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Riya Ghosh, 32, inherited a flat from her father in 2022, which he had originally bought in 2005 for ₹25 lakh. She sold the property in 2025 for ₹1.2 crore. Under the amended law, she now has to compute her long-term capital gains in two ways and pay tax on the lower amount. In the first method, she applies the 12.5% tax rate on the difference between the sale price and the original cost. This gives her a taxable gain of ₹95 lakh, and a tax liability of ₹11.87 lakh.
In the second method, she applies the 20% rate after adjusting the purchase cost for indexation. As this is an inherited property, the ‘date of purchase’ is not the year she inherited it but the year her father bought it. So the indexation starts from 2005, not 2022.
Once indexed, the original cost of ₹25 lakh (Cost of Acquisition) rises to roughly ₹77.56 lakh (Indexed Cost of Acquisition). After subtracting this indexed cost from the sale price of ₹1.2 crore, the taxable gain comes to ₹42.44 lakh (Long-Term Capital Gain), and the tax at 20% works out to ₹8.49 lakh (Tax Liability). Since the law requires taxpayers to pay the lower of the two amounts ( ₹8.49 lakh from Method 2 vs. ₹11.87 lakh from Method 1), Ghosh ends up paying ₹8.49 lakh, and the higher tax under the 12.5% route does not apply.
Also, Ghosh can use Section 54 by reinvesting the entire ₹42.44 lakh long-term capital gain into acquiring a new residential house property within the specified time limits to claim a complete exemption from the ₹8.49 lakh tax liability.
Compare two methods, pay lower tax
“Under the amended law, you now compute capital gains tax in two ways and pay tax on the lower figure. First, calculate gains taxed at 12.5% by applying 12.5% to the difference between the sale price and the original cost. Then calculate gains taxed at 20% by applying 20% to the difference between the sale price and the indexed cost. If the 12.5% tax amount is higher than the 20% amount, the excess is simply ignored, effectively, you pay tax based on whichever method gives the lower liability,” says Anil Harish, Partner, D. M. Harish & Co.
However in the event there is a long term capital loss arising on account of indexation, then such loss shall be treated as zero, and the assessee would not be allowed to carry forward or set off such loss . In such a scenario the long term capital gain (after comparing (A) and (B) would be a zero tax ability.
Which home expenses qualify for deduction
“For the purpose of determining the cost of acquisition and cost of improvement, you can deduct the purchase cost, stamp duty and registration fees, brokerage and legal expenses, finance charges paid to acquire the property, and repair costs involving structural changes such as painting, tiles, walls, or cement,” says Harish. However, white goods and furniture are not allowed as deductions.
Indexation must start from original purchase
The choice between 12.5% and 20% is available only for properties bought before July 23, 2024. For example, if you inherited the property, the ‘date of purchase’ is the date the original owner bought it, not when you received it. This is critical for indexation.
“Say, you sell a house in 2024 that your father bought in 2002. You calculate indexation from 2024 (when you inherited it). You must index from 2002. This gives you 22 years of inflation benefit, likely making the 20% option far superior,” says Rohit Jain, Managing Partner, Singhania & Co.
How to get exemption on capital gains taxes
Section 54 of the Income-tax Act allows taxpayers to claim an exemption from long-term capital gains tax arising from the sale of a residential house, provided the sale proceeds are reinvested in the purchase or construction of another residential property in India within the prescribed timelines.
To avail of capital gains exemption under Section 54, taxpayers must adhere to prescribed timelines. On the sale of a residential property, a new house may be purchased either within one year prior to the sale or within two years after it. If the exemption is claimed through construction, the new residential property must be completed within three years from the date of sale.
Defer long-term capital gains with CGAS
It is important to note that the Capital Gains Account Scheme (CGAS) allows taxpayers in India to deposit unutilized long-term capital gains from property sale into a special bank account. This enables them to claim tax exemption under Sections 54/54F by deferring the mandatory reinvestment deadline. This defers tax, requiring you to reinvest the funds within two or three years to claim full exemption.
A frequent mistake taxpayers make is failing to claim exemptions on capital gains from property sales because they are unaware of options like the Capital Gains Account Scheme (CGAS).
“Many assume that exemptions under Section 54 or 54F of the Income Tax Act (India) are only available if the gains are immediately reinvested in another property. This misconception can lead to unnecessary tax liabilities, as taxpayers may not realize they can temporarily park their gains in a CGAS to retain exemption eligibility,” says Preeti Sharma, Partner, Global Employer Services, Tax & Regulatory Services, BDO India, a professional services organisation.
If deposits exceed the prescribed timelines or required documents, such as bank certificates and sale deeds, are not submitted, the claimed exemption may be denied, making the gains taxable. CGAS serves as a compliance safeguard, so careful adherence to rules is essential to maintain eligibility for the exemption.
Anagh Pal is a personal finance expert who writes on real estate, tax, insurance, mutual funds and other topics
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