Does repaying my home loan from the sale proceeds reduce my capital gain?

No. The capital gain is the sale value less the cost of acquisition, the cost of improvement and the expenses of transfer. Repaying the outstanding loan is none of those three. The loan was how you funded the purchase, and the purchase price is already being allowed as cost — deducting the repayment as well would be counting the same money twice. This is the single most common and most expensive error sellers make, because the money that reaches their bank account is much smaller than the gain they are taxed on.

What rate applies to long-term capital gains on a house?

The standard rate is 12.5% without indexation, plus surcharge where applicable and 4% cess. If the land or building was acquired before 23 July 2024 and the seller is a resident individual or Hindu Undivided Family, there is an option to compute the tax instead at 20% with indexation and pay whichever of the two is lower. Property acquired on or after that date gets only the 12.5% route. Whichever is lower has to be worked out for the specific case — neither option wins automatically.

How long must a house be held to be long-term?

More than 24 months. Sold at or within 24 months of acquisition, the gain is short-term and is added to your total income and taxed at your slab rate, with none of the reinvestment exemptions available and no indexation option. The holding period is counted from the date of acquisition, which for a resale purchase is normally the date of registration.

What happens if I cannot reinvest before the return filing due date?

Deposit the unutilised gain in a Capital Gains Account Scheme account with a bank on or before the due date for filing your return. That preserves the exemption while you continue looking for the new property, within the outer limits of two years to purchase or three years to construct. If the deposited money is not used within those limits, the untouched portion becomes taxable in the year the limit expires. Simply keeping the money in an ordinary savings account does not preserve the exemption.

Is the buyer's 1% TDS deducted on my gain or on the sale price?

On the sale value, not on the gain. Where the consideration or the stamp duty value is fifty lakh rupees or more, the buyer deducts 1% of the higher of those two figures and deposits it against the seller's PAN. It is an advance against your final liability, so a seller with a small gain, a fully exempt gain or an outright loss still sees the deduction and recovers it as a refund after filing.

Money & Tax · Part 4 · Tax · 13 min read · September 2026

You cleared the loan from the sale money. The tax office does not call that a cost.

A house sells for ₹95 lakh. The lender takes ₹28 lakh to close the loan, the broker takes ₹95,000, and ₹66 lakh reaches the seller's account. Almost everyone in that position works out their tax on the ₹66 lakh, or on some version of it. The gain the law computes is ₹64 lakh, and the difference between those two arithmetics is around three and a half lakh rupees of tax that nobody budgeted for.

In short

The loan repayment is not deductible. Your gain is sale value less cost of acquisition, cost of improvement and transfer expenses. The loan was how you paid the purchase price, and the purchase price is already being allowed. Deducting both counts the same money twice.
There are two possible rates and you must compute both. 12.5% without indexation is the default. For a house bought before 23 July 2024, a resident individual can instead compute at 20% with indexation and pay the lower. Neither wins automatically.
The buyer withholds 1% of the sale value, not of your gain. Even a seller with no taxable gain at all sees that money deducted and gets it back only as a refund.
The exemption has a deadline earlier than you think — if the new property is not bought by the time your return is due, the money has to be sitting in a Capital Gains Account by then, not in your savings account.

Where the misunderstanding comes from

It comes from the bank account, and it is completely understandable.

When you sell a house that still has a loan on it, you never see the full sale value. The buyer's payment routes through a closure of your loan — the outstanding is settled, the lender releases the title documents and files the satisfaction of charge, and what lands with you is the remainder. On a ₹95 lakh sale with ₹28 lakh outstanding and ₹95,000 of brokerage, that remainder is ₹66,05,000.

So the seller reasons: I put in ₹30 lakh years ago, I have ₹66 lakh now, my profit is ₹36 lakh. Or, slightly more sophisticated: sale ₹95 lakh, cost ₹30 lakh, loan repaid ₹28 lakh, so the gain is ₹37 lakh. Both feel like common sense. Neither is how the computation works.

The law allows you three things against the sale value: what you paid for the property, what you spent improving it, and what the sale itself cost you. That is the whole list. A loan repayment is not on it — and the reason is not meanness, it is arithmetic. The ₹30 lakh purchase price is already being deducted as your cost. The loan was simply how that ₹30 lakh was funded. Allowing the repayment as well would deduct the same rupees a second time.

Put it the other way round and it becomes obvious. Two neighbours buy identical flats for ₹30 lakh in the same month. One pays cash, the other borrows ₹25 lakh. Thirteen years later both sell for ₹95 lakh. They have made exactly the same gain on exactly the same asset. Nothing about the borrower's financing decision made their profit smaller.

The related question What about all the interest I paid? Interest on a home loan is dealt with as a deduction against house property income year by year — that is its route through the tax system, and it is generally a more valuable one than being added to cost. Interest that has already been claimed as a deduction cannot also be added to the cost of acquisition; the same rupee does not get relieved twice. Where interest was genuinely never claimed in any year, whether it can be capitalised into cost has been argued both ways and is a position to take with a chartered accountant on your own facts, not an assumption to build a tax estimate on.

What the gain is actually computed on

Three deductions, and it is worth being precise about each because sellers routinely leave money on the table by forgetting the second and third.

Cost of acquisition. The purchase price, plus the stamp duty and registration charges you paid to acquire it, plus brokerage paid on the purchase. People remember the price on the sale deed and forget the seven or eight per cent that went to the sub-registrar. That is part of your cost.
Cost of improvement. Capital additions — a room built, a floor added, a kitchen or bathroom rebuilt. Not repainting, not routine repairs, not replacing a geyser. The test is whether it added to the asset rather than maintained it, and the practical test is whether you can produce a bill and a payment trail for it. Improvements from decades ago, undocumented, are effectively unclaimable.
Expenditure on the transfer. Brokerage on the sale, legal fees, and any charge you had to pay to make the transfer happen.

And one more thing that sits on top of the whole computation: if the property was inherited or gifted, you do not start from zero. You step into the shoes of the person who bought it — their cost becomes your cost, and their holding period is added to yours. A flat inherited from a parent who bought it in 1998 is not a windfall taxed on the full sale value. This is the single most common panic among sellers of ancestral property and it is usually misplaced.

Long-term or short-term, and why it decides everything

A house held for more than 24 months is a long-term capital asset. Held for 24 months or less, it is short-term.

The gap between those two is not a matter of a few percentage points. A short-term gain is simply added to your total income and taxed at your slab rate — for anyone in the upper slabs, that is thirty per cent plus surcharge and cess. There is no indexation option and, critically, none of the reinvestment exemptions apply at all. Every route out described later on this page requires a long-term gain.

The holding period runs from the date of acquisition, which for a resale purchase is normally the date of registration. For an under-construction purchase the position is more involved and depends on the facts of the allotment and the agreement. If you are anywhere near the 24-month line, that date is worth establishing before you agree a sale date rather than after.

Two rates. You have to compute both.

This is where the 2024 change still trips people up two years later.

The standard rate on long-term gains from immovable property is 12.5% without indexation, plus surcharge where your income crosses the thresholds, plus 4% cess. Indexation — adjusting your purchase cost upward for inflation before computing the gain — was withdrawn for transfers from 23 July 2024.

But it was not withdrawn cleanly. Where the land or building was acquired before 23 July 2024, and the seller is a resident individual or Hindu Undivided Family, the tax may instead be computed the old way, at 20% with indexation, and you pay whichever of the two figures is lower. Property acquired on or after that date gets only the 12.5% route. Non-residents do not get the choice at all.

The indexation adjustment uses the Cost Inflation Index notified each year. For Tax Year 2026-27 the index is 384, against a base of 100 for 2001-02.

Worked example · both routes

Bought in FY 2013-14 (index 220)₹30,00,000

Sold September 2026 (index 384)₹95,00,000

Brokerage on sale₹95,000

Home loan outstanding, cleared at sale₹28,00,000

Route A — 12.5%, no indexation

Gain: 95,00,000 − 30,00,000 − 95,000₹64,05,000

Tax at 12.5% plus 4% cess₹8,32,650

Route B — 20%, with indexation

Indexed cost: 30,00,000 × 384 ÷ 220₹52,36,364

Gain: 95,00,000 − 52,36,364 − 95,000₹41,68,636

Tax at 20% plus 4% cess₹8,67,076

Lower of the two — pay Route A₹8,32,650

Note what happened there. Indexation cut the taxable gain by more than twenty-two lakh rupees and still produced a slightly higher bill, because the rate it carries is sixty per cent higher. The smaller gain is the seductive number and it is the wrong one to optimise for.

Which route wins depends almost entirely on two things: how long you held, and how fast the property appreciated. Long holdings with modest appreciation favour indexation, because the index has had years to compound against a gain that has not. Shorter holdings, or properties that multiplied several times over, favour the flat 12.5%. There is no rule of thumb reliable enough to skip the arithmetic — compute both, every time.

Now put the loan back in. The seller in that example received ₹66,05,000 and owes ₹8,32,650 in tax. Had they estimated the gain at ₹37 lakh the way most people do, they would have expected a bill of about ₹4,81,000. The gap is ₹3,51,650, discovered somewhere around the following July, typically after the money has been committed to the next property.

The floor under your sale price

One more thing decides the number the gain starts from, and it is not always the number on your sale deed.

If the consideration stated in the deed is less than the stamp duty value — the circle rate or ready reckoner value the state assigns to that property — the stamp duty value is treated as the sale value for computing your gain. You are taxed on a price you did not receive.

There are two softeners. A tolerance band means that where the stamp duty value does not exceed 110% of the actual consideration, the actual consideration stands — so a small gap is ignored, and only a gap of more than ten per cent bites. And where the agreement fixing the price predates registration, the stamp duty value on the agreement date can be used instead, provided at least part of the consideration was received on or before that date through a banking or electronic channel. Cash on the agreement date does not qualify, which is a good reason to route the token amount through a bank transfer.

The same higher-of rule reaches the buyer's side too. Where the difference is large enough, the excess is taxable in the buyer's hands as income as well — the transaction is caught at both ends. If you are selling below circle rate for a genuine reason, such as a distressed sale or a property with a defect the rate card does not reflect, the valuation can be referred to a Valuation Officer. That is a process to start early, not an argument to raise after an assessment.

The 1% the buyer takes off the top

Where the consideration or the stamp duty value is ₹50 lakh or more, the buyer must deduct 1% of the higher of the two and deposit it against the seller's PAN. On a ₹95 lakh sale that is ₹95,000, and it is deducted at the time of payment or credit, whichever comes first.

Three things sellers get wrong about it, in order of how expensive they are.

It is on the sale value, not on the gain. A seller with a fully exempt gain, a marginal gain, or a genuine loss still has 1% of the whole consideration withheld. It is an advance against the final liability, recovered only as a refund after the return is filed — which means it is money out of your hands for the better part of a year, at exactly the moment you are funding the next purchase.
It applies to the whole amount once the threshold is crossed, not just to the excess over ₹50 lakh. Where there are several buyers or several sellers, the amounts are aggregated for testing the threshold, so splitting a sale across joint names does not put it below the line.
Without a valid PAN the rate is far higher. Give the buyer your PAN in writing, correctly, and check afterwards that the deduction actually appears against it.

The paperwork has changed this year along with everything else. From 1 April 2026, Form 141 replaces Form 26QB as the challan-cum-statement the buyer files for this deduction, and the certificate the buyer issues you comes under the renumbered series. If a buyer hands you a Form 16B for a 2026 transaction, something has been filed on the old track and the credit may not reach your account correctly. Check your annual statement before you file rather than after.

Two ways to pay nothing

The gain is large, but it is not inevitable. Two reinvestment routes exist, both requiring a long-term gain.

Route one — sell a house, buy a house. Reinvest the capital gain in one residential house in India, purchased within one year before or two years after the sale, or constructed within three years of it. The exemption is the lower of the gain and the amount invested, capped at ₹10 crore. Two details matter more than they look:

It is the gain that must be reinvested here, not the whole sale value. You may keep the recovered cost.
If the gain does not exceed ₹2 crore, you may split it across two houses instead of one — but that option can be exercised once in a lifetime. Used casually on a small gain, it is gone when a larger one arrives.

Route two — notified bonds. Invest the gain in specified long-term bonds within six months of the sale, up to ₹50 lakh, locked in for five years. Cashing out early reverses the exemption. The six-month window is genuinely tight and it runs from the transfer, not from when the money reaches you or when you get around to thinking about it.

The two can be combined. Where the gain exceeds what you are putting into the new house, the balance can go into bonds up to the ₹50 lakh limit — but the total exemption can never exceed the actual gain.

The deadline people miss Suppose you sell in September and have not found the new property by the following July, when your return falls due. The exemption is not lost — but only if the unutilised gain is deposited in a Capital Gains Account Scheme account with a bank on or before the return filing due date. Money sitting in your ordinary savings account on that date does not qualify, however genuine your intention to buy. This is the most common way a legitimate exemption is thrown away, and it is thrown away by a date, not by a decision. Open the account first and decide later.

Two conditions attach to whatever you claim. If the new house is sold within three years, the exemption is reversed and the earlier gain comes back to be taxed in the year of that sale. And money parked in a Capital Gains Account that is not used within the outer limits — two years to purchase, three to construct — becomes taxable in the year the limit expires. The account is a holding pen with a timer, not a shelter.

The section numbers changed this year too

If you look any of this up, you will find two sets of numbers in circulation, and a great deal of published material still carrying the old ones. From 1 April 2026 the Income-tax Act, 2025 replaced the 1961 Act and renumbered nearly everything. The substance of these provisions did not change; the citations did.

What it does	Old number	Now
Computing the gain, and the inflation index	Section 48	Section 72
Stamp duty value as the floor on sale price	Section 50C	Section 78
Sell a house, buy a house	Section 54	Section 82
Notified bonds	Section 54EC	Section 85
Sell any other asset, buy a house	Section 54F	Section 86
Buyer's 1% deduction on property	Section 194-IA	Section 393

Worth knowing which set applies to you. A sale that happened in the year ended March 2026 is an old-Act transaction and stays with the old numbers. A sale happening now, in Tax Year 2026-27, falls under the new ones — and will be reported next year on a return that uses them. If an adviser or a website is citing Section 54 for a sale you are making today, they are not necessarily wrong about the rule, but they are working from last year's copy of the statute.

Before you sign anything

Six things, in the order they actually bite.

Check the 24-month date. Everything else on this page depends on it, and it is the one thing you can still control by moving the sale date.
Compute the tax before you commit the proceeds. The bill is a function of the sale value, not of what reaches your account, and the loan payoff makes those two numbers wildly different. If the next purchase is being planned off the net figure, the tax is being funded from nowhere.
Run both rate routes. If the property was bought before 23 July 2024 and you are a resident individual, you have a genuine choice and it is worth a spreadsheet. You can sanity-check the loan side of the transaction in the prepayment and closure tools.
Compare the deed value against the circle rate before agreeing the price, and route any token or advance through a bank so the agreement-date value stays available to you.
Assemble the cost paperwork now. Purchase deed, stamp duty and registration receipts, improvement bills. Cost you cannot evidence is cost you cannot claim, and thirteen-year-old invoices do not appear on demand.
If reinvesting, open the Capital Gains Account before the return due date — not when you find the property. That date is the deadline, and it does not move because you are still looking.

The one-line summary

Your tax is computed on the sale, not on the settlement. The lender's cheque coming off the top changes what you receive and changes nothing about what you owe — which is why the gap between the two is where sellers get hurt. Work out the liability from the sale deed before the money is spoken for, and if any part of the arrangement is unusual, that is a conversation with a chartered accountant, not a calculation to take on trust from a page on the internet.

Written at the MoneyClarityTech desk — by a working retail-credit professional in Indian banking who reads loan files, credit reports and bank statements every working day. Patterns from hundreds of real cases; every identifying detail removed. More about MoneyClarityTech →