Capital Gains Tax on Property in India: A Complete Guide for Individuals and NRIs

Introduction:

Selling property in India can bring significant financial gain—but also tax implications. Whether you're an Indian resident or a Non-Resident Indian (NRI), it’s important to understand how capital gains tax applies, how much TDS (Tax Deducted at Source) will be withheld, and how you can legally save tax by reinvesting your capital gains.

This guide simplifies the key rules around capital gains tax, TDS on sale of capital assets, and exemptions available under the Income Tax Act for both residents and NRIs.

What Is Capital Gains Tax?

Capital gains tax is levied on the profit earned from the sale of a capital asset, such as property, Stock market investments etc.

The Capital gains are calculated as:

• Short Term Capital Gains (STCG):

Capital Gains = Full Value of Consideration – (Cost of Acquisition + Cost of Improvement + Transfer Expenses)

• Long Term Capital Gains (LTCG):

Capital Gains = Full Value of Consideration – (Indexed Cost of Acquisition + Indexed Cost of Improvement + Transfer Expenses)

Short-Term vs Long-Term Capital Gains

The holding period of the property determines whether the gains are short-term or long-term:

Asset Type	STCG Holding	LTCG Holding
Listed Equity Shares / MF	≤ 12 months	> 12 months
Immovable Property	≤ 24 months	> 24 months
Unlisted Shares	≤ 24 months	> 24 months
Other Capital Assets	≤ 36 months	> 36 months

And the Tax rates vary for different types of asserts, so it is advisable to check with a CA when unsure of the tax rates.

Tax Deduction at Source (TDS) on Sale of Property

For Indian Residents:

When a resident Indian sells a property valued over ₹50 lakhs, the buyer is required to deduct TDS at 1% under Section 194-IA of the Income Tax Act. This TDS must be deducted regardless of whether the seller actually earns any capital gain from the sale. The deducted amount is then deposited with the Income Tax Department, and the seller can claim credit for this TDS while filing their income tax return.

For Non-Resident Indian (NRI) Sellers:

TDS implications are significantly higher for NRI sellers. In such cases, TDS is deducted on the total sale consideration, not just on the capital gain component.

• If the sale results in a Short-Term Capital Gain (STCG), the TDS rate is 30% plus applicable surcharge and cess.

• If it results in a Long-Term Capital Gain (LTCG), the TDS rate is 20% plus applicable surcharge and cess.

Tip: An NRI can apply to the Income Tax Department for a lower or nil TDS certificate by submitting Form 13, especially when the actual capital gain is less than the total sale value. This can help avoid excess tax deduction at the time of sale.

How to Save Tax on Capital Gains — Available Exemptions

If you have earned long-term capital gains (LTCG) from the sale of a capital asset, the Income Tax Act provides several exemptions to help you save tax, provided you reinvest the gains under certain conditions. Below are the key sections offering such exemptions:

1. Section 54 – Sale of Residential Property

This exemption applies when you sell a residential house property. To claim the exemption, you must reinvest the capital gain in another residential house in India. The reinvestment can be made by:

• Purchasing another residential property within one year before or two years after the date of sale, or

• Constructing a new house within three years from the date of sale.

Note that the new residential property must be located in India to qualify for the exemption.

2. Section 54F – Sale of Any Other Capital Asset

Section 54F provides exemption when the asset sold is not a residential house, such as a plot of land or shares. You can claim a full exemption if the entire net sale consideration is used to purchase or construct a new residential house in India. If only a portion of the sale amount is reinvested, a proportionate exemption is allowed based on the amount invested.

3. Section 54EC – Capital Gains Bonds

If you do not wish to reinvest in property, Section 54EC allows you to save tax by investing in specified capital gains bonds issued by NHAI (National Highways Authority of India) or REC (Rural Electrification Corporation). You can invest up to ₹50 lakhs in these bonds within six months of the sale. These bonds have a lock-in period of five years, and the invested amount is exempt from LTCG tax.

Special Points for transaction involving NRIs – Tax Refunds

Claiming TDS Refund

• Often, TDS deducted is more than actual tax liability.

• File ITR (usually ITR-2 for NRIs) to:

  • Report the sale

  • Claim exemptions (Section 54/54EC)

  • Get a refund of excess TDS deducted by the buyer.

Buyer’s Responsibility:

• Obtain TAN (Tax Deduction Account Number).

• File Form 26QB is not applicable for NRI sellers (used only in Section 194IA for residents).

• Deduct TDS and deposit with the government using Form 27Q.

• Issue Form 16A (TDS certificate) to the NRI seller.

Example Calculation

Let’s say an NRI sells a house in Bangalore for ₹1.5 crore, which was purchased 10 years ago for ₹50 lakhs.

• Indexed cost (after inflation): ₹85 lakhs

• LTCG: ₹1.5 Cr – ₹85L = ₹65L

• TDS (if no exemption): ~ ₹30L (approx. 20% + cess)

• But if the NRI invests ₹50L in NHAI bonds under Section 54EC, they can save tax on that portion.

Conclusion

Selling property in India can attract significant capital gains tax, particularly for NRIs. However, with proper planning, timely reinvestment, and the right documentation, it is possible to significantly reduce—or even eliminate—your tax liability.

If you're uncertain about the next steps—whether it’s applying for a lower TDS certificate, claiming the appropriate exemptions, or planning your reinvestment timeline—it’s best to consult a qualified tax advisor or legal expert.

Consult Prolead Financial Solutions to make informed decisions and ensure full compliance, no matter the size or complexity of your transaction.