Short-term and Long-term Capital Gains on Property in India with the New Tax Scheme (2024): Explained with Examples

When you sell a property in India, the profit you make is classified as either short-term capital gain (STCG) or long-term capital gain (LTCG), depending on the holding period of the property. The tax treatment of these gains is significantly influenced by whether the sale happens under the new tax regime, which was introduced in the Union Budget 2024. Let’s break this down with examples to help you understand it better.

1. Understanding Short-Term and Long-Term Capital Gains

Short-term capital gain (STCG):

• Definition: If the property is sold within two years of purchase, it is considered a short-term capital asset.
• Tax Rate: Under the new tax regime, STCG on property is taxed at 30% (plus applicable surcharge and cess).

Long-term capital gain (LTCG):

• Definition: If the property is sold after holding it for more than two years, it is treated as a long-term capital asset.
• Tax Rate: Under the new tax regime, LTCG is taxed at 20% with the benefit of indexation (if chosen), or 12.5% without indexation.

2. What is Indexation?

Indexation is a method used to adjust the purchase price of a property for inflation. This means the cost of acquisition is adjusted for inflation, reducing the capital gains tax burden when the property is sold. This can lower the overall taxable amount.

• With Indexation: You calculate the capital gain by adjusting the purchase price based on inflation (as per the Cost Inflation Index or CII issued by the government).
• Without Indexation: You calculate the capital gain using the original purchase price without adjusting for inflation.

3. New Tax Scheme in 2024

The 2024 tax reforms provide two options:

1. New tax regime (reduced tax rates, no exemptions)
2. Old tax regime (standard rates, with exemptions like section 80C, 80D, etc.)

For the capital gains tax on property, the new regime offers reduced rates without the ability to claim exemptions such as indexation. However, taxpayers still have the choice to opt for the old tax regime if they wish to avail of the benefits of indexation and other exemptions.

4. Examples of STCG and LTCG on Property in 2024

Example 1: Short-Term Capital Gain (STCG)

• Property purchased: ₹50,00,000
• Property sold: ₹55,00,000
• Holding period: 1 year (short-term, as it’s less than 2 years)

Since the property is sold within 2 years, the gain qualifies as a short-term capital gain. The taxable amount is calculated as:

STCG = Sale Price – Purchase Price = ₹55,00,000 – ₹50,00,000 = ₹5,00,000

Tax payable (30% on STCG):
Tax = ₹5,00,000 × 30% = ₹1,50,000

So, the tax payable on the short-term gain is ₹1,50,000.

Example 2: Long-Term Capital Gain (LTCG) with Indexation

• Property purchased: ₹50,00,000 (in 2015)
• Property sold: ₹80,00,000 (in 2024)
• Holding period: 9 years (long-term)

In this case, the property is held for more than 2 years, so it qualifies as a long-term capital gain. If you choose indexation, we adjust the purchase price according to inflation, which can significantly reduce the capital gains tax.

Let’s assume the Cost Inflation Index (CII) for 2015 is 240 and for 2024 is 350 (these values are indicative and can vary based on government updates).

Indexed Cost of Acquisition = Purchase Price × (CII for year of sale / CII for year of purchase)
Indexed Cost of Acquisition = ₹50,00,000 × (350 / 240) = ₹72,91,667

Long-Term Capital Gain = Sale Price – Indexed Cost of Acquisition
LTCG = ₹80,00,000 – ₹72,91,667 = ₹7,08,333

Tax payable (20% on LTCG with indexation):
Tax = ₹7,08,333 × 20% = ₹1,41,667

So, the tax payable on the long-term gain with indexation is ₹1,41,667.

Example 3: Long-Term Capital Gain (LTCG) without Indexation

• Property purchased: ₹50,00,000 (in 2015)
• Property sold: ₹80,00,000 (in 2024)
• Holding period: 9 years (long-term)

This time, let’s assume the taxpayer opts for no indexation. The capital gain is simply calculated using the original purchase price.

Long-Term Capital Gain = Sale Price – Original Purchase Price
LTCG = ₹80,00,000 – ₹50,00,000 = ₹30,00,000

Tax payable (12.5% on LTCG without indexation):
Tax = ₹30,00,000 × 12.5% = ₹3,75,000

So, the tax payable on the long-term gain without indexation is ₹3,75,000.

5. Conclusion: Which Option Should You Choose?

• Short-Term Capital Gain (STCG): You have no option but to pay 30% tax on the gain if the holding period is less than 2 years.
• Long-Term Capital Gain (LTCG) with Indexation: This is generally more favorable, as it reduces the taxable amount significantly due to inflation adjustments. The tax rate is also lower (20%).
• Long-Term Capital Gain (LTCG) without Indexation: If you do not opt for indexation, your tax burden will be higher, as the gain is calculated using the original purchase price and taxed at 12.5%.

Ultimately, if you’re selling a property with a long holding period, choosing indexation can be a more tax-efficient option. The new tax regime might be attractive for taxpayers who want simpler tax calculations but may miss out on these benefits.

Always consult with a tax advisor to choose the best option based on your individual financial situation.