In India, one often finds income from renting out property. What then happens when you choose to sell that rental property? You might make money; that profit is known as a capital gain. Knowing capital gains tax on rental property helps you to make forward plans and prevent surprises at tax season. Let us dissect it simply here.
Definition of Capital Gain
Your capital gain is what separates your selling of your rental property for more than what you paid for it. The Income Tax Act taxes this gain.
Your profit of ₹30 lakh is thus regarded as a capital gain if you paid ₹40 lakh for a flat and then sold it for ₹70 lakh.
Rental Property Capital Gains: Types
Depending on how long you owned the property, you may be subject to capital gains tax on rental property.
- Short-Term Capital Gain (STCG) should be considered if you sell the house two years after purchase.
- Long-Term Capital Gain (LTCG) should be considered if you sell the house after two years.
Revenue Taxes
- Appropriate STCG is included in your overall income and taxed according to your income slab.
- After indexing—that is, inflation—LTCG is taxed at a flat rate of 20%.
- Indexation raises the purchase cost depending on inflation, helping to lower your taxable gain.
LTCG Calculation: An Example
Assuming so:
- Purchase price: ₹50 lakh (2010)
- Sales price: ₹90 lakh in 2025
- ₹50 lakh × (Index for 2025 ÷ Index for 2010) = indexed cost
- Sales price less indexed cost yields capital gain.
- Tax on the capital gain equals twenty percent.
Correct calculations of this depend on a tax expert.
Capital Gain Tax Exemptions: Save
Legal use of these choices will help you save on capital gains tax on rental property:
- Section 54: Invest the profit within the time limit in another Indian residential house.
- Section 54EC: Within six months of sale, invest in capital gains bonds—like NHAI or REC. One can invest up to ₹50 lakh.
Materials to Prepare
- Purchase agreement and a sales deed
- Proof of expenses—such as renovations or brokerage—like this
- Municipal valuation, sometimes known as property tax receipts
- Aadhaar and the PAN card
- Form 26AS (to investigate TDS should any exist)
Notes of Final Thought
Marketing a house you used to rent? Before closing the contract, be sure you grasp the capital gains tax on rental property. Knowing the rules helps you stay compliant, save money, and make sensible next investment plans. See a tax advisor for assistance in filing correctly and claiming all possible exemptions as needed.