Should one includes sale of residential house property in India in the Income Tax Return?

A residential property is a Capital Asset. The sale of a capital asset results in capital gains. Capital gains are chargeable to tax in India. If you have held this property for a period of less than 3 years it shall be a short term capital gain and if you have held this property for more than 3 years it will be a long term capital gains.
These gains are taxed under the head ‘Income from Capital Gains’ and have to be included in your Income Tax Return.
A short term capital gain from sale of a house property is added to your total income and taxed as per the slab applicable to you. A long term capital gain from sale of a house property is taxes at 20%.
In case you have inherited this property, include the period for which it was held by the previous owner.
Here is an example of how long term capital gains are calculated – If you have held this property for more than 36 months – it shall be treated as a long term capital gain.The cost is indexed by applying cost of inflation index(CII). You are also allowed to deduct expenses directly related to the transfer. Here is an example –  – assuming you bought a house in the year 2004 for Rs 50lakhs and this house is now worth Rs 1.5cr. Since property is a long term asset when held for more than 3 years, cost price will be indexed for calculating capital gains. You can adjust the cost price for the impact of inflation, reduce from Rs 1.5cr, the inflation adjusted value of Rs 50lakhs. Therefore  Rs 50lakhs x CII for 2014-15/CII for 2004-2005 or Rs 50lakhs x 1024/480 = Rs 1.06cr is the adjusted cost of the house. Your net capital gains are Rs 1.5cr less Rs 1.06cr or Rs 44lakhs.
Its important to note that you can save tax on your long term capital gains –
By Purchasing Another Property – The Income tax act allows you to reduce your capital gains to the extent these have been invested in purchasing a new house property. Please note – you do not have to invest the entire sale receipt, but the amount of capital gains. Of course, your purchase price of the new property may be higher than the amount of capital gains, however your exemption shall be limited to the total capital gain on sale. Also, you can purchase this property either one year before the sale or 2 years after the sale of your property. You are also allowed to invest the gains in the construction of a property, but construction must be completed within 3 years from the date of sale. In the Budget for 2014-15, it has been clarified that only ONE house property can be purchased or constructed from the capital gains to claim this exemption. Do remember that this exemption can be taken back if you sell this new property within 3 years of its purchase.
By Investing in Capital Gains Account Scheme –Finding a suitable seller, arranging the requisite funds and getting the paperwork in place for a new property is one time consuming process. Fortunately, the Income Tax agrees with these limitations. If you have not been able to invest your capital gains until the date of filing of return (usually 31st July) of the financial year in which you have sold your property, you are allowed to deposit your gains in a PSU bank or other banks as per the Capital Gains Account Scheme, 1988. And in your return claim this as an exemption from your capital gains, you don’t have to pay tax on it. However, you must invest this money you have deposited within the period specified by the bank, if you fail to do so, your deposit shall be treated as capital gains.
Purchasing Capital Gains Bonds – What happens if you do not intend to purchase another property, there is no use of investing the amount in a Capital Gains Account Scheme. In such a case, you can still save the tax on your capital gains, buy investing them in certain bonds. Bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) have been specified for this purpose. These are redeemable after 3 years and must not be sold before the lapse of 3 years from the date of sale of the house property. Note that you cannot claim this investment under any other deduction. You are allowed a period of 6 months to invest in these bonds – though to be able to claim this exemption, you will have to invest before the return filing date. The Budget for 2014 has specified that you are allowed to invest a maximum of Rs 50lakhs in a financial year in these bonds.