When you sell a property, the tax treatment depends on the holding period. If the property is sold within 24 months from the date of purchase, the profit is classified as a short-term capital gain. In such cases, short-term property gain tax on property applies to the amount earned.
As per the Union Budget 2024 provisions, these gains are added to your total income and taxed according to your applicable income tax slab. Since no indexation benefit is available, understanding how the short-term property gain tax on property is calculated is important for better transaction and tax planning.
What is the short-term gain tax on property?
Short-Term Property Gain Tax in India applies when you sell a property within 24 months of acquiring it. The profit earned from such a transaction is treated as a short-term capital gain and is taxed according to the individual’s applicable income tax slab rate. Unlike long-term gains, which enjoy certain exemptions and indexation benefits, short-term gains do not qualify for such advantages, making them potentially more expensive from a tax perspective. To calculate short-term capital gains, subtract the cost of acquisition, cost of improvement, and transfer expenses from the sale value of the property. The resulting amount is added to your total income and taxed accordingly. For investors and property owners, understanding this tax implication is crucial when planning to sell real estate. Holding a property beyond two years can significantly reduce tax liability, making it a more financially sound decision in the long run.
STCG formula for property
Short-term capital gain on property is calculated using the following formula:
Short Term Capital Gain = Sale consideration – Transfer expenses – Cost of acquisition – Cost of improvement
The final amount derived after these deductions is treated as short-term capital gain and is taxed according to the seller’s applicable income tax slab rate.
Short-term capital gains tax rate
This table outlines how short-term capital gains are taxed across different asset classes, highlighting the distinction between equity-based investments and other assets such as property and land.
Asset Type |
Short Term Capital Gains Taxation |
Tax Rate |
Listed equity shares and equity oriented mutual funds |
Taxed under Section 111A if Securities Transaction Tax is paid |
20% |
Other assets such as real estate land and unlisted shares |
Added to total income and taxed as per applicable slab |
Income tax slab rates |
Criteria for short term capital gains on property
For property sales to be subject to Short-Term Capital Gains (STCG), the following criteria must be met:
Holding period: The property must have been held for less than 24 months before selling.
Type of asset: The property can include residential property, commercial property, land, or buildings.
Profit: The sale must result in a profit, which will be taxed as STCG.
Capital asset: The asset being sold must be a capital asset, which includes any property or investment that is not primarily used for business purposes.
If the property is sold after being held for more than 24 months, it would qualify for Long-Term Capital Gains (LTCG) tax, which is subject to different tax rates and exemptions.
Tax rates applicable to short-term property gains
The tax rates for Short-Term Capital Gains (STCG)on property differ based on the type of asset and applicable tax laws. Below is a table that outlines the key rates:
Type of property |
Holding period |
STCG tax rate |
Residential property |
Less than 24 months |
30% (plus cess) |
Commercial property |
Less than 24 months |
30% (plus cess) |
Land |
Less than 24 months |
30% (plus cess) |
Shares and securities |
Less than 12 months |
15% |
Calculation method for short term capital gains tax
To calculate the Short-Term Capital Gains (STCG) tax, the following steps are involved:
Determine sale price: This is the amount for which the property is sold.
Subtract expenses: Deduct any costs incurred during the sale, such as brokerage fees, legal costs, and stamp duty.
Subtract purchase price: The original cost at which the property was purchased, along with any improvements or renovation costs, should be subtracted from the sale price.
Calculate STCG: The result of the above steps will be the Short-Term Capital Gains (STCG).
Apply tax rate: The STCG is taxed at the applicable rate based on the type of property sold.
Example: Calculating STCG on property sale
Let us consider an example to demonstrate how to calculate property gain tax:
Purchase price of property: Rs. 50,00,000
Sale price of property: Rs. 70,00,000
Selling expenses: Rs. 1,00,000 (brokerage, legal fees, etc.)
Improvement costs: Rs. 2,00,000 (renovations, etc.)
STCG calculation:
Sale Price = Rs. 70,00,000
Less: Selling Expenses = Rs. 1,00,000
Less: Improvement Costs = Rs. 2,00,000
Net Sale Proceeds = Rs. 70,00,000 – Rs. 1,00,000 – Rs. 2,00,000 = Rs. 67,00,000
Subtract Purchase Price = Rs. 67,00,000 – Rs. 50,00,000 = Rs. 17,00,000
So, the short-term capital gain is Rs. 17,00,000.
Now, applying the tax rate of 30%, the STCG Tax would be:
Rs. 17,00,000 x 30% = Rs. 5,10,000
Deductions allowed in STCG calculations
Several expenses can be deducted while calculating short-term capital gains tax, helping reduce the overall taxable gain. These include:
Brokerage fees: Charges paid to brokers or agents for facilitating the property sale.
Legal costs: Expenses incurred towards legal services related to the sale of the property.
Stamp duty: Stamp duty is paid at the time of purchasing or selling the property, where applicable.
Improvement costs: Costs spent on renovations or structural improvements made to the property before its sale.
Expenses deductible from the sale consideration
Expenses deductible from sale consideration include specific costs directly linked to acquiring or selling the property, which can be adjusted against the sale value while calculating capital gains.
Brokerage fees: Brokerage charges paid to agents or intermediaries, usually calculated as a percentage of the sale amount.
Legal charges: Legal expenses incurred for title transfer, drafting agreements, or resolving disputes related to the sale.
Stamp duty: Stamp duty paid at the time of purchase or sale, as applicable under law.
Renovation expenses: Costs incurred on improvements or renovations that enhance the property’s value.
Impact of holding period on taxation
Aspect |
Short Term |
Long Term |
Holding period |
Less than 24 months |
More than 24 months |
Tax rate |
As per applicable income tax slab |
20% with indexation benefit |
Indexation benefit |
Not available |
Available |
Exemptions |
Limited exemptions |
Section 54, Section 54EC and other applicable provisions |
Differences between short-term and long-term capital gains
Understanding the difference between short-term and long-term capital gains helps taxpayers assess tax liability accurately, as each category follows different holding periods, tax rates, and eligibility for indexation benefits.
| Aspect | Short-term capital gains | Long-term capital gains |
| Holding period | Less than 24 months | More than 24 months |
| Tax rate | 30% (for property) | 20% (with indexation benefit) |
| Exemptions | Fewer exemptions | More exemptions (e.g., Section 54) |
| Tax calculation | Based on sale price minus costs | Based on indexed cost of acquisition |
Tax implications on short-term capital gain on property
When a property is sold within twenty-four months from the date of purchase, the resulting profit is treated as short-term capital gain. This gain is added to the seller’s total income and taxed according to the applicable income tax slab rate, not at a flat rate. There are no indexation benefits or long-term exemptions available for short-term gains, which can increase the overall tax burden.
For instance, if an individual falls under the 20% income tax slab and earns a short-term capital gain of Rs. 5,00,000 from selling a property, the tax payable on this gain would be Rs. 1,00,000, excluding applicable cess, while filing income tax returns.
It is also important to distinguish between capital assets and stock in trade. If a property is purchased and sold as part of a business activity, such as by a registered property dealer, it is treated as stock in trade. In such cases, the profit from the sale is taxed as business income and not as short-term capital gains. This classification plays a crucial role in determining how the income is taxed and under which head it is reported.
Exemptions and reliefs available for STCG
Several exemptions and reliefs can reduce the short-term capital gains tax:
- Eligible assessee: Individual or Hindu Undivided Famil
- Asset transferred: Residential house property
- Nature of asset: Long-term capital asset
- New asset required: Residential house property
- Time limit for investment: Purchase the new house 1 year before the date of transfer or within 2 years after transfer
Construct the new house within 3 years from the date of transfer - Exemption amount: Lower of the long-term capital gain or the cost of the new residential property
- Capital Gains Account Scheme: Required if the amount is not immediately utilised. The unspent amount must be deposited before the due date of filing the income tax return.
- Additional conditions: If the new property is sold within 3 years, the earlier exemption claimed will be reduced from its cost of acquisition while computing capital gains.
If the deposited amount in the Capital Gains Account Scheme is not used within the prescribed period, the unutilised portion will be taxed as capital gains.
Recent amendments affecting STCG on property
Recent amendments in Indian tax laws have impacted the taxation ofShort-Term Capital Gains (STCG)on property. The government has introduced new provisions to streamline the tax structure, including more stringent rules on capital gain exemptions and the introduction of newer bonds for Section 54EC. It is essential to stay updated on these amendments to optimise tax benefits.
Common mistakes to avoid when calculating STCG
Here are some common mistakes you can avoid when calculating STCG:
Incorrect holding period: Miscalculating the holding period can lead to wrong tax classification (STCG vs. LTCG).
Ignoring deductions: Failing to account for selling expenses or improvement costs can result in higher taxable gains.
Not reinvesting proceeds: Missing out on exemptions like Section 54 or 54EC due to improper reinvestment.
Underreporting gains: Failing to accurately report all aspects of the sale can lead to tax penalties.
Strategies to save capital gains tax on property sales
These strategies can help reduce the capital gains tax burden on property sales by using available exemptions, deductions, and structuring options within the income tax framework.
Invest in another residential property: Under Section 54, reinvest the sale proceeds in another residential property within the prescribed timeline to claim exemption on long-term capital gains.
Capital Gains Account Scheme: If immediate reinvestment is not possible, deposit the gains in a CGAS account before the income tax return due date to retain exemption eligibility.
Invest in specified bonds: Under Section 54EC, invest up to ₹50 lakh in NHAI or REC bonds within six months of sale to claim exemption on long term gains.
Set off capital losses: Adjust short-term or long-term capital losses from other assets against gains to reduce the overall tax liability.
Joint ownership: Selling a jointly owned property allows gains to be split among co-owners, which may lower individual tax exposure.
Include transfer expenses: Deduct brokerage, legal fees, and other sale-related expenses from the sale consideration to reduce taxable capital gains.
How to report short term capital gains in income tax returns?
To report short-term capital gains on your income tax returns, follow these steps:
Form 16: The sale of property should be reported under “Capital Gains” in your Income Tax Return (ITR).
Schedule CG: Declare the short-term capital gain in the appropriate section of the return.
Tax payment: Pay the applicable STCG tax and ensure that all expenses are accounted for in the calculations.
Conclusion
Understanding Short-Term Capital Gains (STCG)tax is essential for anyone involved in property sales, especially when considering the loan against property option. By knowing how to calculate property gain tax, the tax rates, and exemptions available, property owners can make informed decisions that minimise their tax burden. For those considering a loan against property, understanding the tax implications is crucial, as the proceeds from property sales used for loan repayment may also influence the overall financial strategy. It is important to keep track of changes in tax laws, carefully calculate your holding period, and ensure that eligible deductions and exemptions are applied to optimise tax savings.
Some related sections in India
Understanding related legal and tax provisions helps ensure compliance during property transactions. Below are important sections and tax aspects connected to property transfers in India:
