Capital Gains Tax on House Sale: Understanding the New Rules for ₹34 Lakh Property Sale

The rules governing Capital Gains Tax underwent significant changes in 2024 through the Finance Act. These amendments, particularly concerning the holding period and tax rates for Long-Term Capital Gains (LTCG), have created some confusion among taxpayers.

To clarify the application of these new regulations, we analyze a specific case. Manohar Sharma, a taxpayer from Noida, sold a house in Patna for ₹34 lakh in August 2025. He originally bought the unfinished flat in 1997 for ₹3.65 lakh and registered it in his name in 2007. He spent an additional ₹3 lakh on construction. We asked renowned tax expert and Chartered Accountant, Balwant Jain, to detail the tax liability under the revised rules.

The New Rules for Long-Term Capital Gains (LTCG)

CA Balwant Jain confirmed that the government introduced major changes to the LTCG framework in 2024.

1. Reduced Holding Period

The holding period required for an asset to qualify as 'Long-Term' has been reduced:

• General Capital Assets (including Immovable Property): The holding period has been reduced from three years (36 months) to two years (24 months). Since Mr. Sharma held his property for decades, his sale clearly qualifies for LTCG treatment.

• Exceptions: Only listed company shares and equity-oriented Mutual Fund units retain the 12-month holding period for LTCG qualification.

2. LTCG Tax Rate Change

The tax rates applicable to Long-Term Capital Gains have also been modified.

• If Mr. Sharma chooses not to claim any exemption, his taxable Capital Gains amount will be subject to a flat tax rate of 12.5%, plus applicable Cess and Surcharge.

3. Removal of Indexation Benefit (with a Crucial Exception)

One of the most impactful changes is the removal of the Indexation Benefit. Indexation allows taxpayers to adjust the original cost of acquisition for inflation, significantly lowering the taxable gain.

• General Rule: The indexation benefit has been removed for most capital assets.

• The Exemption: However, the benefit of indexation remains available for land or building (or both) that was purchased before July 23, 2024.

Since Mr. Sharma purchased his flat long before this cutoff date, he is eligible to use the indexation benefit to calculate his Long-Term Capital Gains.

How to Calculate Capital Gains Tax for Mr. Sharma

Given Mr. Sharma's unique situation—an unfinished flat purchased in 1997 but registered in 2007—determining the exact Fair Market Value (FMV) is challenging. CA Jain provided the simplified approach for calculation:

• Basis Date: Since the property was acquired before April 1, 2001, Mr. Sharma can use the cost of acquisition or the Fair Market Value (FMV) as on April 1, 2001, whichever is higher, as the indexed base cost.

• Simplified Cost: Given the complexity of determining the FMV of an unfinished flat, he can reasonably consider the amount paid to the builder up to April 1, 2001, as the base cost and apply indexation from that date.

  • Original Cost: ₹3.65 lakh (Paid up to 1997) + ₹3 lakh (Construction/Improvement cost).

  • Indexed Cost of Acquisition (COA): He will apply the Cost Inflation Index (CII) from the 2001-02 financial year to the year of sale (2025-26) on the base cost.

Capital Gains Calculation:

$$\text{Long-Term Capital Gains} = \text{Net Sale Value} - (\text{Indexed Cost of Acquisition} + \text{Indexed Cost of Improvement})$$

• Net Sale Value: ₹34,00,000

• Indexed COA/Improvement: This value will be calculated using the applicable CII values.

• Tax Payable: LTCG amount $\times$ (12.5% Tax Rate + Cess + Surcharge)

Claiming Exemption Under Section 54

If Mr. Sharma wishes to completely avoid paying tax on the Long-Term Capital Gains, he can claim an exemption under Section 54 of the Income Tax Act.

Exemption Conditions:

1. Investment in a New Residential House: The entire amount of the Capital Gains must be invested in purchasing or constructing another residential house.

2. Timeline: This investment must be made within two years after the date of sale (August 2025) or one year before the date of sale.

3. Alternative Investment: If he does not wish to buy a new house, he can invest the Capital Gains amount into certain specified Capital Gain Bonds issued by designated financial institutions. This investment must be completed within six months from the date of the house sale.

In summary, Mr. Sharma will qualify for Long-Term Capital Gains, is eligible for the Indexation Benefit (as his property was acquired before the July 2024 deadline), and can reduce or eliminate his tax liability by investing the gains in a new residential property or capital gain bonds.