred, is STCG or LTCG.

How to calculate STCG and LTCG?

If you sell the property within two years of purchasing it, the gains will be STCG. The formula for calculating STGC is:

STCG = Sale price of the property – (purchase cost of the property + cost incurred for improvement of property + any other expenditure incurred on sale or transfer of property)

If you sell the property after holding it for more than 2 years, then it becomes LTCG. The formula will be:

LTCG = Sale price of the property – (indexed cost of acquiring the property + indexed cost for improvement of property + any other expenses incurred on sale or transfer of property)

Note that there is no exception for STCG. For LTCG, you can claim tax exemption when you file income tax returns.

What is indexation?

When calculating LTCG, you need to take only the indexed cost of acquisition and not the actual cost. What’s the logic? As you might know, the value of money changes over time, thanks to inflation. The price you paid for your property years back might actually be worth much more. So, you need to find out what price you will actually pay if you had purchased it today.

You have to use the Cost Inflation Index (CII) to find the indexed cost of your property. This index will give you data on how costs have increased over the years. The central government of India notifies CII’s value every year. The base year for this index is 2001-02. So, the index starts at 100 from the year 2001-02.

Here are the index figures for your reference.

Financial Year

Cost Inflation Index

2001-02

100

2002-03

105

2003-04

109

2004-05

113

2005-06

117

2006-07

122

2007-08

129

2008-09

137

2009-10

148

2010-11

167

2011-12

184

2012-13

200

2013-14

220

2014-15

240

2015-16

254

2016-17

264

2017-18

272

2018-19

280

2019-20

289

How to use the indexation?

You need to find out the index value for the year in which you purchased the property. You will then need the CII value for the present year. The formula for calculating the index price of your property is:

Indexed cost of property = Purchase price of property * (CII value for present year / CII value for year of purchase)

Once, you get the indexed cost of your property, you have to subtract this cost from the actual sale price of your property to get the LTCG.

For instance, if you purchased a property in 2015 for Rs. 50,00,000 and sold it in 2019 for Rs. 90,00,000, your LTCG will be Rs. 33.11 lakhs. How?

The indexed cost of your property will be 50,00,000 * (289/254) = Rs.56,88,976. Your LTCG will be Rs. 90,00,000 – Rs. 56,98,729 = Rs. 33,11,023.

So, your actual profits after selling the property is not Rs.40,00,000 (that is Rs 90 lakh minus Rs 50 lakh). It is only Rs 33 lakh. This is the amount on which you need to pay your taxes.

How is STCG, LTCG taxed?

When you incur STCG, the gains will be taxed as per your tax bracket. LTCG will be added to your total income for the year and taxed as per the tax bracket that applies to you.

LTCG tax will be at the rate of 20% with indexation. Taking the above example, your tax payable will be Rs. 6 lakhs. How? Your tax payable will be Rs. 33,11,023 * 20% = Rs. 6,62,204.

You can reduce or even eliminate your LTCG tax by investing in capital gains bonds or in another residential property. You can claim the exemption when you file your taxes. 

Additional read:

What are the tax implications when selling a residential house?

Budget 2019: You can reinvest capital gains in 2 house properties now

With the 5-year tenure, is 54EC bonds a good option to save on capital gains?

Two ITAT decisions in favour of assessee: Self-occupied property and revised returns

Budget 2018: Section 54EC restricted to gains only from real estate; holding made 5 years


Kavya Balaji

Kavya Balaji is a senior contributing writer with RupeeIQ. With more than 14 years of experience in the finance space, Kavya loves everything to do with personal finance. She feels financial literacy is important for every household and likes to stick to simple language for explaining personal finance stories. She is a consultant with investment management companies. In spare time, she reads murder mysteries.

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