Since you held the house for 5 years, it qualifies as a long-term capital asset. This means any profit (capital gain) from the sale will be taxed as long-term capital gains. Under the current provisions effective from Budget 2025, the applicable tax rate for long-term capital gains on residential property is 12.5%.

However, if you choose to reinvest the gains into another residential property within the prescribed period (typically one year before or two years after the sale, or within three years in case of construction), you may be eligible for an exemption under Section 54. If you don’t reinvest, then you will be liable to pay tax at 12.5% on the net gain—calculated as the sale proceeds minus the adjusted purchase cost and any allowable expenses.

“’Transfer’ means—
(a) the sale, exchange, relinquishment, or extinguishment of any rights in a capital asset;
(b) the gift of any such asset; and
(c) any other mode of transferring such asset or any interest therein.”

Explanation:
This provision establishes a very broad definition of “transfer” for the purposes of computing capital gains. It is not limited to a simple sale for money. Instead, any transaction that results in a change of the beneficial ownership of an asset is considered a transfer. This includes:

• Sale or Exchange: When you sell or exchange your asset for money or another asset.

• Relinquishment/Extinguishment: When you give up or lose your rights in the asset.

• Gift: When you transfer the asset without receiving any consideration, such as gifting it to a family member or through a will.

• Other Modes: Any other method by which the ownership or the right to enjoy the benefits of the asset is passed on to someone else.

The cost of acquisition of a capital asset is determined as per Section 55 of the Income Tax Act, 1961. It varies depending on whether the asset was purchased, inherited, gifted, or acquired before a specific date.

Section 55(2) – Cost of Acquisition of a Capital Asset:
“For the purposes of sections 48 and 49,—
(a) in relation to any capital asset,—
(i) where the capital asset became the property of the assessee before 1st day of April, 2001, the cost of acquisition shall be either—
(A) the actual cost of acquisition of the asset; or
(B) the fair market value (FMV) of the asset as on 1st April, 2001,
whichever is higher.”

Explanation in Simple Terms:

1. If You Purchased the Asset:

   • The cost of acquisition is the actual purchase price paid, including any registration fees, brokerage, or legal expenses.

2. If the Asset was Inherited or Gifted:

   • The original cost of acquisition of the previous owner is considered.

   • The holding period of the previous owner is also taken into account to determine whether the gain is short-term or long-term.

3. If the Asset was Acquired before 1st April 2001:

   • The taxpayer has an option to take either the actual purchase price or the Fair Market Value (FMV) as of 1st April 2001, whichever is higher.

4. For Assets Declared under the Income Declaration Scheme, 2016:

   • The cost of acquisition is deemed to be the FMV as of 1st June 2016 (as per Section 49(5)).

5. Indexed Cost of Acquisition (Applicable to Long-Term Capital Assets):

   • If the asset qualifies for indexation benefit (available for immovable property, unlisted shares, debt funds, etc.), the cost is adjusted for inflation using the Cost Inflation Index (CII).

   • Formula:

     Indexed Cost of Acquisition=Original Cost×CII of Year of SaleCII of Year of Purchase\text{Indexed Cost of Acquisition} = \frac{\text{Original Cost} \times \text{CII of Year of Sale}}{\text{CII of Year of Purchase}}Indexed Cost of Acquisition=CII of Year of PurchaseOriginal Cost×CII of Year of Sale​

Practical Example:

• Suppose you bought a house in 1995 for ₹10 lakhs, and you are selling it in 2025.

• Instead of ₹10 lakhs, you can take the FMV as of 1st April 2001 (say ₹25 lakhs).

• If the CII for 2001-02 was 100 and the CII for 2025-26 is 400, then:

  Indexed Cost=₹25,00,000×400100=₹1crore\text{Indexed Cost} = \frac{₹25,00,000 \times 400}{100} = ₹1 croreIndexed Cost=100₹25,00,000×400​=₹1crore

• If the house is sold for ₹1.5 crore, then:

  Capital Gain=Sale Price−Indexed Cost=₹1.5crore−₹1crore=₹50lakhs.\text{Capital Gain} = \text{Sale Price} – \text{Indexed Cost} = ₹1.5 crore – ₹1 crore = ₹50 lakhs.Capital Gain=Sale Price−Indexed Cost=₹1.5crore−₹1crore=₹50lakhs.

• Tax at 12.5% (as per Budget 2025 changes) would be ₹6.25 lakhs.

This method ensures fair tax computation by adjusting for inflation over the years.

The benefit of indexation while computing capital gains is provided under Section 48 of the Income Tax Act, 1961. This provision allows for the adjustment of the cost of acquisition and improvement of a long-term capital asset to account for inflation, using the Cost Inflation Index (CII).

Section 48 – Computation of Capital Gains:

“The income chargeable under the head ‘Capital Gains’ shall be the difference between the full value of consideration received or accruing from the transfer of a capital asset and the cost of acquisition of the asset and the cost of any improvement to the asset, as increased by the Cost Inflation Index (CII), in the case of a long-term capital asset.”

Benefit of Indexation:

• Reduces Taxable Capital Gains: By inflating the cost of your asset, indexation reduces the overall gain on which tax is calculated.

• More Beneficial for Long-term Assets: Since assets held for a longer time usually appreciate significantly, indexation can lead to a lower tax liability when you eventually sell the asset.

When is Indexation Allowed?

• Only for Long-Term Capital Assets: Indexation is applicable only to long-term assets (held for more than 36 months).

• For Both Purchase Cost and Improvement Costs: You can adjust both the purchase cost and any improvement costs using the CII.

• If Indexation is Opted, It Must Be Applied to Both Purchase and Improvement Costs: Once you choose to apply indexation, you must apply it to both the original purchase price and any improvement made to the asset.

The computation of Long-Term Capital Gain (LTCG) is specified under Section 48 of the Income Tax Act, 1961. The key factor in determining whether a capital gain is long-term is the holding period of the asset.

Section 48 – Computation of Capital Gains:
“The income chargeable under the head ‘Capital Gains’ shall be the difference between the full value of consideration received or accruing from the transfer of a capital asset and the cost of acquisition of the asset and the cost of any improvement to the asset, as reduced by the expenditure incurred in connection with the transfer.”

Explanation in Simple Terms:

1. Long-Term Capital Asset (LTCA):

   • A capital asset held for more than 36 months qualifies as a long-term asset for most assets like land, buildings, or unlisted shares.

   • For listed securities, equity mutual funds, and debt funds, the holding period is more than 12 months.

   • Jewelry, bonds, and similar assets generally have a 36-month holding period.

2. Computation of Long-Term Capital Gain (LTCG):
   The capital gain is computed similarly to short-term gains, with the special benefit of indexation for long-term assets. Indexation helps account for inflation, increasing the cost of acquisition and improvement, and thus lowering the capital gain on which tax is computed.

   • Sale Consideration: This is the price you sold the asset for.

   • Cost of Acquisition: This is the original price you paid for the asset, including any additional costs incurred like brokerage fees, registration charges, etc.

   • Cost of Improvement: If you have made any improvements to the asset (like renovation, upgrades, etc.), these costs can also be included.

   • Expenditure on Transfer: This includes any expenses directly related to the sale, like brokerage fees, legal charges, etc.

   • Indexed Cost of Acquisition: The original cost is adjusted for inflation using the Cost Inflation Index (CII).

3. Formula for LTCG (with Indexation):

   LTCG=Sale Consideration−(Indexed Cost of Acquisition+Indexed Cost of Improvement+Expenditure on Transfer)

4. Tax Rate:

   • LTCG on listed equity shares and equity mutual funds is taxed at 10% (without indexation), provided the gain exceeds ₹1 lakh in a financial year.

   • LTCG on other assets (e.g., land, property, unlisted shares) is generally taxed at 20% (with indexation).