Short-Term Capital Gain Tax on Property

When the capital asset is sold, a capital gain or a capital loss arises. The definition of capital assets includes immovable assets like land, building and house property. Any profit or income arising from the sale of capital assets is either a short-term capital gain or a long-term capital gain.

If the property is sold before 24 months from the date of acquisition, gain on such transfer is termed as a short-term capital gain. Any gain on property transfer after 24 months of purchase is termed as a long-term capital gain.

Short-Term Capital Gain Calculation:

Short-Term Capital Gain = Sale consideration of the property (less) Cost of acquisition (less) Improvement cost of asset (less) Transfer expenses

For Illustration: Suppose an individual is in the 30% tax bracket and he sells a property within 24 months of its purchase. He received a sale consideration of Rs.15 lakh, and the cost incurred for the acquisition of such property was Rs.5 lakh. Hence, there is a short-term capital gain of Rs.10 lakh.

Terms Related to the Calculation of Short-Term Capital Gain on Property:

The Full Value of Consideration or Sale Consideration

The amount of consideration received or charged by the seller on the sale of the property. 

However, in Finance Act 2002, a new provision was inserted where if the sale value is less than the value adopted by the Stamp Valuation Authority (SVA), then value as per SVA must be deemed to be the value of sale consideration.

However, in Finance Act 2018, the said section was amended and the variation of up to 5% was allowed between the sale value and value as per SVA. 

Further in Finance Act 2020, the variation of 5% was increased to 10% and hence, if the sale value is less than the value adopted by the Stamp Valuation Authority (SVA) and the variation is more than 10% of the sale value, then value as per SVA shall be deemed to be the value of sale consideration. This is applicable with effect from 1st April 2021.

For example, in the above case, if the sale value claimed is Rs.15 lakh and the value adopted by SVA is Rs.18 lakh, the difference between these two values is more than 10%. Hence, the value to be adopted for sale consideration shall be Rs.18 lakh. Hence, in the above example, the short term capital gain will be Rs.13 lakh. 

Cost of Acquisition

The cost of acquisition is the price paid for acquiring the property sold. It includes all the expenses incurred that are ancillary to the purchase of such property. Ancillary expenses can be brokerage commission, legal cost and any other cost associated with purchasing a residential property.

Note: Any property transferred by way of the gift shall not attract capital gain/loss. However, if the property is further sold, then the capital gain shall arise. Also, the cost of acquisition shall cost to the previous owner, and the period of holding of the previous owner shall also be considered. 

For example, Mr A gifted the property (purchased on 1st April 2019 for Rs.5 lakh) to Mr B on 1st October 2019, and Mr B had sold the same property on 31st May 2020 to Mr C at Rs.20 lakh.

In the above case, there is no capital gain on the transfer of property when Mr A gifts property to Mr B. However, capital gain shall arise when Mr B transfers property to Mr C. The holding period shall be calculated from the date of acquisition of property by Mr A (1st April 2019) to the date of transfer of property by Mr C (31st May 2020), i.e. 14 months. Hence, it is a short-term capital gain of Rs.15 lakh.

Improvement Cost Of Asset

If the property owner incurs expenditure on the modification of the property sold, such expenses shall fall under the cost of asset improvement. Expenses such as repairs and maintenance, the cost for making any addition to the property, etc.

Transfer Expenses

Legal cost or other expenses incurred about the property sale can be considered transfer expenses.

*Exception: The transfer of immovable assets, which are stock in trade, shall not be considered capital gain. For example, a property dealer purchasing a residential property for resale purposes will not attract capital gain tax.

Tax on Short-Term Capital Gain

shall be calculated based on the person’s income tax slab rates. The short term capital gain will be included in the total income of the person, and tax will be computed as per the income tax slab.

For Illustration: Mr J who had purchased a property in October 2018 for Rs.30 lakh, sold it in January 2020 at Rs.50 Lakh. As per his income, Mr J falls in the highest tax slab of 30%. Mr J spent around Rs.4 lakh on house improvement during the period of holding the property. And also paid a brokerage of 0.2 per cent of the sale value, at the time of selling the house.

In this illustration, The property is sold within 2 years of the purchase, which will be considered as a short term capital gain and will be taxed as short term capital gains tax. Also Mr J earns income from a salary of Rs.6 lakh in a financial year.

In this case, as shown below, Mr J’s short term capital gains will be Rs.15.9 Lakh and he is liable to pay a tax as calculated below

Particulars	Amount (in Rs.)	Amount (in Rs.)
Income under the Salary		6,00,000
Income from Capital Gains
Sale price of the house	50,00,000
Less: Transfer expenses (Brokerage)	(10,000)
Net Sale Consideration	49,90,000
Less: Purchase cost	(30,00,000)
Less: House improvement costs	(4,00,000)
Short Term Capital Gain	15,90,000	15,90,000
Gross Total Income		21,90,000
Chapter VI-A Deductions		Nil
Taxable Income		21,90,000
Income Tax thereon		4,69,500
Cess @4%		18,780
Total Tax Liability		4,88,280

Tax exemptions in case of short-term capital gain

For short-term capital gain, the person can benefit from the basic exemption limit of the income tax slabs. 

Hence, the following persons can take the benefit of the basic exemption limit.

• If total taxable income (excluding short term capital gains) stays within Rs.2,50,000 for resident  individuals below 60 years, HUF and NRI, then unutilised exemption can be adjusted against short term capital gain.
• If total taxable income (excluding short term capital gains) stays within Rs.3,00,000 for senior citizens (60-80 years), then unutilised exemption can be adjusted against short term capital gain.
• If total taxable income (excluding short term capital gains) stays within Rs.5,00,000 for super senior citizens (older than 80 years), then unutilised exemption can be adjusted against short term capital gain.
• However, if the taxpayer opts of new tax regime from FY 2020-21, then the benefit of basic exemption limit is available up to Rs.2.5 lakh for every individual, irrespective of their age, and HUF.