Short Term Capital Gain Tax on Sale of Property - Tax Exemption & How to Calculate?

What is a Short-term Capital Asset?

Any sale of a capital asset results in either profit or loss. A short-term capital asset is a property or an asset that is sold before 24 months of purchasing or acquiring it. Such a property is known as short-term capital asset. On the other hand, any gain arising on the transfer of property after 24 months (immovable asset) or 36 months (movable asset) from the date of acquisition is known as long-term capital gain.

What is a Short-term Capital Gain on Property?

When an asset is sold before the completion of 24 months or 36 months of acquiring it, then it is called a capital asset.

Short-term capital gain on property arises when a capital asset is sold within 24 months or 36 months of acquiring it.

What is the Short-term Capital Gain Tax on the Sale of Property?

Short-term capital gain is the profit realized from the sale of a capital asset if it has been held for less than 12 months, 24 months, or 36 months depending on the nature of the capital asset. The minimum holding period for a gain to be qualified as short-term capital gain in the case of the sale of the property is 24 months.

Short-term capital gains on sale of property are taxed based on the individual's income tax slab rates. For example, if someone earns a short-term capital gain of Rs 6 lakh and falls into the 30% tax bracket, they must pay 31.20% on the Rs 6 lakh, totaling Rs 1,87,200. The gain or loss from selling the asset is determined by subtracting the purchase cost, improvement expenses, and sale-related expenses from the sale proceeds.

Formula for Calculating Short-term Capital Gain Tax on Property

The short-term capital gain on sale of property is calculated using the following formula -

Short-term Capital Gain = Sale value of the property - (cost of acquisition + expenses incurred + cost of asset improvement).

The resultant value is short-term capital gain, which is later taxed at the slab rates applicable to the individual taxpayer depending on the total taxable income of the assessee. Suppose, the assessee falls within the 10% tax bracket, then the short term capital gain tax rate on property.

How to Determine if an Asset is a Short-term Capital Asset?

Any immovable property that is sold or transferred before the completion of 24 months is considered a short-term capital asset. Immovable Short-term assets include -

• Buildings, lands, houses, and residential units.
• Agricultural land, barring some exceptions.

Property investment can be helpful in the long run as its price increases significantly. It is also independent of the market, ensuring profits in every situation.

How to Calculate Short-term Capital Gain from the Sale of Property?

While calculating the short-term capital gain, it is necessary to include certain factors like the expenses incurred while selling the asset, net sale consideration, and sale value of the asset. Let’s understand the Short-term gain calculation on a property with the help of an example -

Mr. Sharma, who is a salaried employee, purchased a house worth Rs.10,00,000 in Oct 2020. He sold that property in July 2021 for Rs.10,80,000 and paid a brokerage of Rs.12,000 at the time of selling the property.

Since the holding period of the property is only nine months, the profits made from the sale will be considered as short-term capital gain and will attract short-term capital gains tax on property.

In this example, the total taxable amount will be calculated as follows -

What are the Tax Exemptions Available in Case of Short-term Capital Gains?

There are certain tax exemptions that can be claimed on the short-term capital gain from property. Given below are the exemptions available on short-term capital gains on property -

• If the individual’s total taxable income (except short-term capital gains) is less than Rs.2,50,000 for HUF, NRI, and resident individuals below 60 years of age. In such a case, the unavailed or unutilized amount of exemption can be adjusted against the short-term capital gain to reduce the tax liability.
• If total taxable income (excluding short-term capital gains) is less than Rs.3,00,000 for senior citizens (above 60 years), then the unavailed exemption can be adjusted against the short-term capital gain.
• If the total taxable income (excluding short-term capital gains) is less than Rs.5,00,000 for super senior citizens (above 80 years), then too the unutilized amount of exemption can be used to reduce the tax on short-term capital gains on property.
• If a taxpayer opts for the new tax regime, the basic exemption limit will be 3 lakh only for all ages of taxpayers, whether individual or HUF.

Important Definitions Related to Short-term Capital Gain on Sale of Property

Sale Consideration or Full Value of Consideration

The total amount of consideration received or charged by the seller on the sale of the property. As per the new provision inserted in the Finance Act 2002, where if the sale consideration is less than the property value adopted by the Stamp Valuation Authority (SVA), then the value as per SVA is deemed to be the value of the sale consideration.

Cost of Acquisition

The cost of acquisition is the price of the property paid for purchasing or acquiring it. It includes all the expenses incurred at the time of acquisition of the property. These expenses can include legal costs, brokerage, and commission.

Any property received as a gift does not attract capital gains/losses. However, when this property is sold further, it attracts capital gains. The cost of acquisition and the holding period, in this case, shall be calculated from that of the previous owner.

Improvement Cost of Asset

The cost incurred on the repair, maintenance, or modification of the property by the property owner is known as the cost of improvement.

Transfer Expenses

Legal costs or other costs incurred at the time of the sale of property are considered transfer expenses.

Note: The cost of acquisition and cost of improvement does not include the benefit of indexation in the case of short-term capital gains.

However, the gain transfer of immovable assets that are stock in trade is not considered capital gain. For example, if a property dealer purchases property for sale, it is not considered to be capital gain.

It is important for individuals to know about the tax on short-term capital gain on property, the tax exemptions available, and how to calculate the tax exemption. Now that you know all that you must about the short-term capital gains tax rate on property, you can calculate your STCG on sale of propert. And if you find taxes complicated, you can also seek professional advice from tax experts. Tax2win has a team of experts having more than a decade of industry experience to help you streamline your taxes.

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