Capital Gains Tax on Property Sale in Karnataka: LTCG, STCG, Exemptions and Calculation

Published: 9 September 2026 | Updated on: 9 September 2026 | By L K Monu Borkala, CEO & Founder, OneCity Property — 15 years of property consultancy experience and over 20 years in marketing and management at OneCity Technologies Pvt. Ltd.

What Is Capital Gains Tax on Property Sale?

Capital gains tax is the tax you pay on the profit from selling a capital asset. In property transactions, this means the difference between what you received when you sold the property and what you paid when you bought it (adjusted for certain costs). This tax applies regardless of whether you sell a flat, independent house, plot, commercial space, or agricultural land that has been converted for non-agricultural use.

The tax is not charged on the full sale price. It is charged only on the gain, which is the sale price minus your cost of acquisition, cost of improvements, and transfer expenses like brokerage and legal fees. If you sell at a loss, there is no capital gains tax, but the loss can be set off against other capital gains in certain situations.

In Karnataka, the guidance value set by the state government plays a direct role in capital gains computation. Under Section 50C of the Income Tax Act, if you sell a property for less than its guidance value, the Income Tax Department can treat the guidance value as the deemed sale consideration for calculating your capital gain. This means even if you sold below guidance value, your tax is calculated as if you sold at the government rate.

Short-Term vs Long-Term: The 24-Month Rule

The classification of your gain as short-term or long-term depends entirely on how long you held the property before selling it.

Long-term capital asset: Property held for more than 24 months (2 years) from the date of acquisition. The gain from selling such property is a Long-Term Capital Gain (LTCG), taxed at preferential rates with access to reinvestment exemptions.

Short-term capital asset: Property held for 24 months or less. The gain is a Short-Term Capital Gain (STCG), taxed at your regular income tax slab rate with no special exemptions available.

The holding period is counted from the date of purchase (or allotment, in the case of builder flats) to the date of sale. For inherited property, the holding period of the original owner is included. If your father bought a property in 2010 and you inherited it in 2023, the holding period started in 2010, not 2023, making it a long-term asset.

STCG on Property: Taxed at Your Income Slab Rate

If you sell property within 24 months of buying it, the entire gain is treated as short-term and added to your total income for the year. It is taxed at whatever income tax slab rate applies to you. For someone in the 30% tax bracket, the short-term capital gain on a property sold within two years carries an effective tax rate of approximately 31.2% (including 4% health and education cess).

No special exemptions under Section 54, 54EC, or 54F are available for short-term capital gains on property. The only way to reduce STCG is to accurately account for all costs of acquisition, improvement, and transfer, and to claim any eligible deductions under other sections of the Income Tax Act that apply to your total income.

LTCG on Property: The 12.5% Rate After Budget 2024

The Union Budget 2024, presented on 23 July 2024, fundamentally changed how long-term capital gains on property are taxed in India. The changes were confirmed unchanged by Budget 2025 and Budget 2026.

For property sold on or after 23 July 2024: LTCG is taxed at a flat 12.5% without any indexation benefit. You calculate the gain as sale price minus original purchase price (no inflation adjustment), and pay 12.5% plus applicable cess and surcharge on that amount.

The dual option for pre-July 2024 purchases: If you purchased the property before 23 July 2024 but are selling it now, you have a choice. You can compute your tax using either:

Option A: 12.5% tax on the gain calculated without indexation (sale price minus original cost)

Option B: 20% tax on the gain calculated with indexation (sale price minus inflation-adjusted cost using the Cost Inflation Index)

You pay whichever option results in a lower tax amount. For properties held for many years where inflation has been high, Option B (20% with indexation) often produces the lower tax. For properties held for shorter durations or bought at relatively high prices, Option A (12.5% without indexation) may be more favourable. You should compute both and compare before filing.

For property purchased on or after 23 July 2024: Only the 12.5% flat rate without indexation is available. The 20% with indexation option does not apply to these acquisitions.

Step-by-Step Capital Gains Calculation with Example

Here is a worked example for a Bangalore property seller:

Facts: Ramesh bought a 3BHK flat in Koramangala in April 2015 for Rs 85 lakh. He spent Rs 8 lakh on interior improvements. He sells the flat in August 2026 for Rs 1.65 crore. Brokerage and legal fees for the sale total Rs 2 lakh. The stamp duty value (guidance value) for the property is Rs 1.55 crore, which is below his actual sale price.

Option A (12.5% without indexation):

Sale consideration: Rs 1,65,00,000
Less: Cost of acquisition: Rs 85,00,000
Less: Cost of improvement: Rs 8,00,000
Less: Transfer expenses: Rs 2,00,000
Long-term capital gain: Rs 70,00,000
Tax at 12.5%: Rs 8,75,000
Add 4% cess: Rs 35,000
Total tax: Rs 9,10,000

Option B (20% with indexation):

Cost Inflation Index (CII) for 2015-16: 254
CII for 2026-27: 384 (notified by CBDT)
Indexed cost of acquisition: Rs 85,00,000 x (384/254) = Rs 1,28,50,394
Indexed cost of improvement (assuming 2016-17, CII 264): Rs 8,00,000 x (384/264) = Rs 11,63,636
Sale consideration: Rs 1,65,00,000
Less: Indexed acquisition cost: Rs 1,28,50,394
Less: Indexed improvement cost: Rs 11,63,636
Less: Transfer expenses: Rs 2,00,000
Long-term capital gain: Rs 22,85,970
Tax at 20%: Rs 4,57,194
Add 4% cess: Rs 18,288
Total tax: Rs 4,75,482

Result: Ramesh chooses Option B because it saves him Rs 4,34,518 compared to Option A. This is typical for properties bought many years ago at lower prices, where the CII adjustment significantly reduces the taxable gain. The buyer in this transaction would have already deducted TDS at 1% under Section 194IA (Rs 1,65,000), which Ramesh can claim as credit when filing his return.

Section 50C: When Karnataka Guidance Value Exceeds Your Sale Price

Section 50C of the Income Tax Act is particularly relevant for Karnataka property sellers. If you sell your property for a price lower than the stamp duty value (guidance value in Karnataka), the Income Tax Department will use the guidance value as the deemed sale consideration for computing your capital gain.

For example, if you sell a plot in Yelahanka for Rs 45 lakh but the guidance value for that plot is Rs 52 lakh, your capital gain is calculated based on Rs 52 lakh, not Rs 45 lakh. The additional Rs 7 lakh is treated as if you received it, even though you did not. This provision was introduced to prevent under-reporting of property transaction values.

There is a tolerance band: if the difference between your sale price and the guidance value is within 10%, the Income Tax Department accepts your actual sale consideration. If you sold for Rs 48 lakh and the guidance value is Rs 52 lakh, the difference is about 7.7%, which falls within the 10% band, so your actual sale price of Rs 48 lakh will be accepted. Always check the current guidance value on the Kaveri portal before pricing your property for sale.

Section 54: Reinvest Capital Gains in Another Residential House

Section 54 is the most commonly used exemption for property sellers. If you sell a residential house and reinvest the long-term capital gains in purchasing or constructing another residential house in India, the reinvested amount is exempt from capital gains tax.

Key conditions:

Available to individuals and Hindu Undivided Families (HUFs) only, not to companies or firms.

The property sold must be a residential house held as a long-term asset (more than 24 months).

The new house must be purchased within 1 year before the sale or 2 years after the sale, or constructed within 3 years of the sale.

The exemption equals the lower of the capital gain or the cost of the new house.

Maximum exemption cap: Rs 10 crore. Any capital gain above Rs 10 crore is taxable even if you reinvest the full amount.

If the capital gain is Rs 2 crore or less, you have a one-time option to purchase two residential houses instead of one (this can be used only once in a lifetime).

You cannot sell the new house within 3 years of purchase. If you do, the exemption is reversed and the original capital gain becomes taxable in the year of the new sale.

If you cannot complete the reinvestment before the due date for filing your income tax return (31 July for most individuals), deposit the unutilised amount in a Capital Gains Account Scheme (CGAS) at an authorised bank. This deposit preserves your exemption claim until you actually use the funds for purchase or construction.

Section 54EC: Capital Gains Tax-Saving Bonds

If you do not want to reinvest in another property, Section 54EC offers an alternative. You can invest your long-term capital gains (up to Rs 50 lakh) in specified bonds and claim exemption from LTCG tax.

Eligible bonds: Currently issued by REC (Rural Electrification Corporation), PFC (Power Finance Corporation), and IRFC (Indian Railway Finance Corporation). NHAI has stopped issuing new 54EC bonds, though older ones remain valid.

Investment limit: Rs 50 lakh per financial year. If you sell a property after September 30 and split the investment across two financial years, you can effectively invest up to Rs 1 crore (Rs 50 lakh in each year).

Lock-in period: 5 years. You cannot sell, transfer, or take a loan against these bonds during this period. Doing so reverses the exemption.

Interest rate: Approximately 5.25% per annum. The interest is fully taxable as income from other sources each year, but this does not affect the capital gains exemption itself.

Timeline: The investment must be made within 6 months of the property sale date. Missing this window means losing the exemption permanently for that transaction.

Section 54EC is available to all taxpayers (individuals, HUFs, companies, firms), unlike Section 54 which is restricted to individuals and HUFs. This makes it the only viable capital gains exemption route for corporate property sellers.

Section 54F: For Sellers of Non-Residential Assets

Section 54F applies when you sell a long-term capital asset that is not a residential house (such as commercial property, land, shares, or gold) and reinvest the full net sale consideration in a residential house.

The key difference from Section 54: under Section 54F, you must reinvest the entire net sale consideration (not just the capital gain) to get full exemption. If you reinvest only a portion, the exemption is proportionately reduced. Additionally, at the time of sale, you should not own more than one residential house (other than the new one being purchased). The exemption cap is also Rs 10 crore.

For Karnataka sellers of commercial property or vacant land, Section 54F can be a powerful tool if the proceeds are channelled into buying a residential house. The home loan EMI calculator can help you plan if part of the reinvestment is funded through a loan.

Capital Gains Account Scheme (CGAS): Protecting Your Exemption

The CGAS exists for a specific situation: you sold a property and want to claim Section 54 or 54F exemption, but you have not yet purchased or completed construction of the new house by the time your income tax return is due (31 July for most individuals).

To preserve your exemption claim, deposit the unutilised capital gains in a CGAS account at any authorised bank before the ITR filing deadline. This deposit counts as utilisation of the gains for exemption purposes. You then have 2 years (for purchase) or 3 years (for construction) to actually use the deposited funds.

If you fail to utilise the CGAS deposit within the prescribed period, the remaining amount is treated as capital gains of the year in which the period expires, and tax becomes payable at that point. Withdrawals from the CGAS account must be used for the intended purpose (house purchase or construction) within 60 days of withdrawal.

Inherited or Gifted Property: Special Holding Period and Cost Rules

When you sell a property that you received through inheritance, gift, or will, two special rules apply:

Holding period: You include the holding period of the previous owner (the person from whom you inherited or received the gift). If your mother bought a property in 2008 and gifted it to you in 2024, your holding period is counted from 2008, making it a long-term capital asset.

Cost of acquisition: You use the cost at which the previous owner acquired the property. In the example above, your cost of acquisition is what your mother paid in 2008, not the market value when she gifted it to you in 2024. If the property was acquired before 1 April 2001, you can use the fair market value as on 1 April 2001 as your cost of acquisition (this is called the FMV election and is often beneficial for old family properties).

For properties inherited after a death, there is no tax on the inheritance itself. Capital gains tax arises only when the inheritor sells the property. The same rules of LTCG/STCG classification, exemptions, and the 12.5%/20% option apply based on the original acquisition date. Verify the property's land records through the Bhoomi portal and Pahani records before selling inherited property, as mutation into your name is a prerequisite for registration. Use the BBMP e-Aasthi portal to verify current ownership records before listing.

NRI Capital Gains on Property Sale in Karnataka

NRIs selling property in India face the same capital gains computation rules as resident Indians, but with significant differences in TDS treatment. The capital gain is calculated identically (sale price minus cost of acquisition, with or without indexation depending on the purchase date).

The critical difference is at the TDS stage. For NRI sellers, the buyer must deduct TDS under Section 195 at the applicable capital gains tax rate (12.5% for LTCG or 30% for STCG), applied on the full sale consideration by default, not just the gain. This often results in TDS far exceeding the actual tax liability. Our detailed TDS on property sale guide covers the full Section 195 rules, including the Lower Deduction Certificate process that can reduce TDS to actual liability.

NRIs get the same Section 54, 54EC, and 54F exemptions as residents. However, the repatriation of sale proceeds requires additional compliance: Form 15CA and 15CB certifications from a chartered accountant, and the bank processes the remittance only after verifying tax clearance. Our NRI repatriation guide details the complete process. The NRI property buying guide for India covers the full compliance framework. NRI sellers should also check if a Double Taxation Avoidance Agreement (DTAA) exists between India and their country of residence, as it may provide relief from being taxed in both countries.

Which ITR Form to Use for Property Sale

When you sell property and have capital gains, you need to file your income tax return using the correct form and schedule:

Resident individuals and HUFs: ITR-2 (if you have no business income) or ITR-3 (if you also have business/professional income). Capital gains from property sale are reported in Schedule CG. The updated ITR forms from FY 2024-25 onward require you to report gains separately for transactions before and after 23 July 2024.

NRIs: Same ITR-2 or ITR-3 forms. File through the Income Tax e-filing portal. NRIs must file an ITR in India for the year in which the property is sold, regardless of their total Indian income. This is the only way to claim the TDS refund if TDS exceeds actual tax liability.

Companies and firms: ITR-6 (companies) or ITR-5 (firms). Capital gains are reported in the business return with appropriate schedules.

The due date for filing is 31 July of the assessment year (for taxpayers not subject to audit). For FY 2026-27, the due date would be 31 July 2027. Missing this date can affect your ability to claim CGAS deposits and carry forward capital losses.

Common Mistakes Karnataka Property Sellers Make

1. Not computing both options for pre-2024 purchases. Sellers who bought property before July 2024 often default to 12.5% because it sounds lower, without computing the 20%-with-indexation alternative. For properties held 10+ years, the indexed cost is substantially higher, and 20% on a much smaller gain frequently results in less tax than 12.5% on the full unindexed gain.

2. Ignoring Section 50C guidance value. Selling below the Karnataka guidance value without understanding the deemed consideration rule leads to unexpected tax demands. The Income Tax Department uses the guidance value, not your actual sale price, unless the difference is within 10%.

3. Missing the Section 54EC bond deadline. The 6-month window for investing in REC/PFC/IRFC bonds is strict. Once it passes, the exemption is gone permanently. Sellers who plan to use 54EC should begin the bond application process within weeks of the sale, not months.

4. Not opening a CGAS account before the ITR deadline. If you sold property and have not yet bought a replacement house, the CGAS deposit must be made before 31 July (the ITR due date). Missing this means you cannot claim the Section 54 exemption even if you buy the new house within the 2-year window.

5. Forgetting that revenue site classification affects tax treatment. Agricultural land is exempt from capital gains tax under specific conditions. If your property is classified as agricultural land in revenue records, verify whether the exemption applies based on its location (distance from municipality) before computing tax.

6. Under-reporting transfer costs. Brokerage, legal fees, advertisement expenses for the sale, and stamp duty paid at the time of original purchase are all deductible from the sale consideration. After the sale completes, do not forget to transfer property tax records to the new owner. Many sellers also forget to include the stamp duty and registration charges they paid when they originally bought the property as part of their cost of acquisition.

Frequently Asked Questions

What is the capital gains tax rate on property sale in Karnataka in 2026?

For long-term capital gains (property held more than 24 months), the rate is 12.5% without indexation. If the property was purchased before 23 July 2024, you can choose between 12.5% without indexation or 20% with indexation, whichever results in lower tax. Short-term capital gains (property held 24 months or less) are taxed at your regular income tax slab rate. Budget 2026 made no changes to these rates.

How do I calculate capital gains on property sale?

Subtract the cost of acquisition, cost of improvement, and transfer expenses (brokerage, legal fees) from the sale consideration. For the indexation option, multiply the original costs by the ratio of the current year Cost Inflation Index to the purchase year CII. The resulting gain is taxed at the applicable rate. If the sale price is below the Karnataka guidance value, the guidance value is used as deemed sale consideration under Section 50C.

Can I save capital gains tax by buying another house?

Yes, under Section 54. Reinvest the long-term capital gains in purchasing a new residential house within 1 year before or 2 years after the sale, or construct within 3 years. The exemption is capped at Rs 10 crore. If the gain is below Rs 2 crore, you can buy two houses (one-time option). If you cannot buy before the ITR filing deadline, deposit the amount in a Capital Gains Account Scheme to preserve the exemption.

What are Section 54EC bonds and how do they save tax?

Section 54EC allows you to invest up to Rs 50 lakh of long-term capital gains in bonds issued by REC, PFC, or IRFC within 6 months of the property sale. The invested amount is exempt from capital gains tax. The bonds have a 5-year lock-in period and pay approximately 5.25% annual interest (which is taxable). This option is available to all taxpayers including companies and firms.

Is indexation still available for property sold in 2026?

Only if the property was purchased before 23 July 2024. In that case, you can choose between 12.5% tax without indexation or 20% tax with indexation, whichever is lower. For property purchased on or after 23 July 2024, only the flat 12.5% rate without indexation applies. Compute both options and compare.

What is the capital gains tax on inherited property?

There is no tax on inheriting property itself. Capital gains tax applies only when you sell the inherited property. The holding period includes the original owner's holding period, and the cost of acquisition is what the original owner paid. If the property was acquired before 1 April 2001, you can use the fair market value as on that date as your cost. The same LTCG/STCG rules, rates, and exemptions apply.

How does TDS work when selling property in Karnataka?

For resident sellers, the buyer deducts 1% TDS under Section 194IA if the property value exceeds Rs 50 lakh. For NRI sellers, the buyer deducts TDS under Section 195 at the applicable capital gains tax rate (12.5% or 30% plus surcharge and cess) on the full sale consideration. The seller claims TDS credit when filing their ITR. Detailed filing steps are covered in our Section 194IA TDS compliance guide.

Can I set off capital gains loss against other income?

Capital losses on property can only be set off against capital gains (long-term loss against long-term gains, short-term loss against both types). They cannot be set off against salary, business, or other income. Unabsorbed capital losses can be carried forward for up to 8 assessment years, but only if you file your ITR by the due date.