Selling a residential or commercial property is a big financial event—and it often triggers a capital gains tax liability. Whether you’ve made a profit or loss, the Income Tax Department expects you to report it in your Income Tax Return (ITR) accurately.
In this blog, we’ll walk you through the types of capital gains, how to compute them, how to claim exemptions, and most importantly—how to report them correctly in your ITR (AY 2025–26).
1. Understand the Type of Capital Gain: Short-Term or Long-Term
Your capital gain depends on how long you held the property before selling:
- Short-Term Capital Gain (STCG):
- If property is sold within 24 months of purchase.
- Taxed at your slab rate (as regular income).
- Long-Term Capital Gain (LTCG):
- If sold after 24 months.
- Taxed at 20% with indexation benefit.
- You may be eligible for exemptions under Section 54, 54F, etc.
📌 Indexation means adjusting the purchase price for inflation, thereby reducing your taxable gain.
2. How to Calculate Capital Gains on Sale of Property
A. For LTCG:
Capital Gain = Sale Price – Indexed Cost of Acquisition – Indexed Cost of Improvement – Transfer Expenses
Example:
- Purchase price in 2010 = ₹30 lakhs
- Indexed cost (using CII) = ₹60 lakhs
- Sale price in 2024 = ₹90 lakhs
- Capital gain = ₹90L – ₹60L = ₹30 lakhs
B. For STCG:
No indexation is allowed. Simply subtract original cost and expenses from sale price.
3. ITR Form to Be Used
- ITR-2 – If you have salary and capital gains income (no business income)
- ITR-3 – If you also have business or freelance income
ITR-1 and ITR-4 cannot be used if you have capital gains.
4. Where to Report in ITR
You must fill the “Schedule CG” (Capital Gains Schedule) in the return:
- Choose type of asset (land/building)
- Provide:
- Date of acquisition and sale
- Sale consideration
- Indexed cost of acquisition/improvement
- Capital gains computation
- Mention any exemption claimed under relevant sections
5. Claiming Exemption from LTCG Tax
You can save tax by reinvesting the capital gains:
a. Section 54 – Purchase of another residential property
- Must buy new house within 1 year before or 2 years after, or construct within 3 years.
- Exemption available only if the sold asset was also a residential house.
b. Section 54F – Sale of any asset other than residential property
- Applicable when entire net sale proceeds are invested in a house.
- If you invest partially, exemption is proportionate.
c. Section 54EC – Bonds
- Invest in NHAI/REC capital gains bonds within 6 months of sale.
- Max ₹50 lakh investment; lock-in period is 5 years.
✅ To claim these exemptions, you must report them clearly in the ITR and ideally invest before due date of filing return.
6. What If You Incurred a Capital Loss?
You can carry forward capital losses for 8 assessment years, but only if you file your ITR before the due date.
- Short-term capital loss can be set off against both STCG and LTCG.
- Long-term capital loss can be set off only against LTCG.
⚠️ Missing the ITR deadline = losing your right to carry forward losses.
7. Common Mistakes to Avoid
- Reporting sale amount without deducting brokerage or registration charges
- Using ITR-1 or ITR-4 instead of ITR-2/3
- Not applying indexation properly
- Not reporting the sale at all—even if no capital gain is earned
- Ignoring reinvestment timelines and conditions for exemption
8. What If You Missed Reporting the Sale in Past Years?
If the Income Tax Department finds property sale data in your AIS/Form 26AS or via registry data, you could receive:
- Notice under Section 148 (Reassessment of escaped income)
- Penalty and interest for under-reporting
- Opportunity to file Updated Return (u/s 139(8A)) voluntarily and correct the error
Conclusion
Selling property is not just a financial milestone—it’s also a tax event. By reporting it properly, calculating capital gains carefully, and taking full advantage of available exemptions, you can minimize your tax burden and stay compliant.
Make sure to file using the correct ITR form, report even losses, and keep documentary proofs like purchase deeds, cost receipts, registry records, and proof of reinvestment.
