When it comes to selling property, understanding the tax implications is crucial. One of the key taxes involved is the Short-Term Capital Gains (STCG)tax, which applies when a property is sold within a certain period after purchase. This tax is levied on the profit earned from the sale of a property or asset, and the amount varies depending on the holding period and applicable tax rates. In this article, we will explore how to calculate short term property gain tax, what factors influence the STCG tax, and how exemptions can reduce the overall tax liability.
What is short-term property gain tax?
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.
Definition of Short Term Capital Gains (STCG)
Short-Term Capital Gains (STCG) refers to the profits made from the sale of an asset, such as property, that has been held for a short period. According to Indian tax laws, any asset held for less than 24 months qualifies for short-term capital gain tax if sold for a profit. This gain is calculated as the difference between the sale price and the purchase price, after considering any allowable deductions. The key characteristic of STCG is that it is taxed at a higher rate compared to long-term capital gains.
Criteria for short term capital gains on property
For property sales to be subject toShort-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 forShort-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 calculateShort-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 demonstratehow 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, theshort-term capital gainis 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 calculatingshort-term capital gainstax. These deductions help reduce the taxable gain, and they include:
Brokerage fees: Fees paid to brokers or agents during the sale process.
Legal costs: Legal fees associated with the property sale.
Stamp duty: Stamp duty paid during the property purchase or sale process.
Improvement costs: Costs incurred for renovating or improving the property can be deducted from the sale consideration.
Expenses deductible from sale consideration
Brokerage fees: Brokerage charges are generally a percentage of the sale amount.
Legal charges: Legal costs related to title transfer, contracts, or disputes.
Stamp duty: Applicable stamp duty at the time of purchase or sale.
Renovation expenses: Any improvement made to the property that enhances its value.
Impact of holding period on taxation
Theholding periodof a property significantly impacts whether it is subject toShort-Term Capital Gains (STCG)orLong-Term Capital Gains (LTCG). A property held for less than 24 months is taxed as STCG, which attracts a higher tax rate. If the holding period exceeds 24 months, it qualifies for LTCG, which benefits from lower tax rates and more exemptions.
Differences between short term and long term capital gains
| 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 24 months of purchase, it is subject to short-term capital gains tax. This means the profit earned will be taxed at a higher rate, currently at 30%, plus any applicable cess. The property seller will not be eligible for exemptions or reliefs available for long-term gains, which makes it crucial to plan the sale carefully to avoid a hefty tax liability.
Exemptions and reliefs available for STCG
Several exemptions and reliefs can reduce the short-term capital gains tax:
Section 54: This section applies to residential property sales. If the property is sold and the proceeds are reinvested in a new residential property, STCG tax can be reduced or exempted.
Section 54F: Similar to Section 54 but applies when the seller sells a long-term asset and invests in residential property.
Section 54EC: Exemption is available if the seller invests the proceeds in specified bonds, such as bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC).
Section 54 and its applicability to STCG
Section 54allows individuals to claim exemption from STCG tax if they sell a residential property and reinvest the capital gain in another residential property. The new property must be purchased within a certain timeframe after the sale. The exemption is available only if the property is used for residential purposes.
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 optimize tax benefits.
Common mistakes to 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
- Invest in another residential property:
Under Section 54, reinvest the sale proceeds in another residential property within the prescribed time to claim exemption on long-term capital gains. - Capital Gains Account Scheme (CGAS):
If you’re unable to reinvest immediately, deposit the gains in a CGAS account before the due date of filing your ITR to retain tax exemption eligibility. - Invest in specified bonds:
Under Section 54EC, invest up to ₹50 lakh in NHAI or REC bonds within six months of the sale to claim exemption on long-term gains. - Set off capital losses:
Use capital losses (short or long-term) from other assets to offset your capital gains, reducing overall tax liability. - Joint ownership:
Selling a jointly-owned property can help split the gain between co-owners, potentially lowering the individual tax burden. - Include transfer expenses:
Deduct brokerage, legal fees, and other sale-related expenses from sale proceeds 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 minimize 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 optimize tax savings.
