Capital Gains Tax on Rental Properties in India – STCG & LTCG Explained

Understanding Capital Gains Tax on Rental Properties

If you own a residential property and have rented it out for more than one year, you might wonder whether you need to pay capital gains tax when selling it. In India, capital gains tax is applicable based on the holding period of the property and whether it is classified as a short-term or long-term asset. Let’s break it down in simple terms for easy understanding.

What is Capital Gains Tax?

Capital gains tax (CGT) is the tax you pay on the profit earned from selling a capital asset, such as real estate, stocks, or bonds. For residential properties, the tax is calculated based on the duration of ownership.

Types of Capital Gains:

1. Short-Term Capital Gains (STCG) – If a residential property is sold within 2 years of purchase, the profit is considered a short-term capital gain and is taxed as per the seller’s income tax slab rate.
2. Long-Term Capital Gains (LTCG) – If a residential property is held for more than 2 years, the profit is classified as a long-term capital gain and is taxed at 20% with indexation benefits.

But what if the property was rented out for over a year? Does that change the taxation?

Does Renting Affect Capital Gains Tax?

The simple answer is . Renting out a property for any duration does not impact the classification of capital gains tax. The tax liability is based only on the holding period of the property, not on whether it was self-occupied or rented.

However, if you have earned rental income, you need to pay tax on that separately under income from house property. This is different from capital gains tax, which applies only at the time of sale.

How is Capital Gains Tax Calculated on a Rented Property?

When you sell your rented property, you calculate capital gains as follows:

Formula for Capital Gains:

Capital Gain = Sale Price - (Indexed Purchase Price + Other Costs)

• Indexed Purchase Price: The cost of acquisition adjusted for inflation using the Cost Inflation Index (CII).
• Other Costs: Includes expenses like registration charges, legal fees, brokerage fees, and improvement costs.
• Exemptions and Deductions: You can claim exemptions under Section 54 or Section 54EC to save tax on long-term capital gains.

Example of Capital Gains Calculation

Additional Factors That Affect Capital Gains Tax on Rented Properties

1. Holding Period and Indexation Benefits

• If you hold the property for more than 2 years, you get the benefit of indexation, which adjusts the purchase price for inflation. This reduces the taxable capital gain.
• Indexation helps in lowering tax liability, making it beneficial to hold the property for a longer duration before selling.

2. Taxation on Rental Income vs. Capital Gains

• Rental Income Tax: While owning a rental property, you are required to pay tax on the rental income received. This is taxed under income from house property and is separate from capital gains tax.
• Capital Gains Tax: This applies only when you sell the property and make a profit.

3. Jointly Owned Property

• If the property is owned jointly by two or more people, the capital gain is divided between them based on their share of ownership.
• Each owner can claim individual tax exemptions under Section 54 or Section 54EC.

4. Inherited or Gifted Properties

• If you inherit or receive a property as a gift, the original purchase date of the property is considered for calculating long-term or short-term capital gains.
• The cost of acquisition is taken as the purchase price paid by the previous owner.

How to Save Capital Gains Tax on a Rented Property?

If your property falls under long-term capital gains, you can reduce or avoid taxes using the following methods:

1. Invest in Another Residential Property (Section 54)

• If you use the capital gain to buy another residential property within 2 years or construct one within 3 years, you can claim tax exemption.
• The new property should be in India and cannot be sold within 3 years to retain the benefit.

2. Invest in Capital Gains Bonds (Section 54EC)

• Instead of buying a new property, you can invest up to ₹50 lakh in NHAI (National Highways Authority of India) or REC (Rural Electrification Corporation) bonds within 6 months of the sale.
• These bonds have a 5-year lock-in period.

3. Offset Gains with Capital Losses

• If you have incurred capital losses in other investments, you can adjust them against capital gains to reduce tax liability.

4. Reinvest in Agricultural Land (Section 54B)

• If you use the capital gain to buy agricultural land, you may also get tax relief under certain conditions.

5. Use Tax Saving Funds

• Some tax-saving mutual funds and investment schemes can be used to balance your overall tax liability from capital gains.

Example for Easy Understanding

Scenario 1: Short-Term Capital Gain

• You bought a flat in 2023 for ₹50 lakh and sold it in 2025 for ₹65 lakh.
• Since you sold it within 2 years, the profit of ₹15 lakh will be added to your income and taxed as per your income slab.

Scenario 2: Long-Term Capital Gain

• You bought a house in 2018 for ₹40 lakh and sold it in 2025 for ₹80 lakh.
• After applying indexation, the purchase price is adjusted to ₹55 lakh.
• Your long-term capital gain is ₹25 lakh (₹80 lakh - ₹55 lakh).
• You will pay 20% tax on this amount unless you claim an exemption.

Final Thoughts

If you have rented out your property for more than a year and plan to sell it, capital gains tax will be applicable based on the holding period. Renting the property does not change the tax liability. However, you can use legal tax-saving options like buying another property, investing in bonds, or adjusting capital losses to reduce or avoid tax.

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