Capital Gains Tax on Property Sale in Mumbai – The 2026 Guide
Selling a flat in Mumbai is a mixed emotion. You are happy about the massive appreciation (that flat you bought in Kandivali for ₹40 Lakhs in 2010 is now ₹1.8 Crores), but then comes the reality check: The Taxman.
Many sellers in Mumbai calculate their profit simply: "Sale Price minus Purchase Price".
Wrong.
If you do this, you will either pay too much tax or get a notice from the Income Tax Department. In 2026, the Capital Gains Tax rules have evolved, especially after the recent budget shake-ups regarding indexation. This guide explains exactly how much tax you owe and the legal ways to save it (Section 54, 54EC Bonds, and more).
1. The Two Types of Capital Gains
First, we need to define the "Holding Period". How long did you own the flat?
- Short Term Capital Gain (STCG): If you sold the property within 24 months (2 years) of buying it.
Tax Rate: It is added to your total income and taxed as per your slab (up to 30% + cess).
Verdict: Avoid selling before 2 years unless it's an emergency. The tax hit is brutal.
- Long Term Capital Gain (LTCG): If you sold the property after 24 months.
Tax Rate: 12.5% (without indexation benefit) OR 20% (with indexation benefit) for properties bought before July 23, 2024.
Verdict: This is where you want to be. The rates are lower, and you have options to save tax.
2. The "Indexation" Debate (The 2024/25 Rule Change)
This is the most confusing part for Mumbai sellers right now.
Old Rule: You paid 20% tax on profit, but you could adjust your purchase price for inflation (Indexation). If you bought a flat for ₹50 Lakhs in 2010, the "Indexed Cost" in 2025 might be ₹1.2 Crores. If you sold for ₹1.5 Crores, you only paid tax on ₹30 Lakhs.
New Rule (The 12.5% Shock): The government proposed reducing the rate to 12.5% but removing indexation. This meant you pay tax on the full difference (Sale - Purchase).
The Relief (Grandfathering): After public outcry, the government allowed an option for properties bought before July 23, 2024. You can calculate tax under BOTH methods (12.5% flat or 20% with indexation) and pay whichever is lower.
Mumbai Tip: In high-appreciation areas like Goregaon or Powai, the 12.5% flat rate might actually be better. In slow-growth areas (like parts of South Mumbai), the 20% with indexation is usually better because the "Inflation-Adjusted Cost" might be very close to the Sale Price, reducing your taxable profit to near zero.
3. How to Save Tax: Section 54 (Buying Another House)
The government doesn't want your tax money if you are re-investing it in the housing sector. Under Section 54, you can claim 100% exemption if you buy a resale flat or a new property:
- Who: You are an Individual or HUF.
- What: You sell a Residential House (Long Term) and buy another Residential House.
- Timeline:
- Purchase the new house: 1 year BEFORE or 2 years AFTER the sale.
- Construct a new house: Within 3 years AFTER the sale.
The "Two Houses" Rule
Previously, you could only buy ONE house. Now, you can buy TWO houses to save tax, provided the total Capital Gain does not exceed ₹2 Crores.
Condition: You can use this "Two House" option only once in a lifetime.
4. The "Lazy" Way: Section 54EC Bonds
What if you don't want to buy another property? Maybe you are retiring and want cash.
You can invest the Capital Gains (up to ₹50 Lakhs) in Capital Gains Bonds under Section 54EC.
Where: REC (Rural Electrification Corp), NHAI (National Highways), PFC, or IRFC.
Lock-in: 5 Years.
Interest: Roughly 5% to 5.25% (Taxable).
Verdict: It's safe, but the return is low. It makes sense only if you want to save the 20% tax and have no intention of buying property.
5. TDS on Property Sale (The 1% Cut)
When you sell a property worth more than ₹50 Lakhs in Mumbai (which is basically any property), the buyer will deduct 1% TDS before paying you. This is a mandatory step in the Property Registration Process.
Example: Deal value is ₹1 Crore.
Buyer pays you: ₹99 Lakhs.
Buyer deposits: ₹1 Lakh to the Govt (Form 26QB).
Is this money lost? No. This ₹1 Lakh is reflected in your Form 26AS. You can claim it as a refund or adjust it against your final Capital Gains Tax liability when you file your ITR.
6. The "Set Off" Trick (Loss vs. Profit)
Did you sell another property at a loss? Or did you lose money in the stock market (Long Term)?
You can set off Long Term Capital Loss against Long Term Capital Gain.
Scenario: You made a ₹20 Lakh profit on your Malad flat sale. But you sold a plot in Karjat at a ₹5 Lakh loss. You only pay tax on ₹15 Lakhs.
Note: You cannot set off Short Term Loss against Long Term Gain, or vice versa easily. Consult a CA for the exact "Set Off and Carry Forward" matrix.
7. The "Ready Reckoner" Trap for Sellers
As discussed in our Ready Reckoner Guide, you cannot sell below the government rate.
If you sell a flat for ₹80 Lakhs (Agreement Value), but the Ready Reckoner Value is ₹1 Crore:
The Taxman assumes you sold it for ₹1 Crore.
You have to pay Capital Gains Tax on ₹1 Crore, not ₹80 Lakhs.
Advice: Never agree to a deal price significantly below the RR rate. You will pay tax on money you never received.
My Final Tip: Plan Before You Sell
Capital Gains Tax can eat up a huge chunk of your wealth if you are reactive. If you plan to buy a new house, ensure your timelines match (don't buy the new house 2 years before selling the old one). If you plan to buy Bonds, do it within 6 months of the sale. In Mumbai's high-value market, a simple planning mistake can cost you ₹20-30 Lakhs. Talk to a CA before you sign the Sale Deed.
Frequently Asked Questions (FAQs)
Q1: Can I buy a plot to save tax under Section 54?
No. Section 54 is for "Residential House Property". Buying a plot alone is not enough. However, if you buy a plot and construct a house on it within 3 years, you can claim the exemption.
Q2: Can I buy the new house in my wife's name?
This is a grey area. Some court judgments have allowed it, but the Income Tax Officer might object. The safest way is to buy it in Joint Names (with you as the primary holder) or fully in your name to avoid litigation.
Q3: What is the Capital Gains Account Scheme (CGAS)?
The Panic Button: If the due date for filing your Income Tax Return (usually July 31st) is approaching, and you haven't bought a new house yet, you MUST deposit the unutilized money in a CGAS Account at a PSU Bank. This proves to the government that you intend to use it for a house. If you keep it in your normal Savings Account after July 31st, it becomes fully taxable. No excuses.
Q4: Does the cost of renovation reduce tax?
Yes. If you spent money on "Cost of Improvement" (major repairs, adding a room, etc.), you can deduct it from the profit. However, you need valid bills/invoices. Cash payments to contractors without bills will not be accepted.
Q5: Is there tax on selling an inherited property?
There is no tax when you inherit it. But when you sell it, Capital Gains Tax applies. The "Cost of Acquisition" will be the cost at which the original owner (your father/mother) bought it, and indexation will apply from that date (or 2001, whichever is later).
Disclaimer: Tax laws in India are subject to change with every Union Budget. This guide is based on the AY 2026-27 rules. Please consult a Chartered Accountant (CA) for your specific tax computation.
