Urbanization and population growth have caused increased pressure on land and other natural resources. Land use planning tries to regulate the use of land through efficient resource use for promoting sustainable development. Urbanization, industrialization (quarrying and hydropower generation), and intrusion of commercial activities (tourism) are imposing threats to the hilly areas. Hilly areas have fragile ecosystems, so planning and development strategies for them need added understanding and comprehensive land use and settlement planning. This paper studies the hill and capital city Gangtok, Sikkim, India. It has more than 65 percent of the total urban population of Sikkim. Gangtok is experiencing extensive conversion of natural forest and farmland for development activities like residential, commercial, industrial, and transportation for the last few decades. These unsystematic land use changes and a significant outward extension of urban areas at the fringes affected the fragile ecosystem. Thus, this study aims to provide a sustainable planning approach for the hill city. The city’s growth and land cover changes are recorded over the years. The existing land uses are mapped and the ward’s characteristics are identified through the primary survey. The city’s carrying capacity is computed and a land suitability map is generated in the geographical information system by overlaying various maps like the land cover, landslide, vulnerability, slope, etc. The small, medium, and long-term recommendations are proposed to direct the future growth of the city in a sustainable way. This study provides a sustainable land use assessment framework that can be adopted in any other Hill Cities.