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

Thinking of Selling Your Rental Property? Here’s What You Must Know

Did you know that selling a property you’ve been renting could cost you lakhs in taxes if you’re not careful? Many homeowners in Chennai, Bengaluru, and other cities wonder:

"Does renting my property change how I pay capital gains tax?"

Here’s the simple truth: rental income and capital gains are treated separately. What matters most is how long you’ve owned the property.

In this blog, we’ll cover:

How capital gains tax works for rental properties
The difference between STCG and LTCG
How indexation can save you money
Legal ways to save tax using Sections 54 & 54EC

By the end, you’ll know exactly how to plan your property sale without losing unnecessarily to taxes.

Rental Income vs Capital Gains: The Key Difference

If you’ve rented out your flat or house, here’s what you need to know:

Rental Income: Taxed every year under Income from House Property.
Sale Profit: Taxed only in the year you sell under Capital Gains.

Important: Renting does not affect the capital gains tax you pay. Only your holding period matters.

What is Capital Gains Tax (CGT)?

Capital Gains Tax is levied on the profit you make from selling a property.

For real estate, your tax depends on how long you held the property:

Short-Term Capital Gain (STCG) – Sell within 24 months of purchase

Taxed at your income tax slab rate (10%, 20%, 30%)
No major exemptions available

Long-Term Capital Gain (LTCG) – Sell after 24 months of purchase

Taxed at a flat 20% rate
Benefit from indexation, which adjusts for inflation

The Power of Indexation: Reduce Your Tax Liability

Over time, inflation reduces the value of money. The ₹40 lakh you spent in 2015 is worth more today. Indexation adjusts your cost for inflation, so you pay tax only on real gains.

Formula:

Indexed Cost of Acquisition = Cost of Acquisition × (CII of Year of Sale ÷ CII of Year of Purchase)
Indexed Cost of Improvement = Cost of Improvement × (CII of Year of Sale ÷ CII of Year of Improvement)

CII = Cost Inflation Index notified by the government for each financial year.

Step-by-Step LTCG Example (Chennai Property)

Scenario: You bought a flat in Chennai in May 2015 and sold it in October 2024.

Purchase & Renovation Costs:

Purchase Price: ₹50,00,000
Stamp Duty & Registration: ₹3,00,000
Renovation in 2018: ₹4,00,000
Total Cost of Acquisition: ₹53,00,000

Sale Details:

Sale Price: ₹1,10,00,000
Brokerage Paid: ₹1,00,000

CII Values:

FY 2015-16: 254
FY 2018-19: 280
FY 2024-25: 363

Calculation:

Indexed Cost of Acquisition = ₹53,00,000 × (363 ÷ 254) = ₹75,76,772
Indexed Cost of Improvement = ₹4,00,000 × (363 ÷ 280) = ₹5,18,571
LTCG = 1,10,00,000 – 1,00,000 – 75,76,772 – 5,18,571 = ₹28,04,657
Tax = 20% of LTCG = ₹5,60,931 + 4% cess

Without indexation, your profit would have been ₹52 lakh, with much higher tax. Indexation can save lakhs!

Other Factors That Affect Capital Gains Tax

Jointly Owned Property: Gains are split among owners; each can claim exemptions individually.

Inherited or Gifted Property:

Holding period includes previous owner’s period
Cost of acquisition = price paid by previous owner
Pre-2001 properties can use Fair Market Value as base

Read also : How to Calculate & Pay Capital Gains Tax on Property Sale in India (FY 2025–26) – Tax Saving Tips

How to Save LTCG Tax Legally

1. Section 54 – Buy or Construct Another Residential Property

Invest your capital gains in a new residential property in India.
Timeline:
Buy: Within 1 year before or 2 years after sale
Construct: Within 3 years after sale
Lock-in: Cannot sell new property for 3 years
New Rules:
₹10 crore cap from FY 2023-24
Once-in-a-lifetime option for 2 properties if LTCG ≤ ₹2 crore
Tip: Deposit gains in Capital Gains Account Scheme (CGAS) if purchase is delayed

2. Section 54EC – Invest in Capital Gains Bonds

Invest up to ₹50 lakh in specified 5-year bonds (NHAI, REC, PFC, IRFC)
Must invest within 6 months of sale
Lock-in period: 5 years

3. Other Options

Section 54B: For urban agricultural land
Offset with capital losses: Use LTCG from other investments to reduce tax

Key Takeaways

Renting Doesn’t Affect CGT: Only holding period matters
24 Months is Critical: Hold property >2 years for LTCG and indexation benefits
Indexation Reduces Taxable Profit
Plan Reinvestment Wisely: Use Section 54 (new house) or 54EC (bonds) to save tax

For expert insights and property opportunities, visit MaadiVeedu.com.

For in-depth investment tips, head to blog.maadiveedu.com.

FAQs: Capital Gains Tax on Rental Properties

1: Does renting my property increase capital gains tax?

No, rental income is taxed separately under Income from House Property.

2: Can I claim indexation on inherited property?

Yes, indexation applies from the year the previous owner bought it.

3: What if I sell within 2 years?

You’ll pay STCG at your normal income tax slab rate.

4: How can I save LTCG tax legally?

Invest under Section 54 (residential property) or 54EC (capital gains bonds) within specified timelines.

5: Can joint owners claim exemptions separately?

Yes, each owner can claim exemptions according to ownership percentage.