Capital Gains

Charging Section

General

Section 45(1)

Any profits or gains arising from the transfer of a capital asset effected in the previous year
shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H,
be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the
income of the previous year in which the transfer took place.

Transfer
Section 2(47) defines the word transfer. As per the provisions of Section 2(47), transfer in
relation to a capital asset, includes:
 the sale, exchange or relinquishment of the asset ; or

 the extinguishment of any rights therein ; or

 the compulsory acquisition thereof under any law ; or

 in a case where the asset is converted by the owner thereof into, or is treated by him as,
stock-in-trade of a business carried on by him, such conversion or treatment ; or

 the maturity or redemption of a zero coupon bond; or

 any transaction involving the allowing of the possession of any immovable property to be
taken or retained in part performance of a contract of the nature referred to in section
53A of the Transfer of Property Act, 1882; (Part-performance of the contract)or

Example:
Mr. X enters into an agreement for the sale of his house. The purchaser gives the entire
sale consideration to Mr. X. He hands over complete rights of possession to the
purchaser since he has received the entire sale consideration.

Under the Income-tax Act, the above transaction is considered as transfer.

 any transaction (whether by way of becoming a member of, or acquiring shares in, a co-
operative society, company or other association of persons or by way of any agreement
or any arrangement or in any other manner whatsoever) which has the effect of
transferring, or enabling the enjoyment of, any immovable property.

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Capital Asset

According to Section 2(14), Capital Asset means-

a. property of any kind held by an assessee, whether or not connected with his business or
profession;

b. any securities held by a Foreign Institutional Investor which has invested in such
securities in accordance with the SEBI regulations.

c. any unit linked insurance policy (ULIP) issued on or after 1.2.2021, to which exemption
under section 10(10D) does not apply on account of premium payable exceeding Rs.
2,50,000 for any of the previous years during the term of such policy;

But does not include

a. any stock-in-trade [other than the securities referred to in (b)], consumable stores or raw
materials held for the purposes of his business or profession;

b. personal effects, that is to say, movable property (including wearing apparel and
furniture) held for personal use by the assessee or any member of his family dependent
on him but excludes

i. jewellery;
ii. archaeological collections;
iii. drawings;
iv. paintings;
v. sculptures; or
vi. any work of art

"jewellery" includes
(a) ornaments made of gold, silver, platinum or any other precious metal or any alloy
containing one or more of such precious metals, whether or not containing any
precious or semi-precious stone, and whether or not worked or sewn into any wearing
apparel;

(b) precious or semi-precious stones, whether or not set in any furniture, utensil or
other article or worked or sewn into any wearing apparel;

c. Rural agricultural land in India

d. Specified Gold Bonds: 6½% Gold Bonds, 1977, or 7% Gold Bonds, 1980, or National
Defence Gold Bonds, 1980, issued by the Central Government;

e. Special Bearer Bonds, 1991 issued by the Central Government;

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 f. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates
issued under the Gold Monetisation Scheme, 2015 and Gold Monetisation Scheme, 2019
notified by the Central Government.

Explanation 1 to Section 2(14) clarifies that "property" includes and shall be deemed to have
always included any rights in or in relation to an Indian company, including rights of management
or control or any other rights whatsoever.

Rural Agricultural Land

As per the definition, only rural agricultural lands in India are excluded from the purview of the
term ‘capital asset’. Hence urban agricultural lands constitute capital assets.

Accordingly, the agricultural land described in (a) and (b) below, being land situated within the
specified urban limits, would fall within the definition of “capital asset”, and transfer of such land
would attract capital gains tax. They are:
(a) agricultural land situated in any area within the jurisdiction of a municipality or
cantonment board having population of not less than ten thousand, or

(b) agricultural land situated in any area within such distance, measured aerially, in
relation to the range of population as shown hereunder

Shortest aerial distance from Population according to the last

the local limits of a municipality preceding census of which the
or cantonment board referred to relevant figures have been published
in item (a) before the first day of the previous
year.

(i) ≤ 2 kms > 10,000

(ii) > 2 kms but ≤ 6 kms > 1,00,000

(iii) > 6 kms but ≤ 8 kms > 10,00,000

Insurance Receipts

As per the provisions of Section 45(1A), where any person receives at any time during any
previous year any money or other assets under an insurance from an insurer on account of
damage to, or destruction of, any capital asset, as a result of—
(i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or

(ii) riot or civil disturbance; or

(iii) accidental fire or explosion; or

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 (iv) action by an enemy or action taken in combating an enemy (whether with or
without a declaration of war),

then, any profits or gains arising from receipt of such money or other assets shall be chargeable
to income-tax under the head "Capital gains" and shall be deemed to be the income of such
person of the previous year in which such money or other asset was received.

In order to compute capital gains, the value of any money or the fair market value of other assets on
the date of such receipt shall be deemed to be the full value of the consideration received or accruing
as a result of the transfer of such capital assets

Conversion

According to Section 45(2), Notwithstanding anything contained in sub-section (1), the profits
or gains arising from the transfer by way of conversion by the owner of a capital asset into, or
its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to
income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise
transferred by him.

In order to compute the capital gains, the fair market value of the asset on the date of such
conversion or treatment shall be deemed to be the full value of the consideration received as a result
of the transfer of the capital asset.

Book Transfer

Under Section 45(3), the profits or gains arising from the transfer of a capital asset by a person
to
 a firm or
 other association of persons or body of individuals (not being a company or a co-
operative society) in which
 he is or becomes a partner or member,
 by way of capital contribution or otherwise,

shall be chargeable to tax as his income of the previous year in which such transfer takes place.

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Transactions not regarded as Transfer

As per the provisions of Section 47, nothing contained in section 45 shall apply to the
following transfers

i. any distribution of capital assets on the total or partial partition of a Hindu undivided
family.

ii. any transfer of a capital asset under a gift or will or an irrevocable trust.

iii. any transfer of a capital asset by a company to its subsidiary company, if—
a. the parent company or its nominees hold the whole of the share capital of the
subsidiary company, and
b. the subsidiary company is an Indian company.

iv. any transfer of a capital asset by a subsidiary company to the holding company, if—
a. the whole of the share capital of the subsidiary company is held by the holding
company, and
b. the holding company is an Indian company.

v. any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating

company to the amalgamated company if the amalgamated company is an Indian
company.

vi. any transfer, in a demerger, of a capital asset by the demerged company to the resulting
company, if the resulting company is an Indian company.

vii. any transfer in a business reorganisation, of a capital asset by the predecessor co-
operative bank to the successor co-operative bank.

viii. any transfer or issue of shares by the resulting company, in a scheme of demerger to the
shareholders of the demerged company if the transfer or issue is made in consideration
of demerger of the undertaking.

ix. any transfer by way of conversion of bonds or debentures, debenture-stock or deposit

certificates in any form, of a company into shares or debentures of that company.

x. any transfer by way of conversion of preference shares of a company into equity shares
of that company.

xi. any transfer of a capital asset, being any work of art, archaeological, scientific or art
collection, book, manuscript, drawing, painting, photograph or print, to the Government
or a University or the National Museum, National Art Gallery, National Archives or any
such other public museum or institution as may be notified by the Central Government in
the Official Gazette to be of national importance or to be of renown throughout any State
or States.

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Types of Capital Assets
There are two types of Capital Assets. One which are held for shorter duration is called ‘Short-
term Capital Asset’ and the other category is referred to as ‘Long-term Capital Asset.’

Short-term Capital Asset

As per section 2(42A), short-term capital asset means a capital asset held by an assessee for not
more than 36 months immediately preceding the date of its transfer.

Long-term Capital Asset

As per section 2(29A), long-term capital asset means a capital asset which is not a short-term
capital asset.

Category of Asset Period to be considered as Long-term

Capital Asset
 A security (other than a unit) listed in a
recognized stock exchange (other than
market linked debenture and unit of a
specified mutual fund), or more than 12 months immediately preceding
the date of its transfer
 a unit of an equity-oriented fund or a unit
of the Unit Trust of India or

 a Zero Coupon Bond will

 a share of a company (not being a share
listed in a recognized stock exchange in
India) or more than 24 months immediately preceding
the date of its transfer
 an immovable property, being land or
building or both
Other Categories more than 36 months immediately preceding
the date of its transfer

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Computation of Capital Gains

Short-term Capital Gains

Particulars Amt Amt

Full value of consideration received or accruing as aresult xxx

of transfer
In case of a Short-term capital asset

Less: Expenditure incurred wholly and exclusively in xxx

connection with such transfer (for e.g., brokerage on sale)
(Note: Deduction on account of STT paid will not be
allowed)
xxx
(STCA)

Net Sale Consideration

Less: Cost of acquisition (COA) [Refer table at page 3.459] xxx
Cost of improvement (COI) [Refer table at page3.462] xxx xxx

Short-term capital gain (STCG) xxx

Less: Exemption under sections 54B/54D xxx
Short-term capital gain chargeable to tax xxx

Long-term Capital Gains

Full value of consideration received or accruing as aresult of xxx

transfer
Less: Expenditure incurred wholly and exclusively in xxx
In case of a Long-term capital asset (LTCA)

connection with such transfer (for e.g., brokerage on sale)

(Note: Deduction on account of STT paid will not beallowed)
Net Sale Consideration
xxx
Less: Indexed cost of acquisition (ICOA)
xxx
CII for the year in which the asset is
transferred
Cost of
× CII for the year in which the asset was
acquisition
first held by the assessee or P.Y. 2001-02,
whichever is later
Note: Benefit of indexation will, however, not be available in
respect of LTCG taxable u/s 112A and LTCG from transfer of bonds
or debentures (other than capital indexed bonds issued by the
Government and sovereign gold bonds issuedby RBI)

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Less: Indexed cost of improvement (ICOI) xxx xxx
CII for the year in which the asset is
Cost of transferred
×
improvement CII for the year in which the
improvement took place
Long-term capital gains (LTCG) xxx
Less: Exemption under sections 54/54B/54D/54EC/54F xxx

Long-term capital gains chargeable to tax xxx

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