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Capital Gains

Computation of capital gains in case of immovable property

ThinkLedger Editorial
14 min read

Introduction

An immovable property shall include a land or building or both. Special provisions have been enacted for calculation of capital gains arising from transfer of immovable properties, which relate to full value of consideration, exemptions for roll over of investment in new assets, etc.

1. About

Any profit or gain arising from transfer of a capital asset is taxable under the head capital gains. For computation of capital gains from transfer of an immovable property, the following factors are considered:

(a) Period of holding;

(b) Full value of consideration;

(c) Cost of acquisition;

(d) Cost of improvement;

(e) Expenditure incurred in connection with transfer;

(f) Adjustment for the capital gains taxed under Section 67(10);

(g) Exemptions allowed under Section 82 to 88.

It should be noted that indexation was also a key factor for computing long-term capital gain from the transfer of immovable property. However, the Finance (No. 2) Act, 2024 removed the indexation benefit and introduced a uniform tax rate of 12.5% on long-term capital gains under Income-tax Act, 1961. This change was made to simplify capital gains computation for both taxpayers and the tax authorities.

However, to ease the transition to these new rules, the Government introduced a grandfathering provision. This provision allows resident individuals and resident HUFs to still apply indexation on land or building acquired before 23-07-2024 and pay tax at the old rate of 20% if the tax under the new law (i.e., tax calculated at 12.5% without indexation benefit) results in a higher amount.

This simplified framework has also been continued under Income-tax Act, 2025.

2. How to calculate capital gains?

The capital gains shall be computed in following manner:

Particulars

Amount

Full value of consideration (Higher of actual consideration and stamp duty value)

Less:

(a) Cost of acquisition

(b) Cost of improvement

(c) Expenditure in connection with transfer

(d) Capital gains taxable under section 67(10), which is attributable to the capital asset remaining with the firm, AOP or BOI after reconstitution

Less:

Exemption under Section 82 to 88

xxx

(xxx)

Short-term capital gains or Long-term capital gains

xxx

3. Computation of period of holding

For the purpose of computation of capital gain, a capital asset is bifurcated into short-term capital asset and long-term capital asset. This distinction is important as incidence of tax is higher on short-term capital gains as compared to the long-term capital gains. The distinction between a long-term and short-term capital asset is based on the period for which it is held by the owner before transfer. Usually, the period of holding of a capital asset is reckoned from the date of its purchase. However, in certain special cases, the period of holding is determined in accordance with the specific provisions.

An immovable property, being land or building, is treated as short-term capital asset if it is held for less than 24 months immediately preceding the date of transfer otherwise it shall be treated as long-term capital asset.

4. Computation of full value of consideration

4.1. In general

Where consideration received or accruing on account of transfer for land or building is less than the value adopted by 'Stamp Valuation Authority' of State Government, for the purposes of payment of stamp duty in respect of such transfer, the value so adopted is deemed to be the full value of consideration received or accruing for the purposes of computing capital gain.

Where date of agreement to sale and date of registration of sale deed are not same, the stamp duty value may be taken as on the date of agreement to sale (and not as on the date of registration of sale deed), provided the amount of consideration (or a part thereof) has been received by way of an account payee cheque/draft or by use of ECS through a bank account on or through prescribed electronic modes before the date of agreement to transfer.

However, this deeming provision has the following two exceptions:

4.1-1. If difference is within safe-harbour limit

If the Stamp Duty Value does not exceed 110% of sales consideration, the sales consideration shall not be substituted by the Stamp Duty Value for the purpose of full value of consideration. In other words, actual sales consideration shall be deemed to be the full value of consideration if stamp duty value does not exceed 110% of actual sales consideration.

Example, the taxpayer claims to have sold a plot of land for Rs. 1 crore but the stamp duty value of such plot of land is Rs. 1.10 crore. The full value of consideration in such case shall be the actual sales consideration of Rs. 1 crore. However, if the stamp duty value is Rs. 1.20 crore, the full value of consideration shall be deemed to be Rs. 1.20 crore because it exceeds the actual value of consideration by more than 10%.

(Also see Full value of consideration for transfer of immovable property (other than a capital asset)

4.1-2. If reference is made to valuation officer

Where an assessee claims before any Assessing Officer that the value adopted or assessable by the stamp valuation authority exceeds the fair market value of the property as on the date of transfer, the Assessing Officer may refer the valuation of the capital asset to a Valuation Officer. Reference can be made to valuation officer only when stamp duty value has not been disputed in any appeal or revision or no reference has been made before any other authority or Court.

Where case is referred to the Valuation Officer, lower of the following shall be taken as 'full value of consideration' of the property:

(a) Value ascertained by the Valuation Officer; or

(b) Value adopted by the stamp valuation authority.

4.2. In case of Joint Development Agreements

Joint Development Agreement (JDA) means an agreement or an arrangement between the landowner and the developer wherein the land-owner contributes the land to the project and the developer undertakes the construction of the said land into a developed estate. In JDA, the landowner usually gets the consideration from the developer for contributing his land to the project and the said consideration may be in monetary terms or in non-monetary terms. Monetary consideration includes specified share in the sale consideration of the project. Non-monetary consideration includes specified share in the developed estate.

In this case, the aggregate of consideration received (whether in cash, cheque or any other mode) by the owner of immovable property and the stamp duty value of the property in respect of owner's share in developed project, on date of issuing of certificate of completion by the competent authority, shall be deemed to be the full value of the consideration received or receivable by the owner as a result of the transfer of such immovable property.

5. Computation of cost of acquisition

5.1. In general

The cost of acquisition of the immovable property is computed as per general provision. If an immovable property became the property of the assessee before 01-04-2001, the cost of acquisition of such asset, at the option of the assessee, may either be its purchase price or fair market value as on 01-04-2001. However, such fair market value as on 01-04-2001 shall not exceed the stamp duty value of such asset as on 01-04-2001, wherever available.

Further, where the capital asset is a house property, the interest claimed under Section 22(1)(b) or Chapter VIII (i.e. Section 130 and Section 131) shall not be considered part of the cost of acquisition of such house property.

5.2. In case of Joint development agreement (JDA)

5.2-1. Cost of acquisition of land or building transferred under JDA

The cost of acquisition of the land or building covered by the Joint Development Agreement shall be computed as per general provisions.

5.2-2. Cost of acquisition of share in developed project under JDA

The cost of acquisition of the owner's share in developed project shall be the stamp duty value of share of owner in the developed property as on date of issue of completion certificate, as increased by money consideration (if any) paid by owner to the developer.

The cost of acquisition of the developer's share in the project shall be the stamp duty value of share of developer in the developed property as on date of issue of completion certificate, as increased by money consideration (if any) paid to the owner.

5.3. In case of land pooling scheme

Land Pooling is a concept where small chunks of land are owned by group of owners who assemble for the development of infrastructure. After the development of the land, the Land Pooling agency redistributes the land after deducting some portion as compensation towards infrastructure costs. This is done to develop and bring out the potential of housing and infrastructure to reduce the load on the existing congested and saturated areas. In Land pooling scheme, the compensation in the form of reconstituted plot or land is provided to landowners. The exemption is provided under Schedule III [Table S. No. 38D] in respect of a land transferred under Andhra Pradesh Land Pooling Scheme, 2015.

Where reconstituted plot or land, received under land pooling scheme, is transferred after the expiry of two years from the end of the tax year in which the possession of such plot or land was handed over to the assessee, the cost of acquisition of such plot or land shall be deemed to be its stamp duty value on the last day of the second tax year after the end of tax year in which the possession of such asset was handed over to the assessee.

6. Computation of cost of improvement

6.1. In general

'Cost of Improvement' includes all expenditure of a capital nature incurred on or after 01-04-2001 in making any addition or alterations to the capital asset either by the assessee or the previous owner. Therefore, all capital expenditure incurred on or after 01-04-2001 shall be deducted while calculating the capital gains.

6.2. If asset is acquired before 01-04-2001

If a capital asset is acquired by previous owner or assessee before 01-04-2001, any cost of improvement incurred before 01-04-2001 shall be ignored.

6.3. If asset is acquired from previous owner

Where a capital asset became the property of the assessee in any of the circumstances as referred to in Section 73(1) [Table S. No. 1], the cost of improvement shall include any expenditure of capital nature incurred on or after 01-04-2001 by the previous owner or assessee in making any additions or alterations to the capital asset.

7. Indexed cost of acquisition or improvement

The indexation benefit is no longer available for computing long-term capital gains on capital assets. However, the Government has introduced a grandfathering provision. This provision allows resident individuals and resident HUFs to apply indexation on land or building acquired before 23-07-2024, but only if the tax calculated without indexation results in a higher amount.

Thus, where the grandfathering provision applies, the "Indexed Cost of Acquisition" and the "Indexed Cost of Improvement" are used to compute the capital gain instead of the original cost of acquisition and improvement.

8. Computation of adjustment for tax paid under Section 67(10)

Where the amount is chargeable to tax as income of partnership firm under Section 67(10), the firm shall attribute such amount to the capital asset remaining with it, including capital assets forming part of block of asset. Such attribution is allowed, at the time of computation of capital gains from the sale of such capital asset remaining with the partnership firm, by way of deduction under Section 72(5). The deduction under Section 72(5) is allowed if the following conditions are satisfied:

(a) There should be a reconstitution of the partnership firm;

(b) Capital asset or money or both should be given to the partner on such reconstitution;

(c) Capital gain is computed and taxed in the hands of the firm under Section 67(10); and

(d) The book value (or historical value or WDV) of at least one of the capital assets remaining with the firm after such reconstitution should be less than its fair market value. It may also include the self-generated asset.

The amount chargeable to tax under Section 67(10) shall relate to revaluation of any capital asset or valuation of self-generated asset or self-generated goodwill of firm if the revaluation is based on a valuation report obtained from a registered valuer defined under Rule 56.

9. Computation of exemptions

Certain exemptions can be claimed from the capital gains arising from the transfer of an immovable property under Sections 82 to 88. These exemptions have been enumerated in the below table:

Section	Eligible Assessee	Nature of Capital Asset	Nature of original asset	Nature of new asset	Time-limit allowed for investment	Capital gain account scheme applicability	Amount of exemption
Section 82	Individual and HUF	Long-term Capital Asset	Residential House Property	Residential House Property	To Buy: 1 Year before and 2 Years after the date of transfer To Construct: 3 Years after the date of transfer	Applicable	Lower of the following: - Rs. 10 crores - Aggregate of amount invested in new house property and deposited in capital gain account scheme
Section 83	Individual and HUF	Short-term or Long-term	Agriculture land	Agriculture land	2 years after the date of transfer	Applicable	Aggregate of amount invested in new agricultural land and deposited in capital gain account scheme
Section 84	Any Assessee	Short-term or Long-term	Land or Building forming part of Industrial Undertaking transferred by way of compulsory acquisition	Land or Building to shift, re-establish or set up a new Industrial Undertaking	To Buy or construct: 3 Years after the date of compulsory acquisition	Applicable	Aggregate of amount invested in new land or building and deposited in capital gain account scheme
Section 85	Any Assessee	Long-term Capital Asset	Immovable Property	Bonds of NHAI or REC or other notified bonds	6 months after the date of transfer	Not Applicable	Lower of the following: - Rs. 50,00,000 - Amount invested in specified bonds
Section 86	Individual and HUF	Long-term Capital Asset	Any capital asset other than residential house property	Residential House Property	To Buy: 1 Year before and 2 Years after the date of transfer To Construct: 3 Years after the date of transfer	Applicable	Exemption is computed as per following formula: Eligible Investment * Long-term capital gain/Net sale consideration Note: The amount of eligible investment cannot exceed Rs. 10 crores.
Section 87	Any Assessee	Short-term or Long-term	Specified Assets of Industrial Undertaking in urban area	Assets of Industrial Undertaking in non-urban area	1 Year before and 3 Years after the date of transfer	Applicable	Aggregate of amount invested in new asset or transfer of establishment and deposited in capital gain account scheme
Section 88	Any Assessee	Short-term or Long-term	Specified Assets of Industrial Undertaking in urban area	Specified Assets of Industrial Undertaking in SEZ	1 Year before and 3 Years after the date of transfer	Applicable	Aggregate of amount invested in new asset or transfer of establishment and deposited in capital gain account scheme

Further, the exemption is allowed under Section 11 from the following capital gains:

(a) Capital gains arising on compulsory acquisition of urban agricultural land is exempt from tax under Schedule III [Table S. No. 18];

(b) Capital gain arising on account of compulsory acquisition of any land under any provisions (except Section 46) of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 is exempt under Schedule III [Table S. No. 38C]

(c) Capital gain arising on transfer of specified capital assets under land pooling scheme of the Andhra Pradesh Government is exempt under Schedule III [Table S. No. 38D]

10. Other provisions

10.1. Forfeiture of advance money

As an industry practice, advance money paid in the course of negotiation of transfer of a capital asset is forfeited by the owner if the negotiation becomes infructuous or the other party does not fulfill its part of obligation. The money so forfeited is charged to tax in the hands of recipient under Section 92(2)(h) under the head Income from other sources in the tax year in which advance money is forfeited. Thus, it shall not be deducted from the cost of acquisition of such capital asset.

10.2. Tax Rates

Long-term capital gain arising on transfer of a capital asset, being land or building or both, shall be taxable at the rate of 12.5%. However, the resident individual and resident HUF have the option to pay tax at the rate of 12.5% without indexation benefit or 20% with indexation benefit on long-term capital gain from land or building acquired before 23-07-2024.

Short-term capital gain shall be taxable at normal rate applicable to an assessee.

References

Resident individuals and HUFs may opt for the benefit of indexation while computing long-term capital gains arising from the transfer of land or building acquired before 23-07-2024, where the tax without indexation exceeds the tax computed with indexation.

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.