Capital Gains

CAPITAL GAINS
CHAPTER 12
CAPITAL GAINS
“The Expert in anything was once a Beginner”
CA NIKUNJ GOENKA 12.1

CAPITAL GAINS
CHAPTER OVERVIEW
S.L.
TOPIC
No
1 CHARGING SECTION
2 MEANING OF TRANSFER AND CAPITAL ASSET
3 TYPES OF CAPITAL ASSETS

4 MODE OF COMPUTATION OF CAPITAL GAINS
5 SPECIAL CASES OF CAPITAL GAINS
(i) TRANSFER OF LAND OR BUILDING AS CAPITAL ASSET
(ii) TRANSFER OF LAND OR BUILDING AS STOCK
(iii) CAPITAL GAINS TAXABLE ON RECEIPT BASIS

TRANSFER BETWEEN PARTNER AND PARTNERSHIP FIRM
(iv)
AND VICE VERSA
(v) CONVERSION OF CAPITAL ASSET INTO STOCK IN TRADE
(vi) CAPITAL GAINS ON SLUMP SALE
(vii) CAPITAL GAINS ON TRANSFER OF INTANGIBLE ASSETS
(viii) CAPITAL GAINS ON JOINT DEVELOPMENT AGREEMENTS
(ix) CAPITAL GAINS ON UNQUOTED SHARES

CAPITAL GAINS
6 TRANSFER OF SHARES AND SECURITIES
7 TRANSACTIONS NOT REGARDED AS TRANSFER
8 EXEMPTIONS UNDER CAPITAL GAINS
9 CAPITAL GAINS ON LIQUIDATION & BUY-BACK
10 TAX RATES ON CAPITAL GAINS

CAPITAL GAINS
INCOME FROM CAPITAL GAINS

(Sections 45 to 55A of the Act)
PART A: INTRODUCTION AND CHARGING SECTION

The Income-tax Act, 1961 charges income-tax on revenue receipts and not capital receipts “unless
otherwise specifically mentioned in provisions of the Act”. Capital Gains covers all capital receipts
which are chargeable to income-tax.
CHARGING SECTION [Section 45(1)]

“Any profit or gains arising from the TRANSFER of a CAPITAL ASSET in the previous year in which the
transfer took place (other than prescribed exemptions) is chargeable to tax under the head “CAPITAL
GAINS”
Capital gains is NOT chargeable if ANY one of the following conditions are not fulfilled:
• There should be a Capital Asset; and

• There should be Transfer of such Capital Asset.
Year of chargeability - Capital gains are chargeable as the income of the previous year in which the sale
or transfer takes place. In other words, for determining the year of chargeability, the relevant date of
transfer is not the date of the agreement to sell, but the actual date of sale i.e., the date on which the
effect of transfer of title to the property as contemplated by the parties has taken place. [Alapati
Venkatramiah v. CIT [1965] 57 ITR 185 (SC)]
However, as already noted, Income-tax Act has recognised certain transactions as transfer in spite of the
fact that conveyance deed might not have been executed and registered. Power of Attorney sales as
explained above or co-operative society transactions for acquisition of house are examples in this regard.
DEFINITION OF A CAPITAL ASSET [Section 2(14)]

Capital Assets means —
a) Property of any kind held by an assessee, whether connected with his business or profession or
not.
b) Any securities held by a Foreign Industrial Investor (FII) which has invested in such securities in
accordance with the regulations made under the Securities Exchange Board of India Act 1992.
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 –
(i) premium payable exceeding ₹ 2,50,000 for any of the previous years during the term of
such policy; or

CAPITAL GAINS
(ii) the aggregate amount of premium exceeding ₹ 2,50,000 in any of the previous years
during the term of any such ULIP(s), in a case where premium is payable by a person for
more than one ULIP issued on or after 1.2.2021. [Inserted vide Finance Act 2021]
Explanation: “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.
SPECIFIC EXCLUSIONS from definition of capital asset
Stock-in-trade
Deposit
certificates* Personal
Moveable Assets
Gold Deposit
bonds**
Agricultural Land
in Rural India
*Issued under Gold Monetization Scheme, 2015 Ι ** Issued under Gold Deposit Scheme, 1999
Stock-in-trade: Any stock-in-trade, consumable stores or raw materials held for purpose of business or
profession of the assessee. [Example: Inventories are business assets]
Personal Moveable Assets: MOVABLE + PERSONAL (including wearing apparel and furniture) held for
personal use by the assessee or any member of his family dependent on him [Immovable property and
assets held for business purpose are CAPITAL ASSETS]
Agricultural Land in Rural Area: [Non-Agricultural land is always a capital asset]

a) Agriculture land situated not in any area within the jurisdiction of a municipality or cantonment
board having population of 10,000 or more; or
b) Agricultural land not situated in any area as mentioned below
Population according to last preceding census of Shortest aerial distance from the local limits
which the relevant figures have been published of a municipality or cantonment board
before the first day of the previous year referred to in item (a)
More than 10,000 to 1,00,000 Within 2 kms
More than 1,00,000 to 10,00,000 Within 6 kms
More than 10,00,000 Within 8 kms

CAPITAL GAINS
Transfer of Urban Agricultural land is not considered as Agricultural Income. Accordingly, gain on such
transfer is chargeable to tax under Section 45
Specific Inclusions in definition of capital asset

[Irrespective of the fact whether it is personal and moveable]
(1) Jewellery (2) Archaeological collection (3) Drawings (4) Paintings (5) Sculptures (6) Any work of art
(7) Security held by FII shall always be treated as Capital Assets even if held as stock in trade [To boost
foreign investments in Indian economy]
Examples: State whether following are capital assets
Personal Bicycle
Household Machinery and Furniture
Personal Land and Building
Business Motor Car
Agricultural land in UK
Agricultural land in Bangalore
MEANING OF TRANSFER [Section 2(47)]

The Act contains an inclusive definition of the term “transfer”. Accordingly, transfer in relation to a
capital asset includes the following types of transactions:
(i) the sale, exchange or relinquishment of the asset; or
(ii) the extinguishment of any rights therein; or
(iii) the compulsory acquisition thereof under any law; or
(iv) owner of a capital asset may convert the same into the stock-in-trade of a business carried on by
him. Such conversion is treated as transfer; or [refer Section 45(2)]
(v) the maturity or redemption of a Zero-Coupon Bond; or
ZCBs means a bond issued by any infrastructure capital company or infrastructure capital fund or
a public sector company or a scheduled bank on which no payment and benefit is received or
receivable before maturity or redemption from such issuing entity and which the Central
Government may notify in this behalf.
(vi) Part-performance of the contract: Sometimes, possession of an immovable property is given in
consideration of part-performance of a contract. Example: A enters into an agreement for the
sale of his house. The purchaser gives the part sale consideration to A. A hands over complete
rights of possession to the purchaser since he has realized part sale consideration.

CAPITAL GAINS
(vii) Transactions which have effect of transferring / enabling enjoyment of an immovable property.
Example: Person may become a member of a co-operative society, company or other association
of persons which may be building houses/flats. When he pays an agreed amount, the society etc.
hands over possession of the house to the person concerned. No conveyance is registered.
PART B: TYPES OF CAPITAL ASSETS
Short term Capital Asset Long term Capital Asset
General Capital Assets

Period of holding is ≤ 36 months before the Period of holding is > 36 months before the
date of transfer date of transfer
Special Capital Assets

Period of holding of following assets is ≤ 12 Period of holding of such assets is > 12 months
months (instead of 36 months) before the date (instead of 36 months) before the date of
of transfer transfer
(a) Listed shares
(b) Units of Mutual Fund (Only Equity Oriented Fund) [Debt oriented funds excluded]
(c) UTI
(d) Zero Coupon Bond
(e) Other Listed Securities (other than units)
**Very Special Capital Asset: Unlisted shares of a company and Land or Building
Period of holding of such asset is ≤ 24 months Period of holding of such asset is > 24 months
(instead of 12 & 36 months) before the date of (instead of 12 & 36 months) before the date of
transfer transfer
Points to remember
1. Equity oriented fund means a fund –
• which has been set up under a scheme of a Mutual Fund specified under Section 10(23D) or
under a scheme of an insurance company comprising ULIPs issued on or after 1.2.2021, to
which exemption under section 10(10D) does not apply on account of –
(a) premium payable exceeding ₹ 2,50,000 for any of the previous years during the term of
such policy; or
(b) the aggregate amount of premium exceeding ₹ 2,50,000 in any of the previous years
during the term of any such ULIP(s), in a case where premium is payable by a person for more
than one ULIP issued on or after 1.2.2021.
and

CAPITAL GAINS
• in a case where the fund invested in the units of another fund which is traded on a recognised
stock exchange –
o a minimum of 90% of the total proceeds of such fund is invested in the units of such other
fund; and
o such other fund also invests a minimum of 90% of its total proceeds in the equity shares
of domestic companies listed on a recognised stock exchange; and
• in any other case, where the investible funds are invested by way of equity shares in
domestic companies for > 65% of the total proceeds of such fund;
However, the percentage of equity shareholding or unit held in respect of the fund, as the case
may be, shall be computed with reference to the annual average of the monthly averages of the
opening and closing figures.
In case of a scheme of an insurance company comprising ULIPs issued on or after 1.2.2021, to

which exemption u/s 10(10D) does not apply on account of the reasons stated in (a) or (b)
above, the minimum requirement of 90% or 65%, as the case may be, mentioned in (i) and (ii)
above, is required to be satisfied throughout the term of such insurance policy.
2. Zero Coupon Bond means a bond
- issued by any infrastructure capital company or infrastructure capital fund or infrastructure debt
fund or a public sector company or a scheduled bank on or after 1 st June, 2005,
- in respect of which no payment and benefit is received or receivable before maturity or
redemption from such issuing entity and
- which the Central Government may notify in this behalf.
SPECIAL CASES FOR CALCULATING PERIOD OF HOLDING

Determination of period of holding [Clause (i) of Explanation 1 to section 2(42A)]:
Circumstances Period of Holding

Where shares held in a company in liquidation The period subsequent to the date of
liquidation of company shall be excluded
Where asset becomes the property of an The period for which the capital asset was held
assessee by virtue of section 49(1) by the previous owner shall be included
Where inventory of business is converted into Period from the date of conversion or
or treated as a capital asset by the assessee treatment as a capital asset shall be considered
Where share/s in the Indian company The period for which the share(s) was held by
(amalgamated company), becomes the the assessee in the amalgamating company
property of an assessee in lieu of share/s held by shall be included.

CAPITAL GAINS
him in the amalgamating company at the time of

transfer referred under section 47(vii).
Where the share or any other security is Period from the date of allotment of such share
subscribed by the assessee on the basis of right or security shall be reckoned.
to subscribe to any share or security or by the
person in whose favour such right is renounced
by the assessee
Where the right to subscribe to any share or Period from the date of offer of such right by
security is renounced in favour of any other the company or institution shall be reckoned
person
Where any financial asset is allotted without Period from the date of allotment of such
any payment and on the basis of holding of any financial asset shall be reckoned
other financial asset
Where share/s in the Indian company being a The period for which the share/s were held by
resulting company becomes the property of an the assessee in demerged company shall be
assessee in consideration of demerger included
Where equity share in a company becomes the The period for which the preference shares
property of the assessee by way of conversion were held by the assessee shall be included
of preference shares into equity shares referred
under section 47(xb)
Where any specified security or sweat equity Period from the date of allotment or transfer of
shares is allotted or transferred, directly or such specified security or sweat equity shares
indirectly, by the employer free of cost or at shall be reckoned
concessional rate to his employees (including
former employees)
Period of holding in respect of other capital assets
The period for which any capital asset is held by the assessee shall be determined in accordance with
any rules made by the CBDT in this behalf.
Accordingly, the CBDT has inserted Rule 8AA in the Income-tax Rules, 1962 to provide for method of
determination of period of holding of capital assets, other than the capital assets mentioned in clause
(i) of Explanation 1 to section 2(42A).
Specifically, in the case of a capital asset, being a share or debenture of a company, which becomes the
property of the assessee in the circumstances mentioned in section 47(x), there shall be included the
period for which the bond, debenture, debenture-stock or deposit certificate, as the case may be, was
held by the assessee prior to the conversion.

CAPITAL GAINS
Note: Section 47(x) provides that 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 shall
not be regarded as transfer for the purposes of levy of capital gains tax.
In case capital assets becomes property of the assessee by any of the following modes: [Section
49(1)]
1. Distribution of Assets on total or partition of HUF / liquidation of company

2. By way of gift/will
3. Succession /inheritance
4. Transfer to revocable /irrevocable trust
5. Specified exempted transfers
6. Received by HUF from its member
Period of Holding for assessee who acquired property in above situations is
[Date from which the last previous owner held the capital asset, who did not acquire in
such modes] TO [Date immediately preceding date of transfer of capital asset by
assessee]
PART C: MODE OF COMPUTATION OF CAPITAL GAINS [Section 48]
COMPUTATION OF SHORT TERM CAPITAL GAINS

Amount
Particulars
(in ₹)
Full value of consideration [FVC]
Less: Expenditure incurred wholly and exclusively in connection with such
transfer (for example, brokerage on sale)
Net sales consideration
Less:
Cost of Acquisition [COA]
Cost of Improvement [COI]
Gross Short term capital gains
Less: Exemption u/s 54B/54/54EC/54EE and others
Taxable Short term capital gains [STCG]

CAPITAL GAINS
COMPUTATION OF LONG TERM CAPITAL GAINS
Amount
Particulars
(in ₹)
Full value of consideration [FVC]
Less: Expenditure incurred wholly and exclusively in connection with such
transfer (for example, brokerage on sale)
Net sales consideration
Less:
INDEXED Cost of Acquisition [ICOA]
INDEXED Cost of Improvement [ICOI]
Gross Long term capital gains
Less: Exemption u/s 54B/54/54EC/54EE and others
Taxable Long term capital gains [LTCG]
Meaning of certain terms used above [Section 48 and 55]

1. Full value of consideration = Sale Consideration of Capital Asset
2. Net consideration = Sale Consideration – expenses on transfer
3. Indexed Cost of Acquisition [Indexed only in case of LTCG]
CII of the year of transfer

Cost of Acquisition x CII for the first year in which the assets were
held by the assessee or PY 2001-02 whichever is later*
4. Indexed Cost of Improvement = [Indexed only in case of LTCG]

*Indexation benefit cannot
CII of the year of transfer . be provided for period of
Cost of improvement x CII for the year of improvement* asset held before 1/04/2001
* Improvements done before 1/04/2001 to be completely ignored
CII - “Cost Inflation Index” in relation to a previous year shall mean such index as may be notified by
the Central Government having regard to 75% of average rise in the Customer Price Index (urban)
for the immediately preceding previous year to such previous year.
FY CII FY CII
2001-02 100 2010-11 167
2002-03 105 2011-12 184
2003-04 109 2012-13 200
2004-05 113 2013-14 220

CAPITAL GAINS
2005-06 117 2014-15 240

2006-07 122 2015-16 254
2007-08 129 2016-17 264
2008-09 137 2017-18 272
2009-10 148 2018-19 280
2019-20 289 2020-21 301
2021-22 317 2022-23 331
Points to be remembered: For 5 situations discussed above

1. The cost of acquisition of the asset is the cost for which the previous owner acquired the asset as
increased by the cost of any improvement of the assets incurred or borne by the previous owner
or the assessee, as the case may be.
2. Section 2(42A) provides that in 5 situations as discussed above, for determining the period for
which the capital asset is held by the transferee, the period of holding of the asset by the previous
owner shall also be considered.
3. The Bombay High Court in CIT v/s. Manjula J. Shah has held that indexed cost of acquisition in case
where cost of acquisition is considered to be of previous owner, indexation has to be computed
with reference to the year in which the previous owner first held the asset and not the year in
which the assessee became the owner of the asset
Advance money received against asset
Advance money forfeited by assessee shall be reduced from the cost of

acquisition of asset
Prior to AY 2015-16
Example: Cost of acquisition of land is ₹ 50 lakhs and advance forfeited
by is ₹ 2 lakhs. Cost of acquisition of asset would be ₹ 48 lakhs
Advance money forfeited by assessee shall NOT be reduced from the

cost of acquisition of asset. Instead it would be separately taxable under
Income from Other Sources
W.e.f. AY 2015-16 Example: Cost of acquisition of land is ₹ 50 lakhs and advance forfeited
by is ₹ 2 lakhs. Cost of acquisition of asset would be ₹ 50 lakhs. Advance
forfeited would be taxable under “Income from other sources”
according to Section 51 read with Section 56(2)(ix) of the Act

CAPITAL GAINS
STEPS TO FOLLOW FOR ANY SUM ON CAPITAL GAIN

A. Prepare a line diagram at the time when you are reading the sum to summarize data
B. Identify the transferor/ transferee and nature of capital asset
C. Compute period of holding to determine if it is LTCG or STCG
D. Compute sales consideration (i.e. FVC)
E. Do not forget to check for any expenditure incurred for transfer
F. Compute Cost of Acquisition and Cost of Improvement with giving proper indexation benefit (if it
is LTCG) based on period of holding determined above
G. Check if any exemption is to be provided
SUMMARY OF DISCUSSIONS DONE ABOVE
Period of which asset was held by previous owner is included in period of

Period of holding
holding
Indexation benefit shall be provided from the year in which asset was
Indexation benefit held by the previous owner. BENEFIT CANNOT BE GIVEN BEFORE
1/04/2001
Cost of acquisition in the hands of assessee shall be deemed to be the cost
to previous owner. Adjust advance forfeited with the cost of asset (before
11 April 2014). No adjustment required if forfeiture takes place after 11
April 2014.
ASSET PURCHASED BEFORE 1/04/2001 – Cost of acquisition = Higher of

original cost of acquisition OR FMV of asset on 1/04/2001
Cost of Acquisition
In case of a capital asset, being land or building or both which became the
property of the assessee before 01/04/2001 or acquired from previous
owner, the fair market value of such an asset on 01/04/2001 shall not
exceed the stamp duty value of such asset as on 01/04/2001, where such
stamp duty value is available [Inserted vide Finance Act 2020]
Cost of improvement incurred by previous owner shall also be considered
Cost of while computing capital gains
Improvement EXCEPTION: IGNORE all improvements done before 1/04/2001 (whether
by assessee or previous owner)

CAPITAL GAINS
Example for better understanding:
Illustration 1:
Mr. X acquires a property on 1/08/1979 for ₹ 7,00,000. [FMV on 1/04/2001 is ₹ 10 lakhs]. One floor is
constructed on 1/05/1999 for ₹ 1,50,000. One more floor is constructed on 1/04/2004 for ₹ 2,00,000.
He finally sells the property on 10/09/20XX for ₹ 95,00,000.
Illustration 2:
X purchases a property on April 1, 2000 for ₹ 95,000. Later on he gifts the property to his friend Y on June
15, 2006. The following expenses are incurred by X and Y for renewal of the property:
Cost (₹)
Addition of two rooms by X during 1999-2000 25,000
Addition of first floor by X during 2003-04 40,000
Addition of second floor by Y during 2010-11 1,15,000
Fair Market Value of the property on April 1, 2001 is ₹ 1,15,000. Y finds a buyer in C to whom property
is transferred for ₹ 28,00,000 on January 1, 20XY. Compute the Capital Gain chargeable to tax in the
hands of Y.

CAPITAL GAINS
PART C: SPECIAL CASES OF CAPITAL GAINS [Section 48]
SPECIAL CASE 1: SALE OF LAND OR BUILDING OR BOTH (as CAPITAL ASSETS]

[Section 50C]
Section 50C of the Act is a deeming provision which deems sale consideration of land or building or
both to be the value adopted by Stamp Valuation Authority (for purpose of stamp duty in respect of
such transfer) as on date of registration, for purpose of computing capital gains.
Stamp Duty value is deemed to be the sale consideration if Actual Sale consideration <
Stamp Duty Value
If stamp duty value does not exceed 110% of the consideration received or accruing then, such
consideration shall be deemed to be the full value of consideration for computing Capital Gains.
How disputes will be settled?
The value of Stamp Department The value of Stamp Dept NOT contested in
contested in Court Court. But Assessee requests the Assessing
Officer (A.O.) to get FMV of the property
Full value of Consideration = Value as Full value of consideration = Value adopted

declared by court shall be considered by Stamp Department or Fair Market value
whichever is lower
Particulars What is Actual sales consideration
Value ascertained by Valuation officer > Stamp Duty value is deemed to be the sale
Stamp Duty Value consideration
Value ascertained by Valuation officer < Value ascertained by Valuation officer is
Stamp Duty Value deemed to be the sale consideration
When date of agreement and date of registration is not same, stamp value on date of agreement may
be considered, if some consideration is discharged by way of A/C payee cheque / A/C payee bank
draft/ ECS or through a bank account or through such other electronic mode as may be prescribed”,
has been paid to the buyer, on or before the date of agreement.
Other prescribed electronic modes: Credit Card, Debit Card, Net Banking, IMPS, UPI, RTGS, NEFT and
BHIM Aadhar Pay.

CAPITAL GAINS
NON-APPLICABILITY OF SECTION 50C
(i) Transfer of immovable property, held by the transferor as stock-in-trade.

(ii) Transfer of any capital asset other than land or building.
(iii) Stamp duty value not exceeding 110% of actual consideration
Illustration 3
X purchased a piece of land for ₹ 1,00,000 on 01/08/1991. Fair Market Value on 01/04/2001 ₹ 2,00,000.
In 2005-06 he constructed building on it for ₹ 4,00,000. The property was sold in FY 20XX-XY for
₹ 25,00,000 though the value adopted by Stamp Valuation Authority was ₹ 95,00,000. The Fair Market
Value of the property as ascertained on request of assessee was ₹ 94,00,000. Compute Capital Gains.
Illustration 4
Mr. Dinesh received a vacant site as gift from his friend in November 2005. The site was acquired by his
friend for ₹ 7,00,000 in April 2002. Dinesh constructed a residential building during the year 2010-11 in
the said site for ₹ 15,00,000. He carried out some further extension of the construction in the year 2012-
13 for ₹ 5,00,000. Dinesh sold the residential building for ₹ 55,00,000 in January 20XY but the State
stamp valuation authority adopted ₹ 65,00,000 as value for the purpose of stamp duty. Compute his
long-term capital gain, for the assessment year 20XY-XZ based on the above information.
Illustration 5:
Mr. Bala sold his vacant site on 21.09.20XX for ₹ 7,00,000. It was acquired by him on 01.10.2005 for
₹ 1,50,000. The State stamp valuation authority fixed the value of the site at the time of transfer @
₹ 13,00,000. Compute capital gains in the hands of Bala and give your reasons for computation.

CAPITAL GAINS
SPECIAL CASE 2: SALE OF LAND OR BUILDING OR BOTH (as STOCK-IN-

TRADE] [Section 43CA]
Section 43CA of the Act is a deeming provision which deems sale consideration of land or building or
both to be the value adopted by Stamp Valuation Authority (for purpose of stamp duty in respect of
such transfer) as on date of registration, for purpose of computing BUSINESS INCOME (PGBP). – for
real estate builders who hold land and building as STOCK-IN-TRADE.
If stamp duty value does not exceed 110% of the consideration received or accruing then, such
consideration shall be deemed to be the full value of consideration for computing Business
Income.
Such provisions are ONLY applicable in case of transfer of property, held by the transferor as stock-in-
trade. If it is transferred as capital asset, Section 50C is applicable.
Notes:
1. Income from transfer of land and building under Section 43CA is chargeable to tax under Business
Income and not Capital Gains
2. A real estate dealer who is engaged in business of properties will be chargeable to tax under PGBP
and Section 43CA does not allow him to sell properties below Stamp duty value.
3. When date of agreement and date of registration is not same, stamp value on date of agreement
may be considered, if some consideration is discharged by way of A/C payee cheque / A/C payee
bank draft/ ECS or through a bank account or through such other prescribed electronic mode, has
been paid to the buyer, on or before the date of agreement.
Other prescribed electronic modes: Credit Card, Debit Card, Net Banking, IMPS, UPI, RTGS, NEFT and
BHIM Aadhar Pay.
Illustration 7
What will be the answer if in Illustration 5 and 6 mentioned above, the assessee is a real estate dealer.
Check for Stamp Duty Value the moment you see Land or Building is transferred

CAPITAL GAINS
SPECIAL CASE 3: CAPITAL GAIN TAXABLE ON RECEIPTS BASIS

[Section 45(1A), 45(1B) & Section 45(5)]
Generally capital assets are chargeable to tax in the year in which the capital asset is transferred – TWO
EXCEPTIONS to this rule
1. Receipts from Insurance parties [Section 45(1A)]

When capital assets are destroyed as a result of flood, typhoon, hurricane, cyclone, earthquake or other
convulsion of nature, riot or civil disturbance, accidental fire or explosion or because of action by an
enemy or action taken in combating an enemy
Capital Gains tax is chargeable to tax in the previous year in which INSURANCE CLAIM IS RECEIVED
Full value of consideration = Money received or Fair market value of other assets received
Although capital assets are considered to be transferred in the year in which the asset is destroyed
[relinquishment of asset is treated to be as transfer]. However, in this case capital gain is chargeable to
tax in the year in which insurance claim is received (either in cash or kind)
Illustration 8:
A fire took place in the premises of Mr. X on 1/5/2012. As a result of this, his jewellery was destroyed
which was purchased by him on 1/6/2007 for ₹ 2,00,000. The insurance company admitted an
insurance claim of ₹ 10,00,000 which was received on 1/11/20XX. Compute Capital Gains for PY 2012-
13 and 20XX-XY.
2. Unit Linked Insurance Policy Receipts [Section 45(1B)]
Where any person receives, at any time during any previous year, any amount, under a ULIP issued on
or after 1.2.2021, to which exemption under section 10(10D) does not apply on account of –
(i) premium payable exceeding ₹ 2,50,000 for any of the previous years during the term of such policy;
or
(ii) the aggregate amount of premium exceeding ₹ 2,50,000 in any of the previous years during the
term of any such ULIP(s), in a case where premium is payable by a person for more than one ULIP
issued on or after 1.2.2021,
then, any profits or gains arising from receipt of such amount by such person shall be chargeable to
income-tax under the head “Capital gains” and shall be deemed to be the income of the such person
for the previous year in which such amount was received. The income taxable shall be calculated in
such manner as may be prescribed.

CAPITAL GAINS
3. Compulsory Acquisition by Government [Section 45(5)]

Sometimes, a building or some other capital asset belonging to a person is taken over by the Central
Government by way of compulsory acquisition and the consideration for the transfer is determined
by the Central Government or Reserve Bank of India.
Capital Gains tax is chargeable to tax in the previous year in which initial compensation or
part thereof is received
FULL VALUE OF CONSIDERATION = COMPENSATION RECEIVED
INITIAL COMPENSATION ENHANCED COMPENSATION

[Fixed by Government] [Enhanced or increased by the court]
(i) Taxable when compensation or part thereof is (i) Taxable as and when received after passing of
first received the final order of the court
(ii) Cost of Acquisition and cost of improvement
(ii) Period of holding and Indexation shall be will be NIL
calculated till the date of compulsory (iii) Period of holding for enhanced compensation
acquisition will be same as initial compensation
Other Points to be remembered:

• If enhanced compensation is reduced by any court, tribunal or any authority, the assessed capital
gain of that year shall be recomputed by taking into consideration the reduced amount by the
assessing officer.
• It is possible that the transferor may die before he receives the enhanced compensation. In that
case, the enhanced compensation or consideration will be chargeable to tax in the hands of the
person who received the same.
• Interest on enhanced compensation is taxable in the hands of recipient under “Income from other
sources” in the year of receipt. No deduction for actual expenses but standard deduction of 50%
will be allowed from such interest under Section 57(iv) of the Act.
Illustration 9: X acquires a House Property on 1/4/1999 for 5,00,000. (FMV of the property on
1/4/2001 ₹ 7,00,000). He incurred ₹ 1,00,000 in making addition of another floor on 1/7/2008. The
Govt. of India compulsorily acquires a House Property on 1/8/2010. On 1/4/20XX, he receives a
compensation of ₹ 24,00,000. Aggrieved by order, he files a suit against Central Government for
enhanced compensation. The court enhances the compensation to ₹ 30,00,000 out of which he
receives ₹ 4,00,000 on 20/3/20XY and ₹ 2,00,000 on 10/4/20XY.
For the delay in compensation the assessee also received interest of ₹ 12,00,000.
The expenses for such interest amounted to ₹ 1,00,000. Compute Capital Gains for AY 20XY-XZ.

CAPITAL GAINS
SPECIAL CASE 4: Transfer of capital assets between Partner and Firm

[Section 45(3) and Section 45(4)]
Partner ----------------------------------------------------→ Firm
Where a person transfers a capital asset to a firm, AOP or BOI in which he is already a partner/member
or is to become a partner/member by way of capital contribution or otherwise
Capital gains tax is chargeable to tax in the year in which such transfer took place
AND
Full value of consideration = Amount recorded in the books of account of the firm
Firm ----------------------------------------------------→ Partner
Transfer of capital assets by way of distribution of capital assets on the dissolution of a firm or AOP
or BOI or “otherwise*”
Capital gains tax is chargeable to tax in the year in which such transfer took place
AND
Full value of consideration = Fair Market Value of the asset on the date of such transfer
* When a firm is in existence and there is a transfer of capital asset, it comes within the expression
“otherwise”. Further, subsisting partners of a partnership, transferring assets in favour of retiring
partners will also be covered within this Section
Illustration 10
X introduces his personal car and his residential building acquired for ₹ 2,00,000 and ₹ 4,00,000
respectively to partnership firm. These are recorded in the books of the firm for ₹ 3,00,000 and ₹
9,00,000 (FMV on the date of transfer ₹ 2,50,000 and ₹ 6,00,000). Date of acquisition of asset 1/3/2006.
Date of transfer 02/03/20XY. Compute Capital Gains.

CAPITAL GAINS
Amended Section 45(4) inserted vide Finance Act 2021
Notwithstanding anything contained in sub-section (1), where a specified person receives during the
previous year any money or capital asset or both from a specified entity in connection with the
reconstitution of such specified entity, then any profits or gains arising from receipt of such money by
the specified person shall be chargeable to income-tax as income of such specified entity under the head
"Capital gains" and shall be deemed to be the income of such specified entity of the previous year in
which such money or capital asset or both were received by the specified person, and notwithstanding
anything to the contrary contained in this Act, such profits or gains shall be determined in accordance
with the following formula, namely:—
A = B+C-D
Where,
A = income chargeable to income-tax under this sub-section as income of the specified entity under the
head "Capital gains";
B = value of any money received by the specified person from the specified entity on the date of such
receipt;
C = the amount of fair market value of the capital asset received by the specified person from the
specified entity on the date of such receipt; and
D = the amount of balance in the capital account (represented in any manner) of the specified person in
the books of account of the specified entity at the time of its reconstitution:
Provided that if the value of “A” in the above formula is negative, its value shall be deemed to be zero:
Provided further that the balance in the capital account of the specified person in the books of account
of the specified entity is to be calculated without taking into account the increase in the capital account
of the specified person due to revaluation of any asset or due to self-generated goodwill or any other
self-generated asset.
Explanation 1.— For the purposes of this sub-section,—

(i) the expressions “reconstitution of the specified entity”, “specified entity” and "specified person" shall
have the meanings respectively assigned to them in section 9B;
(ii) “self-generated goodwill” and “self-generated asset” mean goodwill or asset, as the case may be,
which has been acquired without incurring any cost for purchase or which has been generated during
the course of the business or profession.
Explanation 2.— For the removal of doubts, it is clarified that when a capital asseet is received by a
specified person from a specified entity in connection with the reconstitution of such specified entity,
the provisions of this sub-section shall operate in addition to the provisions of section 9B and the
taxation under the said provisions thereof shall be worked out independently.’

CAPITAL GAINS
Income on receipt of capital asset or stock in trade by specified person from specified entity
[Section 9B inserted vide Finance Act 2021]
(1) Where a specified person receives during the previous year any capital asset or stock in trade or both
from a specified entity in connection with the dissolution or reconstitution of such specified entity, then
the specified entity shall be deemed to have transferred such capital asset or stock in trade or both, as
the case may be, to the specified person in the year in which such capital asset or stock in trade or both
are received by the specified person.
(2) Any profits and gains arising from such deemed transfer of capital asset or stock in trade or both, as
the case may be, by the specified entity shall be—
(i) deemed to be the income of such specified entity of the previous year in which such capital asset or
stock in trade or both were received by the specified person; and
(ii) chargeable to income-tax as income of such specified entity under the head “Profits and gains of
business or profession” or under the head "Capital gains", in accordance with the provisions of this
Act.
(3) For the purposes of this section, fair market value of the capital asset or stock in trade or both on the
date of its receipt by the specified person shall be deemed to be the full value of the consideration
received or accruing as a result of such deemed transfer of the capital asset or stock in trade or both by
the specified entity.
(4) If any difficulty arises in giving effect to the provisions of this section and section 45(4), the Board
may, with the approval of the Central Government, issue guidelines for the purposes of removing the
difficulty.
(5) Every guideline issued by the Board under sub-section (4) shall, as soon as may be after it is issued,
be laid before each House of Parliament, and shall be binding on the income-tax authorities and on the
assessee.
Meaning of certain terms
(i) “reconstitution of the specified entity” means, where—
(a) one or more of its partners or members, as the case may be, of such specified entity ceases to
be partners or members; or
(b) one or more new partners or members, as the case may be, are admitted in such specified
entity in such circumstances that one or more of the persons who were partners or members, as
the case may be, of the specified entity, before the change, continue as partner or partners or
member or members after the change; or
(c) all the partners or members, as the case may be, of such specified entity continue with a change in
their respective share or in the shares of some of them;
(ii) “specified entity” means a firm or other association of persons or body of individuals (not being a
company or a co-operative society);

CAPITAL GAINS
(iii) “specified person” means a person, who is a partner of a firm or member of other association of
persons or body of individuals (not being a company or a co-operative society) in any previous year.’
SPECIAL CASE 5: Conversion of capital asset into stock-in-trade

[Section 45(2)]
The definition of transfer as per Section 2(47) of the Act includes conversion of capital asset into stock
in trade. Assessee may convert capital assets into stock-in-trade in books of accounts before
transferring the asset in order to avoid capital gains.
Capital Gain is chargeable to tax in the year in which stock-in-trade is actually sold
Indexation and period of holding shall however be considered upto date of conversion
[Transfer is considered to happen in the year of conversion]
How to compute capital gains and business income in such scenario?
Capital Gains = FMV on date of conversion – Cost of Acquisition/ Indexed Cost of

Acquisition
Business Income = Sale Value of stock - FMV on date of conversion
FMV on date of conversion of capital asset shall be considered as cost of the stock
Illustration 11
A is the owner of a car. On 1-4-20XX, he starts a business of purchase and sale of motor cars. He treats
the above car as part of the stock-in-trade of his new business. He sells the same on 31-3-20XY and gets
a profit of ₹ 1 lakh. Discuss the tax implications
Illustration 12
X converts his capital asset (acquired on June 10, 2004 for ₹ 60,000) into stock-in-trade in March 10,
2022. The fair market value on the date of the above conversion was ₹ 5,50,000. He subsequently sells
the stock-in-trade so converted for ₹ 6,00,000 on June 10, 20XX. Discuss the tax implications.
Illustration 13
Mr. A converts its capital asset acquired for an amount of ₹ 50,000 in June, 2003 into stock-in-trade
in the month of November, 2019. The fair market value of the asset on the date of conversion is
₹ 4,50,000. The stock-in-trade was sold for an amount of ₹ 6,50,000 in the month of September, 20XX.
What will be the tax treatment?

CAPITAL GAINS
SPECIAL CASE 6: SLUMP SALE [Section 50B]
Meaning of Slump Sale [Section 2(42C)]

Slump sale means transfer of one or more undertakings, by any means, for a lump sum consideration
without assigning values to each individual assets and liabilities. Explanation provides that
determination of value of asset or liability for the sole purpose of stamp duty or registration shall not be
regarded as assigning values.
“Transfer” has the same meaning as similar to Section 2(47).
Example: ITC limited sell its FMCG division to HUL at ₹ 100 crs. If ITC would have derived ₹ 100 crs. by
separately allocating values to individual assets / liabilities, it would not be considered as slump sale.
How to compute Capital Gains on Slump Sale
Particulars Value to be considered

FMV of the capital assets as on the date of transfer, calculated in the
Deemed Full value prescribed manner, shall be deemed to be the full value of the
consideration consideration received or accruing as a result of the transfer of such capital
asset
Net Worth of the undertaking to be considered which would be computed
Deemed Cost of
as under (Without any Indexation)
Acquisition and Cost of
(Aggregate value of total assets – liabilities) of such undertaking or
Improvement
division as appearing in BOOKS OF ACCOUNTS
• For Depreciable Assets – Written down value of block of assets
• For capital asset, being goodwill of a business or profession, which has
not been acquired by the assessee by purchase from a previous owner
Value of total assets [Self-generated goodwill]: Nil
• For Capital Assets in respect of which whole of expenditure has been
allowed under Section 35AD – NIL
• Other Assets – Book Value of assets
Points to be remembered:
• The CBDT has prescribed that, the fair market value (FMV) of capital assets would be the higher of
o FMV 1, being the fair market value of capital assets transferred by way of slump sale
(determined on the date of slump sale); and
o FMV 2, being the fair market value of the consideration (monetary and non-monetary) received
or accruing as a result of transfer by way of slump sale
• Revaluation of assets to be ignored;
• No indexation benefit will be available;

CAPITAL GAINS
• If undertaking is held by the transferor for more than 36 months - Long term capital asset, else it
will be considered to be short-term capital asset.
• Every assessee in case of slump sale, shall furnish in Form 29B, a report of an accountant as defined
in the Explanation below Section 288(2) before the specified date referred to in section 44AB (i.e.
one month prior to due date of filing return of income u/s 139(1))
Illustration 14: Mr. Z is engaged into 2 business (i) dairy business (“Business 1”) (ii) cow dung business
(“Business 2”) since 1995-1996. He transferred on 1.4.2022 his Business 1, by way of slump sale for
a total consideration of 25 lacs. The fair market value of the unit on 1.4.2022 is ₹ 30 lacs. The
expenses incurred for the transfer were 28,000. His Balance Sheet as on 31.3.2022 is as under –
LIABILITIES Amount ASSETS Amount

Building [Business 1 – 12,00,000;
Own capital 15,00,000 14,00,000
Business 2 – 2,00,000
Revaluation Reserve (for building Machinery - [Business 1- 3,00,000

3,00,000 4,00,000
of Business 1) & Business 2- 1,00,000]
Debtors- [Business 1- 1,00,000 &

Bank loan (70% for Business 1) 2,00,000 1,40,000
Business 2- 40,000]
Trade creditors (25% for Other Assets - [Business 1 -

1,50,000 2,10,000
Business 1) 1,50,000 & Business 2 - 60,000]
Total 21,50,000 Total 21,50,000
Additional Information:
(i) Revaluation reserve is created by revising upward the value of the building of business 1.
(ii) Other assets of business 1 include buildings acquired on 1.7.2020 for ₹ 50,000 on which no
depreciation has been charged. Rate of depreciation on buildings is 10%. Compute the capital gain for
the assessment year. Answer: ₹ 17,21,375

CAPITAL GAINS
SPECIAL CASE 7: CAPITAL GAINS ON INTANGIBLE ASSETS [Section 55(2)]

Goodwill of a business or profession or a trademark or brand name associated with a business or
profession or a right to manufacture, produce or process any article or thing, or right to carry on any
business or profession, tenancy rights, stage carriage permits and loom hours
In case of acquisition from previous owner:

In the case of the above capital assets, if the assessee has purchased them from a previous owner, the
cost of acquisition means the amount of the purchase price.
However, in case of a capital asset, being goodwill of a business or profession, in respect of which
depreciation under section 32(1) has been obtained by the assessee in any previous year (upto PY 2019-
20), the cost of acquisition of such goodwill would be the amount of the purchase price as reduced by
the total amount of depreciation (upto PY 2019-20) obtained by the assessee under section 32(1).
In case of circumstances mentioned under section 49(1)(i)/(ii)/(iii)/(iv):

In cases where the capital asset became the property of the assessee by any of the following modes
from the previous owner, and such capital assets were acquired by the previous owner by purchase,
cost of acquisition to the assessee will be the amount of the purchase price for such previous owner:
1) On any distribution of assets on the total or partial partition of a Hindu undivided family
2) Under a gift or will.
3) By succession, inheritance or devolution.
4) On any distribution of assets on the liquidation of a company.
5) Under a transfer to a revocable or an irrevocable trust.
6) Under any transfer of a capital asset referred to in –
(i) Section 47(iv) – transfer by a holding company to its 100% subsidiary Indian company;
(ii) Section 47(v) – transfer by a subsidiary company to its 100% holding company, being an Indian
company,
(iii) Section 47(vi) – transfer in a scheme of amalgamation by the amalgamating company to the
amalgamated company, being an Indian company
(iv) Section 47(vib) – transfer in a demerger, by the demerged company to the resulting company,
being an Indian company
7) Where the assessee is a Hindu undivided family, by the mode referred to in section 64(2) i.e.,
conversion of self-acquired property of a member of a HUF into the property of the HUF (For details,
read Chapter Clubbing)
However, in case of a capital asset, being goodwill of a business or profession, in respect of which
depreciation under section 32(1) has been obtained by the assessee in any previous year (upto PY 2019-
20), the cost of acquisition of such goodwill would be the amount of the purchase price for such
previous owner as reduced by the total amount of depreciation (upto PY 2019-20) obtained by the
assessee under section 32(1).

CAPITAL GAINS
In any other case [i.e., in case of self-generated assets]:

In case of self-generated assets namely, goodwill of a business or profession or a trademark or brand
name associated with a business or profession or a right to manufacture, produce or process any article
or thing, or right to carry on any business or profession, tenancy rights, stage carriage permits, or loom
hours, the cost of acquisition will be taken to be nil.
* The Finance Act 2016 has specifically inserted the right to carry on any profession as self-
generated assets, whose cost of acquisition shall be NIL
In case of above capital assets, if assessee has purchased them from a previous owner:
Cost of acquisition = Amount of the purchase price
Example 1: If A purchases a stage carriage permit from B for ₹ 2 lacs, Cost of acquisition for A = ₹ 2
lakhs
Example 2: Suppose a doctor starts his profession. With the passage of time, the doctor acquires lot of
reputation. He opens a clinic and runs it for 5 years. After 5 years he sells the clinic to another doctor
for ₹ 10 lacs which includes ₹ 2 lacs for his reputation or goodwill. Now a question arises as to how to
find out the profit in respect of goodwill. It is obvious that the goodwill is self-generated and hence it
is difficult to calculate the cost of its acquisition. However, it is certainly a capital asset.
The Supreme Court in case of B.C. Srinivasa Shetty has held that charging section fails if computation
mechanism fails. If cost of acquisition is not ascertainable, it is not possible to compute capital gains
and hence capital gains is not chargeable to tax.
Points to remember:
1. Cost of Acquisition of Self-generated assets are NIL.
2. In relation to a capital asset being goodwill of a business or a right to manufacture, produce or
process any article or thing, or right to carry on any business or profession, the cost of improvement
shall be taken to be Nil.
3. Goodwill of profession is not taxable [Will be covered by the judgement of Supreme Court in case
of BC Srinivasa Shetty].
4. Right to carry on profession is taxable but goodwill of profession is not taxable.

CAPITAL GAINS
SPECIAL CASE 8: TAXABILITY OF CAPITAL GAINS IN CASE OF “SPECIFIED

AGREEMENT” [Section 45(5A)]
Genuine hardship on account of taxability of capital gains in the year of transfer of property to
developer:
The definition of ‘transfer’, inter alia, includes any arrangement or transaction where any rights are
handed over in execution of part performance of contract, even though the legal title has not been
transferred.
Applying the definition of transfer, under certain development agreements, the transfer took place in
the year in which owner of the immovable property, being land or building or both, handed over the
immovable property to the developer.
Consequently, the capital gains tax liability in the hands of the owner would arise in the year in which
the possession of immovable property is handed over to the developer for development of a project,
in spite of the fact that the consideration thereof (i.e. the actual constructed property) will be received
only after a couple of years
Postponement of taxability of capital gains: With a view to minimise the genuine hardship which the
owner of land may face in paying capital gains tax in the year of transfer, a new sub-section (5A) in
section 45 has been inserted to provide that
(i) in case of an assessee being individual or Hindu undivided family,
(ii) who enters into a “specified agreement” for development of a project,
(iii) the capital gain arising from such transfer shall be chargeable to income-tax as
income of the PY in which the certificate of completion for the whole or part of the project is issued
by the competent authority.
Meaning of Specified Agreement: Specified agreement means the registered agreement in which
(i) a person owing land or building or both, agrees to allow another person to develop a real estate
project on such land or building or both,
(ii) in consideration of a share, being land or building or both in such project,

(iii) whether with or without payment of part of the consideration in cash.
Full value of consideration: Stamp duty value of his share, being land or building or both, in the project
on the date of issuing of said certificate of completion as increased by any consideration received in
cash, shall be deemed to be the full value of the consideration.
Non-applicability of the beneficial provision: It may, however, be noted that these beneficial
provisions would not apply, where the assessee transfers his share in the project on or before the
date of issue of said completion certificate and capital gain tax liability would be deemed to arise in
the PY in which such transfer took place.

CAPITAL GAINS
In such a case, full value of consideration received or accruing shall be determined by the general
provisions of the Act [Section 50C of the Act]
Cost of acquisition of capital asset, being share in the project referred under Section 45(5A):
Where capital gain arises from transfer of a capital asset, being share in the project, in the form of land
or building or both, referred to in section 45(5A) which is chargeable to tax in the PY in which completion
of certificate for the whole or part of the project is issued by the competent authority, -----→
Cost of acquisition of such asset = Deemed as full value of consideration in Section 45(5A)
Non-Applicability:
However, this does not apply to a capital asset, being share in the project which is transferred on or
before the date of issue of said completion certificate [Section 49(7)]
SPECIAL CASE 9: Special Provision for Full Value of Consideration for

Transfer of UNLISTED SHARES [Section 50CA]
Where consideration received or accruing as a result of transfer of a capital asset, being share of a
company other than a “quoted share”, is LESS than FMV of such share determined in such manner as
may be prescribed,
Such FMV shall be deemed to be full value of consideration
For the purpose, “quoted shares” means share quoted on any recognized stock exchange with regularity
from time to time, where the quotation of such share is based on current transaction made in the
ordinary course of business.
The above provisions shall not apply to any consideration received or accruing as a result of transfer by
such class of persons and subject to such conditions as may be prescribed.” [Finance Act 2019]

CAPITAL GAINS
TRANSACTIONS NOT REGARDED AS TRANSFER [Section 47]

We had studied in Section 45 of the Act that capital gains are chargeable on “transfer” of “capital
assets”. Section 47 of the Act specifically enumerates a list of transactions that are not regarded as
“TRANSFER” and thus capital gains are not chargeable on such “transfers”
TRANSACTIONS NOT REGARDED AS TRANSFER
LIQUIDATION / PARTITION [Section 47(i)]
X Ltd. A A HUF Son

B Wife
Distribution of assets on Daughter
Distribution of capital assets on
liquidation total /partial partition of HUF
Distribution of assets in kind of a Company to its shareholders, on its liquidation is not taxable in
hands of company [Section 46(1)]
Distribution of capital assets in kind by HUF to its members on total / partial partition of HUF [Section
47(i)] is not a transfer
Period of holding = Date of purchase of shares – Date on which company goes into
liquidation [Period after date on which company goes into liquidation is excluded]
GIFT [Section 47(iii)]
Mr. X Mr. Y Mr. Q Mr. Z

Jewellery - Gift / Will / Gift of shares / debentures allotted
irrevocable trust under ESOP
Transfer of capital asset under a gift / irrevocable trust / will, is not a transfer [Section 47(iii)]
Transfer of shares or debentures under gift /irrevocable trust, being allotted to employees under
Employee Stock Option Plan is NOT EXEMPT [Proviso to Section 47(iii)]
Full Value of Consideration = Fair market value on the date of transfer

Cost of Acquisition for Mr. Y = Cost in hands of previous owner
Period of holding (for ESOPs) = Date of allotment of ESOPs to Date of transfer
Period of holding (for gift) = Date of acquisition by previous owner to Date of transfer

CAPITAL GAINS
HOLDING COMPANY TO SUBSIDIARY COMPANY – (VICE VERSA) [Section 47(iv)/(v)]

Z Ltd.
100%
shares held Transfer of
Transfer of
in Q Ltd Land
Building
Q Ltd.
Transfer of capital asset by a company to its wholly owned Indian subsidiary is not a transfer,
provided subsidiary company is an Indian company and the parent company or its nominee must
hold the whole of the shares of the subsidiary company [Section 47(iv)]
Transfer of capital asset by a subsidiary company to its holding company (who is holding whole of
the share capital of subsidiary company) is not a transfer, provided holding company is an Indian
company and the whole of shares of the subsidiary company must be held by the holding company;
[Section 47(v)]
The exemption mentioned above will not apply if a capital asset is transferred as stock-in-trade.
Cost of Acquisition = Cost in hands of previous owner
Period of holding = Date of acquisition by previous owner to Date of transfer
CONDITIONS TO BE FULFILLED [SECTION 47A]
1. Such capital asset shall not be converted into stock-in-trade within a period of 8 years from the
date of transfer of capital asset;
2. Holding company holds the entire share capital of the subsidiary company for a period of 8 years
from the date of transfer of capital asset.
CONSEQUENCES OF NON-FULFILMENT OF CONDITIONS
If above 2 conditions are not fulfilled, capital gain would be chargeable to tax in the hands of
transferor company in the previous year in which the transfer took place
What will be the cost of acquisition of the capital asset in the hands of transferee company if capital
gain is chargeable due to non-fulfilment of the abovementioned conditions?
Cost of Acquisition = Actual cost of acquisition for which it was acquired

CAPITAL GAINS
AMALGAMATION INTO INDIAN COMPANY [Section 47(vi)]

Issue of shares to Z
Mr Z by X Ltd
Shares held in Y Ltd

by Mr. Z
Y Ltd Amalgamation X Ltd

into X Ltd
Amalgamating Amalgamated
company company
Here, two transfers are taking place:

Transfer of capital asset pursuant to Amalgamation of Y Ltd into X Ltd – Transfer of capital asset
under a scheme of amalgamation is not a transfer [Section 47(vi)]
Issue of shares by X Ltd. to Mr. Z – Mr Z would be getting shares of X Ltd. as against shares of Y Ltd.
Therefore, there is a transfer of shares of Y Ltd in hands of Mr. Z [exchange of shares is a transfer].
As per Section 47(vii), such transfer is exempt provided
(i) Amalgamated company is an Indian Company and
(ii) No cash consideration to shareholder (i.e. shareholder of amalgamating company should get
shares of amalgamated company in consideration of shares of amalgamating company)
What if amalgamated company, itself is the shareholder of amalgamating company:
Z Ltd. Amalgamated
company
Amalgamation
100%
into Z Ltd
Y Ltd Amalgamating
company
In the above case, as Z Ltd. cannot issue shares to itself, condition (ii) of consideration is not required
to be fulfilled.
Cost of Acquisition of shares of amalgamated company = Cost of Acquisition of shares of
amalgamating company [Section 49(2)]
DEMERGER [Section 47(vib)]

Issue of shares to
ABC
ABC
Demerger of Food
Demerged Company ITC HUL
(Hotel and Food) Business
Resultant Company
business

CAPITAL GAINS
Here, two transfers are taking place:
Transfer of capital asset pursuant to demerger of food business into HUL– Transfer of capital asset
by demerged company into resultant company is not a transfer provided resultant company is an
Indian company [Section 47(vib)]
Issue of shares by HUL to ABC – ABC would be getting shares of HUL as against shares of ITC
[exchange of shares is a transfer]. Therefore, there is transfer of shares of ITC in hands of ABC. As per
Section 47(vid), such transfer is exempt if the transfer is made in consideration of demerger of
undertaking (i.e. food business) [Section 47(vid)]
CONDITIONS TO BE FULFILLED: [Section 2(19AA)] - Meaning of demerger

1. ALL properties and liabilities relatable to undertaking shall be transferred to resultant company;
2. Transfer of such properties and liabilities shall be made at BOOK VALUES.
3. Resultant company shall issue equity shares to shareholders of demerged company, in
consideration of demerger.
4. Shareholders holding 75% in value of shares in demerged company shall become shareholders of
resultant company by virtue of demerger.
What will be the cost of acquisition of shares held in demerged company and resultant company?
Cost of Acquisition of shares of resultant company [Section 49(2C)]
COA of shares of demerged company * Net book value of assets transferred

Net worth of the undertaking
Cost of Acquisition of shares of demerged company [Section 49(2D)]
COA of shares of Demerged company (before demerger) less COA of shares of resultant company
ARTS AND CRAFTS [Section 47(ix)]

Transfer of following capital asset to the Government or to the University or the National Museum,
National Art Gallery, National Archives or any other public museum or institution notified by the
Central Government is exempt [Section 47(ix)]
(1) work of art
(2) archaeological, scientific or art collection
(3) book
(4) manuscript
(5) drawing
(6) painting
(7) photograph or
(8) print
Transfer of above capital assets to any person other than persons mentioned above is taxable

CAPITAL GAINS
REVERSE MORTGAGE SCHEME [Section 47(xvi)]

The Reverse Mortgage scheme is for the benefit of senior citizens, who own a residential house
property. In order to supplement their existing income, they can mortgage their house property with
a scheduled bank or housing finance company, in return for a lump-sum amount or for a regular
monthly/quarterly/annual income. The senior citizens can continue to live in the house and receive
regular income, without the botheration of having to pay back the loan.
Taxability is discussed as under:
(i) As per Transfer of property Act, mortgage of property is treated to be a “transfer”. Therefore
Section 47(xvi) exempts transfer of capital asset in a transaction notified under reverse
mortgage scheme.
(ii) Section 10(43) specifically exempts any amount of loan received either in lump sum or
instalments under a notified reverse mortgage scheme.
(iii) Capital gain is chargeable only if property is transferred at the time of settlement.
SOME OTHER IMPORTANT EXEMPTIONS

Transfer of Sovereign Gold Bonds issued by the Reserve Bank of India under the Sovereign Gold
Scheme, 2015 by way of redemption by an INDIVIDUAL is exempt [Section 47(viic)]
Transfer of unit held in consolidating plan of mutual fund scheme made in consideration of allotment
a unit of consolidated plan of that scheme. [Section 47(xix]
Cost of acquisition of unit in consolidated plan of the scheme of the mutual fund in consideration of
a transfer referred to in section 47(xix) = Cost of acquisition of unit in consolidating plan of the
scheme of the mutual fund. [Section 49(2AF)]
OTHER MISCELLANEOUS EXEMPTIONS
Conversion of bonds or debentures or deposit certificates of a company into shares/debentures of
that company. [Section 47(x)]
Cost of Acquisition of such converted shares / debentures = Cost of original debenture / bonds in
relation to which such asset is acquired
Conversion of preference shares into equity shares: Any transfer by way of conversion of preference
shares of a company into equity shares of that company is exempt [Section 47(xb)]
Cost of acquisition of such equity shares of a company, which became property of assessee in
consideration of transfer referred to in section 47(xb), = Cost of Preference Shares [Section
49(2AE)]

CAPITAL GAINS
Transfer of Rupee denominated bond outside India by non-resident to another non-resident: Any
transfer, made outside India, of a capital asset being rupee denominated bond of an Indian company
issued outside India, by a non-resident to another non-resident is exempt. [Section 47(viiaa)]
Transfer of following capital assets by a non-resident: [Section 47(viab)]

a) bond or Global Depository Receipt referred to in Section 115AC(1); or
b) rupee denominated bond of an Indian company; or
c) derivative
on a recognised stock exchange located in any International Financial Services Centre and
consideration for such transaction is paid or payable in foreign currency
Illustration 15
M held 2000 shares in a company ABC Ltd. This company amalgamated with another company during
the previous year ending 31-3-20XY. Under the scheme of amalgamation, M was allotted 1000 shares
in the new company. The market value of shares allotted is higher by ₹ 50,000 than the value of holding
in ABC Ltd. The Assessing Officer proposes to treat the transaction as an exchange and to tax ₹ 50,000
as capital gain. Is he justified? [SM]
Illustration 16
In which of the following situations capital gains tax liability does not arise? [SM]
(i) Mr. A purchased gold in 1970 for ₹ 25,000. In the PY 20XX-XY, he gifted it to his son at the time of
marriage. Fair market value (FMV) of the gold on the day the gift was made was ₹ 1,00,000.
(ii) A house property is purchased by a Hindu undivided family in 1945 for ₹ 20,000. It is given to one
of the family members in the PY 20XX-XY at the time of partition of the family. FMV on the day of
partition was ₹ 12,00,000.
(iii) Mr. B purchased 50 convertible debentures for ₹ 40,000 in 1995 which are converted in to 500
shares worth ₹ 85,000 in November 20XX by the company.
Illustration 17
Examine, with reasons, whether the following statements are True or False. [SM]
(i) Alienation of a residential house in a transaction of reverse mortgage under a scheme made and
notified by the Central Government is treated as “transfer” for the purpose of capital gains.
(ii) Zero coupon bonds of eligible corporation, held for more than 12 months, will be long-term capital
assets.
(iii) Where an urban agricultural land owned by an individual, continuously used by him for agricultural
purposes for a period of two years prior to the date of transfer, is compulsorily acquired under law
and the compensation is fixed by the State Government, resultant capital gain is exempt.
(iv) Zero Coupon Bond means a bond on which no payment and benefits are received or receivable
before maturity or redemption.
(v) Income from growing and manufacturing tea in India is treated as agricultural income wholly.

CAPITAL GAINS
Illustration 18
X & sons, HUF, purchased a land for ₹ 1,20,000 in the PY 2002-03. In the PY 2006-07, a partition takes
place when Mr. A, a coparcener, is allotted this plot valued at ₹ 1,50,000. In PY 2007-08, he had incurred
expenses of ₹2,35,000 towards fencing of the plot. Mr. A sells this plot of land for ₹ 15,00,000 in PY
20XX-XY after incurring expenses to the extent of ₹ 20,000. You are required to compute the capital
gain for the AY 20XY-XZ. [SM]
Illustration 19
Mr. B purchased convertible debentures for ₹ 5,00,000 during August 2002. The debentures were
converted into shares in September 2012. These shares were sold for ₹ 15,00,000 in August, 20XX. The
brokerage expenses are ₹ 50,000. You are required to compute the capital gains in case of Mr. B for
the AY 20XY-XZ. [SM]
CAPITAL GAINS ON SHARES AND SECURITIES

We have studied that following asset are considered to be Long term capital asset if held for more than
12 months.
• Listed shares
• Mutual Fund (Only Equity Oriented Fund) [Debt oriented funds excluded]
• UTI
• Zero Coupon Bond
• Other Listed Securities
Unlisted shares – Held for more than 24 months to qualify as long term capital asset

CAPITAL GAINS
TREATMENT OF BONUS SHARES

Company issues bonus shares to its existing shareholders when company makes huge profits. Such
bonus shares allotted are capital assets in hands of shareholders
Cost of Acquisition of bonus shares

FMV on 01/04/2001
(received before 01/04/2001)
Cost of Acquisition of bonus shares
NIL
(received after 01/04/2001)
Sale consideration Actual sale consideration of bonus shares

Date of Allotment of bonus shares to
Period of Holding
Date of transfer
Illustration 20:
Ms. Usha purchases 1,000 equity shares in X Ltd. at a cost of ₹ 30 per share (brokerage 1%) in January
1996. She gets 100 bonus shares in August 2000. She again gets 1100 bonus shares by virtue of her
holding on February 2006. Fair market value of the shares of X Ltd. on April 1, 2001 is ₹ 80. In January
20XY, she transfers all her shares @ ₹ 200 per share (brokerage 2%). Compute the capital gains
taxable in the hands of Ms. Usha for the AY 20XY-XZ
TREATMENT OF RIGHT SHARES

Sometimes company require short term funds, for which they issue rights shares to existing
shareholders and raise funds. Such right shares allotted are capital assets in hands of shareholders. The
existing shareholder may not opt for such rights issue or renounce such rights to another person (as
the case may be) who would ultimately subscribe to share capital of company.
Rights shares
Cost of acquisition of shares in hands of
Actual Amount paid to Company
Original Shareholder (who actually got rights)
Cost of acquisition of shares in hands of Actual Amount paid to Company + Amount paid
person to whom right is renounced for right entitlement
Period of holding Date of allotment of rights shares to date of
renouncement/sale (as the case may be)

CAPITAL GAINS
Rights Entitlement
Cost of acquisition of right entitlement in
NIL
hands of Original Shareholder
Period of Holding Date of rights offer to Date of renouncement
Illustration 21
Mr. R holds 1000 shares in Star Minus Ltd., an unlisted company, acquired in the year 2001-02 at a
cost of ₹ 75,000. He has been offered right shares by the company in the month of August, 20XX at ₹
160 per share, in the ratio of 2 for every 5 held. He retains 50% of the rights and renounces the
balance right shares in favour of Mr. Q for ₹ 30 per share in September 20XX. All the shares are sold
by Mr. R for ₹ 300 per share in January 20XY and Mr. Q sells his shares in December 20XX at ₹ 280
per share.What are the capital gains taxable in the hands of Mr. R and Mr. Q?
Transfer of securities by depository [Section 45(2A)]

Capital gains shall be chargeable to tax in the hands of beneficial owner in respect of dematerialized
shares.
Cost of Acquisition and period of holding of any securities in respect of dematerialized shares shall be
determined based on FIFO method (First in First out).
Beneficial owner means a person whose name is recorded as such with a depository.
Illustration 22:
Date Particulars No. of shares
01/04/20XX Purchased shares of Ambuja Cements 2000
04/04/20XX Shares purchased of Ambuja on 30/03/2016 now dematerialized 300
06/04/20XX Shares sold 500
State how the cost of acquisition and period of holding of 500 shares be determined?

CAPITAL GAINS
TRANSFER OF BONDS / DEBENTURES AND PREFERENCE SHARES
Bonds /Debentures Preference shares

NO indexation benefit on transfer of bonds /
Indexation permissible on transfer of preference
debentures (other than capital indexed bonds
shares
and ZCBs and sovereign gold bonds)
Conversion of debentures into shares is exempt Conversion of preference shares into any form is
transfer under Section 47(x) also an exempt transfer u/s 47(xb)
Period of holding of shares shall include the Period of holding of shares shall include the
period of debentures held by assessee (prior to period of preference shares held by assessee
conversion into shares) (prior to conversion into shares)
Redemption of both debentures and preference shares are fully taxable
Capital Gains tax chargeable when shares are actually sold
Special provision for non-residents

In case of non-residents who invest foreign exchange to acquire capital assets, capital gains arising from
the transfer of shares or debentures of an Indian company is to be computed in the following manner:
1) The cost of acquisition, the expenditure incurred wholly and exclusively in connection with the
transfer and the full value of the consideration are to be converted into the same foreign currency
with which such shares were acquired. The conversion has to be done at the average of Telegraphic
Transfer Buying Rate (TTBR) and Telegraphic Transfer Selling Rate (TTSR) on the respective dates.
2) The resulting capital gains shall be reconverted into Indian currency by applying the TTBR on the date
of transfer.
The aforesaid manner of computation of capital gains shall be applied for every purchase and sale of
shares or debentures in an Indian company. This will provide relief from risk of foreign currency
fluctuation to non-residents.
Benefit of indexation will not be available in this case.
Non-residents and foreign companies are subject to tax at a concessional rate of 10% (without
indexation benefit or currency conversion) on long term capital gains arising from transfer of
unlisted securities or shares of a company in which public are not substantially interested [Section
112]

CAPITAL GAINS
Note – The benefit of indexation and currency conversion would not be applicable to the long-
term capital gains arising from the transfer of the following assets referred to in section 112A –
(i) equity share in a company on which STT is paid both at the time of acquisition and transfer
(ii) unit of equity-oriented fund or unit of business trust on which STT is paid at the time of
transfer.
EXEMPTIONS UNDER CAPITAL GAINS
A. EXEMPTIONS RELATED TO AGRICULTURAL LAND
Compulsory Acquisition of Urban Agricultural Land [Section 10(37)]

Compulsory acquisition of urban agricultural land which has been used for agricultural purpose
(consideration for which has been determined or approved by the Central Government or the RBI) will
be exempt subject to following conditions
– Urban agricultural land is owned by Individual /HUF [NOT APPLICABLE TO COMPANY]; AND
– Such land is used for agricultural purposes for a period of 2 years immediately preceding the date
of transfer by such individual or his parent of his or by such HUF
Transfer of Rural agricultural land is exempt fully as rural agricultural land is not a capital asset
Illustration 23:
Mr. Kumar has an agricultural land (costing ₹ 6 lakhs) in Lucknow and has been using it for agricultural
purposes since 1.4.2002 till 1.8.2011 when the Government took over compulsory acquisition of this
land. A compensation of ₹ 10 lakhs was settled. The compensation was received by Mr. Kumar on
1.7.20XX. Compute the amount of capital gains taxable in the hands of Mr. Kumar.
Will your answer be any different if Mr. Kumar had by his own will sold this land to his friend Mr.
Sharma? Explain.
Will your answer be different if Mr. Kumar had not used this land for agricultural activities? Explain.
Will your answer be different if the land belonged to ABC Ltd. and not Mr. Kumar and compensation
on compulsory acquisition was received by the company? Explain.

CAPITAL GAINS
PURCHASE of AGRICULTURAL LAND [Section 54B]
Eligible Assessee Individual / HUF

Original Assets transferred Urban Agricultural Land
Period of holding of asset
At-least 2 years before date of transfer
transferred
Land is used for agricultural purposes for 2 years by
Other conditions
individual or his parent
Qualifying asset i.e. new asset in
which Capital gains has to be Agricultural land (Urban/ Rural)
invested
Time limit for purchase of new
2 years from date of transfer
asset
Amount of exemption Lower of cost of new asset* OR capital gains (LTCG/STCG)
Shall not be transferred before 3 years from date of
Lock-in period of new asset purchase. If transferred within 3 years, Cost of new asset
shall be reduced by amount of exemption earlier.
* Amount may be invested by depositing money under Capital gains deposit scheme (CGDS) before due
date of filing return of income. If amount is deposited BEFORE the due date of filing return of income
– it would be treated as cost of new asset and exemption would be provided.
However, if money deposited in CGDS is kept unutilized till 2 years from the date of transfer of capital
asset, it would be taxable in the previous year in which period of 2 years expires.

CAPITAL GAINS
B. PURCHASE OF RESIDENTIAL HOUSE IN INDIA [Section 54 AND 54F]
Particulars Section 54 Section 54F

Eligible Assessee Individual / HUF
Any asset other than
Original Assets transferred Residential House
Residential House
Period of holding of asset
Long term capital asset
transferred
Income from such house Asssessee should not own more
shall be chargeable under than 1 residential house on date
Other conditions
Income from House of transfer (other than new
Property house)*
Qualifying asset i.e. new asset TWO Residential Houses
ONE Residential House situated
in which Capital gains has to be situated in India subject
in India
invested to conditions (Note 1)
Time limit for Purchase – 1 year before date of transfer OR within 2 years
purchase/construction of new from date of transfer
asset Construction – within 3 years from date of transfer
Lower of cost of new LTCG* Cost (Refer Note 2 below)
Amount of exemption
asset* OR capital gains Net consideration
New House shall not be transferred before 3 years from the date
Lock-in period of new asset
of purchase / construction.
Amount of capital gain exempted

Cost of new asset shall be
Taxability on withdrawal of earlier shall be treated as LTCG of
reduced by amount of
exemption the year in which new house is
exemption earlier.
sold
* If an assessee purchases another house property (OTHER THAN THE NEW HOUSE) within 2 years or
constructs within 3 years from the date of transfer of original asset, exemption so granted earlier shall
be taxable as LTCG in the year of such purchase/construction.
Note 1: The higher limit of 2 houses is applicable only when the amount of capital gains does not
exceed ₹ 2 crore. Further, once an assessee has availed the benefit of 2 houses, exemption u/s 54 is
not applicable. Also, if the capital gains exceed ₹ 2 crore, exemption shall be restricted to only 1
house.
Where during any AY, the assessee has exercised the option to purchase or construct 2 residential
houses in India, he shall not be subsequently entitled to exercise the option for the same or any other
AY.

CAPITAL GAINS
Example: This implies that if an assessee has availed the option of claiming benefit of section 54 in
respect of purchase of two residential houses in Jaipur and Jodhpur, say, in respect of capital gains of
₹ 1.50 crores arising from transfer of residential house at Bombay in the PY 2019-20 then, he will not
be entitled to avail the benefit of section 54 again in respect of purchase of two residential houses in,
say, Pune and Baroda, in respect of capital gains of ₹ 1.20 crores arising from transfer of residential
house in Jaipur in the PY 2023-24, even though the capital gains arising on transfer of the residential
house at Jaipur does not exceed ₹ 2 crore
Note 2: How to compute exemption under Section 54F

Case 1: Cost of new residential house > Net consideration
Entire capital gains exempt Net Consideration:

Case 2: Cost of new residential house < Net consideration Full value consideration
less expenditure on
Amount of exemption = Cost of new house * LTCG (as computed) transfer
Net Consideration
Case 3: In case amount invested in CGDS
Amount of exemption = Amount invested in CGDS * LTCG (as computed)

Net Consideration
Note 3: Provisions of Capital Gains deposit scheme shall apply similarly as mentioned above (except
the fact that the time limit is 3 years). In other words, if money deposited in CGDS is kept unutilized till
3 years from the date of transfer of capital asset, it would be taxable in the previous year in which
period of 3 years expires as under:
Unutilised amount of CGDS * LTCG

Net Consideration
Illustration 24:
Ms. Vimla sold a residential building at Jodhpur for ₹ 25,00,000 on 01-07-20XX. The building was
acquired for ₹ 1,50,000 on 01-06-2002. She paid brokerage @ 2% at the time of sale of the building.
She invested ₹ 7 lakhs in purchase of a residential building in December 20XX. Compute her taxable
capital gain.

CAPITAL GAINS
Illustration 25:
Compute the taxable capital gains of Mr. D for AY 20XY-XZ as per following details:
Cost of jewellery [Purchased in FY 2004-05] 4,52,000

Sale price of jewellery sold in January 20XY 21,50,000
Expenses on transfer 7,000
Residential house purchased in March 20XY 5,00,000
Case 1: What will be the consequences if new house is sold before 3 years?
Case 2: What will be the consequences if the assessee already owns 2 houses on date of transfer?
Illustration 26
Mr. Cee purchased a residential house on July 20, 2020 for ₹ 10,00,000 and made some additions to
the house incurring ₹ 2,00,000 in August 2020. He sold the house property in April 20XX for
₹ 20,00,000. Out of the sale proceeds, he spent ₹ 5,00,000 to purchase another house property in
September 20XX.
What is the amount of capital gains taxable in the hands of Mr. Cee for the AY 20XY-XZ?

CAPITAL GAINS
C. PURCHASE of LAND, BUILDING, PLANT & MACHINERY

[Section 54D, 54G AND 54GA]
Particulars Section 54D Section 54G Section 54GA

Eligible Assessee Any Assessee
Land, Building, plant

Land, Building, plant
Original Assets Land or Building of & machinery used for
& machinery used for
transferred Industrial Undertaking Industrial Undertaking
Industrial Undertaking
in URBAN AREA
Use the land for at-

Period of holding of Long term capital asset / Short term capital
least 2 years before
asset transferred asset
date of transfer
Shifting industrial
Transfer should be by Shifting industrial
undertaking from
way of compulsory undertaking from
Other conditions urban area to any
acquisition of land or urban area to Special
area other than
building Economic Zone
urban area
Qualifying asset i.e. new Land, building, plant and machinery (used for
asset in which Capital Land or Building business) and expenses on shifting the
gains has to be invested undertaking
Purchase /
Construction – within
Time limit for purchase/ Purchase – 1 year before date of transfer
3 years from date of
construction of new Construction – within 3 years from date of
transfer for shifting
asset transfer
existing or setting up
new undertaking
Lower of cost of new (Lower of cost of new assets plus expenses on

Amount of exemption
asset and capital gains shifting) and capital gains
Lock-in period of new New assets shall not be transferred before 3 years from the date of
asset purchase / construction
Taxability on withdrawal
Cost of new asset shall be reduced by amount of exemption earlier
of exemption
*Note: Capital Gain deposit scheme provision is applicable for all the above sections.

CAPITAL GAINS
Note: As per Section 54D, the exemption in respect of capital gains from transfer of capital asset would
be available even in respect of short-term capital asset, being land or building or any right in any land
or building, provided such capital asset is used by assessee for the industrial undertaking belonging to
him, even if he was not the owner for the said period of 2 years.
Illustration 27
PQR Ltd., purchased a land for industrial undertaking in May 2003, at a cost of ₹ 4,00,000. The above
property was compulsorily acquired by the State Government at a compensation of ₹ 12,00,000 in the
month of January, 20XY. The compensation was received in March, 20XY. The company purchased
another land for its industrial undertaking at a cost of ₹ 2,00,000 in the month of March, 20XY. What
is the amount of the capital gains chargeable to tax in the hands of the company for the AY 20XY-XZ?
INVESTMENT IN BONDS [SECTION 54EC]
Eligible Assessee Any assessee

Original Assets transferred Land or building or both
Period of holding of asset transferred Long-term capital asset
Investment of proceeds in bonds of NHAI or
RECL or IRFC or PFC
Qualifying asset i.e. new asset in which
Capital gains has to be invested Such bonds shall be redeemable after 5 years (if
issued on or after 1 April 2018); otherwise, the
time limit is 3 years.
Time limit for purchase of new asset Within 6 months from date of transfer
Amount of exemption Lower of amount of investment and ₹ 50 lakhs
Shall not be transferred before 5 years from date
Lock-in period of new asset
of purchase.
The amount of exemption earlier shall be taxable
Taxability on withdrawal of exemption as capital gains in the year in which such new
asset is sold.

CAPITAL GAINS
Points to remember:
(i) NHAI -National Highway Authority of India; RECL - Rural Electrification Corporation Limited
IRFC - Indian Railways Finance Corporation; PFC - Power Finance Corporation Limited
(ii) Maximum permissible investment in such bonds out of capital gains arising in any FYs is ₹ 50 lakhs
whether such investment is made in current FY or subsequent FY.
(iii) If assessee obtains any loans/ advances by mortgaging “investments in such bonds”, it would be
deemed that the investment has been transferred.
TAX RATES ON CAPITAL GAINS
TAX ON LONG TERM CAPITAL GAINS ON CERTAIN ASSETS [SECTION 112A]
(A) Applicability of Section 112A

A concessional rate of tax @10% levied on the long-term capital gains exceeding ₹ 1,00,000 on transfer
of
(a) Equity share in a company or
(b) Unit of an equity-oriented fund or
(c) Unit of a business trust
(B) Conditions for applicability of Section 112A
Equity share in a company Securities Transaction Tax has been paid on acquisition and
transfer of such capital asset
Unit of an equity-oriented fund / Securities Transaction Tax has been paid on transfer of such
unit of business trust capital asset
The Central Government may, by notification in the Official Gazette, specify the nature of acquisition
of equity share in a company on which the condition of payment of STT on acquisition would not be
applicable.
What if STT is not leviable in respect of such transaction?

Long-term capital gains arising from transaction undertaken on a recognized stock exchange located in
an International Financial Service Centre (IFSC) would still be taxable at a concessional rate of 10%,
where the consideration for transfer is received or receivable in foreign currency.

CAPITAL GAINS
(C) Adjustment of Unexhausted Basic Exemption Limit
If the basic exemption is not fully exhausted by any other income, then such long-
Resident
term capital gain exceeding ₹1 lakh will be reduced by the unexhausted basic
Individual/HUF
exemption limit and only the balance would be taxed at 10%.
Non-residents The benefit of adjustment of unexhausted basic exemption limit is not available
(D) No deduction under Chapter VI-A against LTCG taxable under Section 112A:
Deductions under Chapter VI-A cannot be availed from such long term capital gains.
(E) No benefit of rebate u/s 87A against LTCG taxable under Section 112A:
Rebate under section 87A is not available in respect of tax payable @10% on LTCG under Section 112A
(F) Cost of Acquisition [Section 55(2)(ac)]

The cost of acquisition in relation to the long-term capital assets referred to in Section 112A acquired
before 1st February, 2018 shall be the higher of
(i) cost of acquisition of such asset; and [Actual Cost]

(ii) lower of
(a) fair market value of such asset; and [Fair Market Value]
(b) full value of consideration received or accruing as a result of the transfer of the capital asset.
If the full value of consideration on transfer is less than the fair market value, then such full value of
consideration or the actual cost, whichever is higher, will be deemed to be the cost of acquisition
Meaning of Fair Market Value
Particulars Circumstances Fair Market Value
If there is trading in such asset
The highest price of the capital
on such exchange on
asset quoted on such exchange on
In a case where capital 31.01.2018
the said date.
asset is listed on any
recognized stock The highest price of such asset on
exchange as on If there is no trading in such such exchange on a date
31.01.2018 asset on such exchange on immediately preceding 31.01.2018
31.01.2018 when such asset was traded on
such exchange.
In a case where the capital asset is a unit which is not listed Net asset value of such unit as on
on any recognized stock exchange as on 31.01.2018 the said date

CAPITAL GAINS
not listed on a recognized

In a case where the capital Cost of Acquisition* CII of FY 2017-
stock exchange as on
asset is an equity share in 18/ CII for the first year in which the
31.01.2018 but listed on such
a company which is asset was held by the assessee or on
exchange on the date of
01.04.2001, whichever is later.
transfer
listed on a recognized stock
exchange on the date of
transfer and which became
the property of the assessee in
consideration of share which is
not listed on such exchange as
on 31.01.2018 by way of
transaction not regarded as
transfer u/s 47
No Indexation benefit to be provided while computing long term capital gains taxable u/s 112A.
Cost of acquisition of bonus shares and right shares acquired before 1st February 2018 would be
computed in similar manner as mentioned above.
(G) Scenarios to compute long-term capital gains

SCENARIO 1
Issue Answer
An equity share is acquired on 1st of January, As the actual cost of acquisition is less than the
2017 at ₹ 100, its fair market value is ₹ 200 on fair market value as on 31st of January, 2018, the
31st of January, 2018 and it is sold on 1st of April, fair market value of ₹ 200 will be taken as the
2018 at ₹ 250. cost of acquisition and the long-term capital
gain will be ₹ 50 (₹ 250 – ₹ 200).
SCENARIO 2
Issue Answer
An equity share is acquired on 1st of January, The actual cost of acquisition is less than the fair
2017 at ₹ 100, its fair market value is ₹ 200 on market value as on 31st of January, 2018.
31st of January, 2018 and it is sold on 1st of April, However, the sale value is also less than the fair
2018 at ₹ 150. market value as on 31st of January, 2018.
Accordingly, the sale value of ₹ 150 will be taken
as the cost of acquisition and the long-term
capital gain will be NIL (₹ 150 – ₹ 150).

CAPITAL GAINS
SCENARIO 3
Issue Answer
An equity share is acquired on 1st of January, The fair market value as on 31st of January, 2018
2017 at ₹ 100, its fair market value is ₹ 50 on 31st is less than the actual cost of acquisition, and
of January, 2018 and it is sold on 1st of April, 2018 therefore, the actual cost of ₹ 100 will be taken
at ₹ 150. as actual cost of acquisition and the long-term
capital gain will be ₹ 50 (₹ 150 – ₹ 100).
SCENARIO 4
Issue Answer
An equity share is acquired on 1stof January, The actual cost of acquisition is less than the fair
2017 at ₹ 100, its fair market value is ₹ 200 on market value as on 31st January, 2018. The sale
31st of January, 2018 and it is sold on 1st of April, value is less than the fair market value as on 31st
2018 at ₹ 50. of January, 2018 and also the actual cost of
acquisition. Therefore, the actual cost of ₹ 100
will be taken as the cost of acquisition in this
case. Hence, the long-term capital loss will be ₹
50 (₹ 50 – ₹ 100).
(H) Treatment of Long-term capital loss

Long-term capital loss arising from transfer made on or after 1st April, 2018 will be allowed to be set-
off and carried forward in accordance with existing provisions of the Act. Therefore, it can be set-off
against any other long-term capital gains and unabsorbed loss can be carried forward to subsequent 8
years for set-off against long-term capital gains.
Points to be remembered [Clarification F. No. 370149/20/2018-TPL dated 04.02.2018]
(i) Section 112A is applicable on transfer of equity shares in a company listed on a recognised stock
exchange.
(ii) Securities Transaction Tax is required to be paid even at the time of acquisition (subject to notified
exemptions) in the case of equity shares acquired after 1.10.2004.
(iii) The tax will be levied only upon transfer of the long-term capital asset on or after 1st April, 2018.
(iv) Long-term capital gains exceeding ₹ 1 Lakh arising from transfer of these assets made on after 1 st
April, 2018 will be taxed at 10%. There will be no tax on gains accrued upto 31st January, 2018.
(v) Long-term capital gains will be computed by deducting the cost of acquisition from the full value
of consideration on transfer of the long-term capital asset.
(vi) Long-term capital gain will be computed without giving effect to the provisions of the second
provisos of section 48. Accordingly, it is clarified that benefit of inflation indexation of the cost of

CAPITAL GAINS
acquisition would not be available for computing long-term capital gains [Third Proviso to
Section 48]
(vii) The holding period will be counted from the date of acquisition.
(viii) There will be no deduction of tax at source from the payment of long-term capital gains to a
resident tax payer.
Meaning of Equity Oriented Fund

A fund set up under a scheme of a mutual fund specified u/s 10(23D) or under a scheme of an insurance
company comprising ULIPs issued on or after 1.2.2021, to which exemption under section 10(10D)
does not apply on account of –
(i) premium payable exceeding ₹ 2,50,000 for any of the previous years during the term of such
policy; or
(ii) the aggregate amount of premium exceeding ₹ 2,50,000 in any of the previous years during the
term of any such ULIP(s), in a case where premium is payable by a person for more than one ULIP
issued on or after 1.2.2021).
Fund invests in the units of (i) ≥ 90% of the total proceeds of such fund is invested in the
“another fund” which is units of such other fund; and
traded on a recognised stock
(ii) such other fund also invests ≥ 90% of its total proceeds in the
exchange
equity shares of domestic companies listed on a recognised
stock exchange.
Other cases ≥ 65% of the total proceeds of such fund is invested in the equity
shares of domestic companies listed on a recognised stock
exchange
*% of equity shareholding / unit held in respect of the fund shall be computed with reference to the
annual average of the monthly averages of the opening and closing figures.
D. STCG ON TRANSFER OF SHARES AND SECURITIES [SECTION 111A)
Any income arising from the transfer of a SHORT-TERM CAPITAL ASSET being an EQUITY SHARE IN A
COMPANY OR A UNIT OF EQUITY ORIENTED FUND prescribed u/s 112A shall be taxable @ 15%, if such
transaction is chargeable to SECURITIES TRANSACTION TAX.
Securities Transaction Tax (STT) is a tax payable in India on the value of securities (excluding
commodities and currency) transacted through a recognized stock exchange. [LISTED SHARES]

CAPITAL GAINS
What if STT is not paid??
A. Recognized stock exchange located in an International Financial Services Centre (IFSC) – EXEMPT,
if transaction is undertaken in foreign currency.
B. Others – Fully Taxable and no exemption
An IFSC caters to customers outside the jurisdiction of the domestic economy. Such centres deal with
flows of finance, financial products and services across borders.
Points to be remembered
a) No deduction under Chapter VI-A against STCG taxable under section 111A
b) Adjustment of Unexhausted Basic Exemption Limit
Resident Short-term capital gain will be reduced by the unexhausted basic exemption
individuals /HUF limit and only the balance would be taxed at 15%.
Non-resident Adjustment is not allowed
Example
Short term capital gain on transfer of shares on which STT is paid: ₹ 1,30,000
Other income: ₹ 1,66,000
Calculate tax of Mr. X aged 45 years?
REFERENCE TO VALUATION OFFICER – SECTION 55A

The Assessing Officer may refer the valuation of a capital asset to a Valuation Officer in the following
circumstances with a view to ascertaining the fair market value of the capital asset for the purposes of
capital gains.
(i) In a case where the value of the asset is in accordance with registered valuer, if the Assessing Officer
is of the opinion that the value so claimed is at variance with its fair market value
Challenge FMV when it is a
(ii) In any other case: sales consideration
a. the fair market value of the asset exceeds the value of the asset as claimed by the assessee by
more than 15% of the value of asset as claimed OR by more than ₹ 25,000 of the value of the
asset as claimed by the assessee.

CAPITAL GAINS
b. The Assessing Officer believes that, having regard to the nature of asset and other relevant
circumstances, it is necessary to make the reference.
Note: Assessing Officer can also make a reference to the Valuation Officer in a case where the fair
market value of the asset as on 01.04.2001 is taken as the cost of the asset, if he is of the view that
there is any variation between the value as on 01.04.2001 claimed by the assessee in accordance with
the estimate made by a registered valuer and the fair market value of the asset on that date.
Challenge FMV when it is a
Cost of Acquisition
FMV DEEMED TO BE FVC – SECTION 50D

Where Full Value of Consideration is not ascertainable, then the fair market value of the said asset on
the date of transfer shall be deemed to be the full value of consideration.
CAPITAL GAIN ON DISTRIBUTION OF ASSETS BY COMPANIES IN ITS

LIQUIDATION [SECTION 46]
Assets are disposed on liquidation of a company after payment of all its outside liabilities.
Tax Treatment in the hands of Company [Section 46(1)]
Any transfer by way of distribution of assets among its shareholder is not treated as transfer. Hence,
no capital gain arises in hands of company.
Non-applicability of Section 46(1)

When assets are sold in market (thereafter sale proceeds is distributed among shareholders), then such
sale of assets by the company in market shall be treated as transfer and chargeable under ‘Capital gains’
in hands of company.
Tax Treatment in the hands of shareholders [Section 46(2)]
When a shareholder receives money / other assets at time of liquidation of the company then such
receipts [excluding the amount of dividend u/s 2(22)(c)] shall be liable to capital gain as under –
Sales consideration Total amount/ Market value of assets received on liquidation by shareholder
Less: Deemed Dividend u/s 2(22)(c)
Cost of Acquisition As usual

CAPITAL GAINS
Points to be remembered
a) Payment in installments by the liquidator to shareholders: In case payment is received by the
shareholder in installments then the cost of acquisition shall be deducted from the earlier
installment(s). Once the cost of acquisition is absorbed by the earlier installment then subsequent
installment (less expenditure on transfer) shall be fully taxable.
b) Cost of Acquisition of assets acquired on liquidation by shareholder is the Fair Market Value on
date of distribution.
c) The distributed asset may not be a capital asset, to come within the ambit of Section 46(2).
d) The distribution is deemed to take place in proportion of share capital and accumulated profit as
appears immediately before the distribution in the books of account of the company.
Illustration
Balance sheet of Purva India (P) Ltd. as on 31/12/20XX
Liabilities Amount (₹) Assets Amount (₹)

Equity Share capital of ₹ 10 each 8,00,000 Land 6,00,000
Preference Share capital 1,00,000 Building (WDV as per IT) 3,00,000
Reserves 2,00,000 Machinery (WDV as per IT) 4,00,000
Loan 6,00,000 Current Asset 10,40,715
Creditors 6,00,000
Provision for dividend tax 40,715
Additional information:
Company went into liquidation on the balance sheet date and all current assets and building realized at
book value. The realized money was applied in payment of outside liabilities including dividend tax and
preference shareholder.
Utkarsh is a holder of 10% equity share and 20% preference share of the company. Equity shares were
originally acquired by him on 16/08/2002 at face value. However, he sub-scribed to preference share
on 1-04-20XX, which was issued at par. He received a part of land (MV ₹ 5,00,000) and cash (for
preference share) ₹ 20,000. Compute capital gain in hands of company & Utkarsh.

CAPITAL GAINS
CAPITAL GAIN ON “BUY BACK” OF OWN SHARES OR OTHER SPECIFIED

SECURITIES [SECTION 46A]
Buy-back of shares
Domestic company Other company
Company is liable to Exempt u/s 10(34A) Sec. 115QA is not Shareholder is

pay Buy Back Tax u/s in hands of applicable liable to pay Capital
115QA @ 20% + (HEC) Shareholder Gain Tax u/s 46A
Points to be remembered:
(i) Sale consideration: Amount received by a shareholder (or a holder of other specified securities)
from the company.
(ii) Taxable in the year in which when such shares or securities are purchased by the company
Buyback of shares by a Buyback of specified

Taxability in the Buyback of shares by
company, other than a securities by any
hands of domestic companies
domestic company company
Not subject to tax in
Subject to additional Not subject to tax in the
Company the hands of the
income-tax @ 23.296% hands of the company
company
Income arising to Income arising to Income arising to
Shareholder/ holder
shareholders exempt shareholder taxable as shareholder taxable as
of specified securities
under Section 10(34A) capital gains u/s 46A capital gains u/s 46A
Note – (1) As far as shares are concerned, this provision would be attracted in the hands of the
shareholder only if the shares are bought back by a company, other than a domestic company.
(2) As per Section 68 of the Companies Act, 2013,"specified securities" includes employees' stock option
or other securities as may be notified by the Central Government from time to time

CAPITAL GAINS
TAX RATES ON LONG TERM CAPITAL GAINS U/S 112
Resident Individuals and HUF 20% [Basic exemption limit available]
Resident AOP/BOI and Firms 20% [No Basic exemption limit available]
Domestic companies 20% [Basic exemption limit not applicable]
20% - Capital assets, other than unlisted securities or shares
of closely held companies
Non-residents and foreign
10% - Unlisted securities or shares of closely held companies
companies
(without benefit of indexation or foreign currency
fluctuation)
• Unexhausted basic exemption limit can be utilized against LTCG (only for resident individuals/HUF
and not applicable for non-residents)
• No deduction under chapter VIA (i.e. u/s 80C to 80U) is available against LTCG.
• The above rates to be increased by surcharge and cess as applicable.
SPECIAL OPTION AVAILABLE ON CAPITAL GAINS ON SHARES, SECURITIES

& UNITS [PROVISO TO SECTION 112]
Applicability: Long-term capital asset being security (other than units) listed in any recognized stock
exchange in India or zero coupon bonds
Treatment: Capital gain may be calculated and assessed in any of the following two options
Step Option 1 Option 2

1 Compute sales consideration Compute sales consideration
Reduce expenditure on transfer, Indexed Reduce expenditure on transfer, Cost of

2 Cost of Acquisition and Indexed Cost of Acquisition and Cost of Improvement as usual
Improvement as usual No indexation benefit is available
3 Step 1 – Step 2 is LTCG Step 1 – Step 2 is LTCG

4 LTCG taxable @ 20% + surcharge + cess LTCG taxable @ 10% + surcharge + cess

CAPITAL GAINS
Example: Mr. Jadu has sold following assets on 31/03/20XY:
Transfer
Assets transferred Cost Acquired on Sold for
expenses
Land 4,00,000 19/08/2009 15,00,000 40,000
Government securities 10000 17/07/2006 1,00,000 5,000
Listed Debentures 20,000 17/04/2010 1,00,000 2,000
Compute his tax liability
Example 2: Mr. Janardan, a resident aged 52 years, has other income of ₹ 1,70,000 and LTCG ₹ 90,000

CAPITAL GAINS
CLASSWORK PROBLEMS
Question 1 [SM]
Mr. C purchases a house property for ₹ 1,06,000 on May 15, 1975. The following expenses are incurred
by him for making addition/alternation to the house property:
Particulars ₹
a. Cost of construction of first floor in 1982-83 3,10,000
b. Cost of construction of the second floor in 2002-03 7,35,000
c. Reconstruction of the property in 2012-13 5,50,000
Fair market value of the property on April 1, 2001 is ₹ 8,50,000. The house property is sold by Mr. C
on August 10, 20XX for ₹ 68,00,000 (expenses incurred on transfer - ₹ 50,000). Compute the capital
gain for the assessment year 20XY-XZ.
Question 2
Mrs. Harshita purchased a land at a cost of ₹ 35 lakhs in the financial year 2004-05 and held the
same as her capital asset till 20th March, 2022. She started her real estate business on 21st March,
2022 and converted the said land into stock-in-trade of her business on the said date, when the fair
market value of the land was ₹ 210 lakhs.
She constructed 15 flats of equal size, quality and dimension. Cost of construction of each flat is
₹ 10 lakhs. Construction was completed in February, 20XY. She sold 10 flats at ₹ 30 lakhs per flat in
March, 20XY. The remaining 5 flats were held in stock as on 31st March, 20XY.
She invested ₹ 50 lakhs in bonds issued by National Highways Authority of India on 31 st March, 20XY
and another ₹ 50 lakhs in bonds of Rural Electrification Corporation Ltd. in April, 20XY.
Compute the amount of chargeable capital gain and business income in the hands of Mrs. Harshita
arising from the above transactions for Assessment Year 20XY-XZ indicating clearly the reasons for
treatment for each item. Cost Inflation Index: F.Y. 2004-05: 113; F.Y. 2021-22: 317 Answer: Capital
Gains: ₹ 24,54,277 PGBP: ₹ 60,00,000
Question 3
Mr. Selvan, acquired a residential house in January, 2005 for ₹ 10,00,000 and made some
improvements by way of additional construction to the house, incurring expenditure of ₹ 2,00,000
in October, 2009. He sold the house property in October, 20XX for ₹ 75,00,000. The value of
property was adopted as ₹ 80,00,000 by the State stamp valuation authority for registration
purpose. He acquired a residential house in January, 20XY for ₹ 25,00,000. He deposited ₹ 20,00,000
in capital gains bonds issued by National Highways Authority of India (NHAI) in June, 20XY.
Compute the capital gain chargeable to tax for the assessment year 20XY-XZ

CAPITAL GAINS
EXEMPTIONS ON CAPITAL GAINS

Question 3A
Mr. Sarthak entered into an agreement with Mr. Jaikumar to sell his residential house located Kanpur
on 16.08.2022 for ₹ 1,50,00,000. The sale proceeds were to be paid in the following manner:
(i) 20% through account payee bank draft on the date of agreement.
(ii) 60% on the date of the possession of the property.
(iii) Balance after the completion of the registration of the title to the property
Mr. Jaikumar was handed over the possession of the property on 15.12.2022 and the registration
process was completed on 14.01.2023. He paid the sale proceeds as per the sale agreement.
The value determined by the Stamp Duty Authority-
(a) on 16.08.2022 was ₹ 1,70,00,000;
(b) on 15.12.2022 was ₹ 1,71,00,000; and
(c) on 14.01.2023 was ₹ 1,71,50,000.
Mr. Sarthak had acquired the residential house at Kanpur on 01.04.2002 for ₹ 30,00,000. After
recovering the sale proceeds from Jaikumar, he purchased two residential house properties, one in
Kanpur for ₹ 20,00,000 on 24.3.2023 and another in Delhi for ₹ 35,00,000 on 28.5.2023.
Compute the income chargeable under the head "Capital Gains" of Mr. Sarthak for the Assessment
Year 2022-23. Cost Inflation Index for Financial Year(s): 2001-02 - 100; 2021-22 - 317
Question 3B
Mrs. Yuvika bought a vacant land for ₹ 80 lakhs in May 2004. Registration and other expenses were
10% of the cost of land. She constructed a residential building on the said land for ₹ 100 lakhs during
the financial year 2006-07.
She entered into an agreement for sale of the above said residential house with Mr. Johar (not a
relative) in April 2015. The sale consideration was fixed at ₹ 700 lakhs and on 23-4-2015, Mrs. Yuvika
received ₹ 20 lakhs as advance in cash by executing an agreement. However, due to failure on part of
Mr. Johar, the said negotiation could not materialise and hence, the said amount of advance was
forfeited by Mrs. Yuvika.
Mrs. Yuvika, again entered into an agreement on 01.08.2022 for sale of this house at ₹ 810 lakhs. She
received ₹ 80 lakhs as advance by RTGS. The stamp duty value on the date of agreement was ₹ 890
lakhs. The sale deed was executed and registered on 14-1-2023 for the agreed consideration. However,
the State stamp valuation authority had revised the values, hence, the value of property for stamp duty
purposes was ₹ 900 lakhs. Mrs. Yuvika paid 1% as brokerage on sale consideration received.
Subsequent to sale, Mrs. Yuvika made following investments:

CAPITAL GAINS
(i) Acquired two residential houses at Delhi for ₹ 130 lakhs and ₹ 50 lakhs on 31.1.2023 and 15.5.2023
(ii) Acquired a residential house at UK for ₹ 180 lakhs on 23.3.2023.
(iii) Subscribed to NHAI capital gains bond (approved under section 54EC) for ₹ 50 lakhs on 29-3-2023
and for ₹ 40 lakhs on 12-5-2023.
Compute the income chargeable under the head 'Capital Gains' of Mrs. Yuvika for A.Y.2023-24. The
choice of exemption must be in the manner most beneficial to the assessee. Cost Inflation Index: F.Y.
2004-05 – 113; F.Y. 2006-07 – 122; F.Y. 2021-22 - 317.
Question 3C
Mr. Shiva purchased a house property on February 15, 1979 for ₹ 3,24,000. In addition, he has also paid
stamp duty value @10% on the stamp duty value of ₹ 3,50,000.
In April, 2007, Mr. Shiva entered into an agreement with Mr. Mohan for sale of such property for
₹ 14,35,000 and received an amount of ₹ 1,11,000 as advance. However, the sale consideration did not
materialize and Mr. Shiva forfeited the advance. In May 2014, he again entered into an agreement for
sale of said house for ₹ 20,25,000 to Ms. Deepshikha and received ₹ 1,51,000 as advance. However, as
Ms. Deepshikha did not pay the balance amount, Mr. Shiva forfeited the advance. In August, 2014, Mr.
Shiva constructed the first floor by incurring a cost of ₹ 3,90,000.
On November 15, 2022, Mr. Shiva entered into an agreement with Mr. Manish for sale of such house
for ₹ 30,50,000 and received an amount of ₹ 1,50,000 as advance through an account payee cheque.
Mr. Manish paid the balance entire sum and Mr. Shiva transferred the house to Mr. Manish on February
20, 2023. Mr. Shiva has paid the brokerage @1% of sale consideration to the broker.
On April 1, 2001, fair market value of the house property was ₹ 11,85,000 and Stamp duty value was
₹ 10,70,000. Further, the Valuation as per Stamp duty Authority of such house on 15th November, 2022
was ₹ 39,00,000 and on 20th February, 2023 was ₹ 41,00,000. Compute the capital gains in the hands
of Mr. Shiva for A.Y.2023-24. CII for F.Y. 2001-02: 100; F.Y. 2007-08: 129; F.Y. 2014-15: 240; F.Y. 2021-
22: 317
Question 4
Mr. Chandru transferred a vacant site on 28.10.20XX for ₹ 100 lakhs. The site was acquired for
₹ 9,99,300 on 30.06.2013. He invested ₹ 50 lakhs in eligible bonds issued by Rural Electrification
Corporation Ltd. (RECL) on 20.03.20XY.
Again, he invested ₹ 20 lakhs in eligible bonds issued by National Highways Authority of India
(NHAI) on 16.4.20XY. Compute the chargeable capital gain in the hands of Mr. Chandru for the AY
20XY-XZ.

CAPITAL GAINS
CAPITAL GAINS TAX

Question 5
Calculate the income-tax liability for the assessment year 20XY-XZ in the following cases
Status A (age 45) B (age 62) C (age 81) D (age 82)

Resident Non-resident Resident Non-resident
Total Income 2,40,000 2,80,000 5,90,000 4,80,000
other than LTCG
LTCG 15,000 (sale of 10,000 (from sale 60,000 (from sale Nil
vacant site) of listed equity of agricultural
shares (STT paid land in rural area)
on sale and
purchase of
shares)
Answer: ₹ Nil, 1,560, 18,720, 11,960
HOMEWORK PROBLEMS
Question 1
Mr. Rakesh purchased a house property on 14 thApril, 1999 for ₹ 1,05,000. He entered into an
agreement with Mr. Bobby for the sale of house on 15 th September, 2002 and received an advance
of ₹ 25,000. However, since Mr. Bobby did not remit the balance amount, Mr. Rakesh forfeited the
advance. Later on, he gifted the house property to his friend Mr. Aakash on 15th June, 2005.
Following renovations were carried out by Mr. Rakesh and Mr. Aakash to the house property:
Particulars ₹
By Mr. Rakesh during FY 1998-99 10,000
By Mr. Rakesh during FY 2001-02 50,000
By Mr. Aakash during FY 2002-03 1,90,000
The fair market value of the property as on 1.4.2001 is ₹ 1,50,000. Mr. Aakash entered into an
agreement with Mr. Chintu for sale of the house on 1 st June, 2005 and received an advance of
₹ 80,000. The said amount was forfeited by Mr. Aakash, since Mr. Chintu could not fulfil the terms
of the agreement. Finally, the house was sold by Mr. Aakash to Mr. Sanjay on 2 nd January, 20XY for
a consideration of ₹ 12,00,000. Compute the capital gains chargeable to tax in the hands of Mr.
Aakash for the assessment year 20XY-XZ.

CAPITAL GAINS
Question 2
Mr. Anand Prakash, a resident individual, aged 55 years, purchased 10 plots in the financial year
2002-03 for ₹ 12 Lakh. On 1st April 2010, he started a business of property dealing and converted all
10 plots as stock in trade of his business and recorded the cost at ₹ 40 Lakh in his books being the
fair market value on 1st April 2010.
On 31st March 2014, he sold all 10 Plots for ₹ 55 Lakh and purchased a residential house property for
₹ 50 Lakh. He has constructed 2 rooms in this residential house in June 2015 and has spent ₹ 8 lakhs.
He sold the above residential house on 5 th Feb 20XY, for ₹ 70 Lakh. The valuation adopted by Stamp
valuation authority for the payment of stamp duty was ₹ 92 Lakh. On the request of Mr. Anand
Prakash, Assessing Officer made a reference to the Valuation Officer. The Valuation Officer
determined the value at ₹ 95 Lakh. Mr. Anand Prakash paid brokerage 1% of sale consideration.
Compute the total income and total tax liability of Mr. Anand Prakash for the AY 20XY-XZ.
Question 3 [SM]
Mr. Kay purchases a house property on April 10, 1992 for ₹ 65,000. The fair market value of the
house property on April 1, 2001 was ₹ 2,70,000. On August 31, 2003, Mr. Kay enters into an
agreement with Mr. Jay for sale of such property for ₹ 3,70,000 and received an amount of ₹ 60,000
as advance. However, as Mr. Jay did not pay the balance amount, Mr. Kay forfeited the advance. In
May 2008, Mr. Kay constructed the first floor by incurring a cost of ₹ 2,35,000. Subsequently, in
January 2009, Mr. Kay gifted the house to his friend Mr. Dee. On February 10, 20XY, Mr. Dee sold
the house for ₹ 12,00,000. CII for FY 2003-04: 109; 2008-09: 137; 2018-19: 280; 2020-21: 301
Compute the capital gains in the hands of Mr. Dee for AY 20XY-XZ.
Question 4 [SM]
Mr. X purchases a house property in December 1993 for ₹ 5,25,000 and an amount of ₹ 1,75,000 was
spent on the improvement and repairs of the property in March, 1997. The property was proposed
to be sold to Mr. Z in the month of May, 2006 and an advance of ₹ 40,000 was taken from him. As
the entire money was not paid in time, Mr. X forfeited the advance and subsequently sold the
property to Mr. Y in the month of March, 20XY for ₹ 52,00,000. The fair value of the property on April
1, 2001 was ₹ 11,90,000. What is the capital gain chargeable in the hands of Mr. X for the AY 20XY-
XZ?
Question 5
Mr. Thomas inherited a house in Jaipur under will of his father in May, 2008. The house was
purchased by his father in January, 2000 for ₹ 2,50,000. He invested an amount of ₹ 7,00,000 in
construction of one more floor in this house in June, 2002. The house was sold by him in November,
20XX for ₹ 37,50,000. The valuation adopted by the registration authorities for charge of stamp duty
was ₹ 47,25,000 which was not contested by the buyer, but as per assessee’s request, the Assessing

CAPITAL GAINS
Officer made a reference to Valuation officer. The value determined by the Valuation officer was
₹ 47,50,000. Brokerage @ 1% of sale consideration was paid by Mr. Thomas to Mr. Sunil. The fair
market value of house as on 01.04.2001 was ₹ 2,70,000.
You are required to compute the amount of capital gain chargeable to tax for AY 20XY-XZ with the
help of given information.
Question 6
Mr. Raj Kumar sold a house to his friend Mr. Dhuruv on 1 st November, 20XX for a consideration of
₹ 25,00,000. The Sub-Registrar refused to register the document for the said value, as according to
him, stamp duty had to be paid on ₹ 45,00,000, which was the Government guideline value. Mr. Raj
Kumar preferred an appeal to the Revenue Divisional Officer, who fixed the value of the house as
₹ 32,00,000 (₹ 22,00,000 for land and the balance for building portion). The differential stamp duty
was paid, accepting the said value determined. What are the tax implications in the hands of Mr.
Raj Kumar and Mr. Dhuruv for the AY 20XY-XZ? Mr. Raj Kumar had purchased the land on 1 st June,
2012 for ₹ 5,19,000 and completed the construction of house on 1 st October, 2019 for ₹ 14,00,000.
CONVERSION OF CAPITAL ASSET INTO STOCK-IN-TRADE
Question 7
Aarav converts his plot of land purchased in July, 2004 for ₹ 80,000 into stock-in-trade on 31st March,
2022. The fair market value as on 31.3.2022 was ₹ 3,00,000. The stock-in-trade was sold for
₹ 3,25,000 in the month of January, 20XY.
Find out the taxable income, if any, and if so under which ‘head of income’ and for which Assessment
Year? Cost Inflation Index: F.Y. 2004-05:113; F.Y. 2021-22: 317.
Question 8
Mr. C inherited from his father 8 plots of land in 1999. His father had purchased the plots in 1980
for ₹ 5 lakhs. The fair market value of the plots as on 1-4-2001 was ₹ 8 lakhs. (₹ 1 lakh for each plot)
On 1st June 2014, C started a business of dealer in plots and converted the 8 plots as stock- in-trade
of his business. He recorded the plots in his books at ₹ 45 lakhs being the fair market value on that
date. In June 2015, C sold the 8 plots for ₹ 50 lakhs. In the same year, he acquired a residential
house property for ₹ 35 lakhs. He invested an amount of ₹ 5 lakhs in construction of one more floor
in his house in June 2016. The house was sold by him in June 20XX for ₹ 75,00,000.
The valuation adopted by the registration authorities for charge of stamp duty was ₹ 98,00,000. As
per the assessee's request, the Assessing Officer made a reference to a Valuation Officer. The value
determined by the Valuation Officer was ₹ 1,05,00,000. Brokerage of 1 % of sale consideration was
paid by C. The relevant Cost Inflation Indices are:
Give the tax computation for the Assessment Year 20XY-XZ

CAPITAL GAINS
EXEMPTIONS ON CAPITAL GAINS

Question 9
Mr. Mayank, aged 55 years owned a residential house in Noida. It was acquired by Mr. Mayank on
17-12-2004 for ₹ 8,00,000. He sold it for ₹ 68,00,000 on 14-12-20XX. The stamp valuation authority
of the State fixed value of the property at ₹ 85,00,000. The assessee paid 2% of the sale consideration
as brokerage on sale of the said property.
Mr. Mayank acquired a residential house property at Kota on 3.3.20XY for ₹ 7,00,000 and deposited
₹ 3,50,000 on 14-5-20XY and ₹ 5,50,000 on 25-7-20XY in the capital gains bonds of the National
Highway Authority of India. He deposited ₹ 4,50,000 on 16-7-20XY and ₹ 8,70,000 on 11-11-20XY in
the capital gain deposit scheme in a Nationalized Bank for construction of an additional floor on the
residential house property in Kota.
Compute the Capital Gain chargeable to tax for the AY 20XY-XZ and income-tax chargeable thereon
assuming Mr. Mayank has no other income.
Question 10
Ms. Anshu transferred land and building on 02-01-20XY and furnishes the following information
Particulars (₹)
(i) Net consideration received 23,00,000
(ii) Value adopted by Stamp Valuation Authority 25,00,000
(iii) Value ascertained by Valuation Officer on reference by the Assessing Officer 27,00,000
(iv) This land was acquired by Anshu on 1-04-2001. Fair Market Value of the land 1,10,000
as on 01-04-2001
(v) Anshu constructed a residential building on the land at a cost of ₹ 3,20,000
(construction completed on 01-12-2012 during the financial year 2012-13)
(vi) Brought forward short term capital loss incurred on sale of shares during 1,50,000
financial year 2011-12
Anshu seeks your advice regarding the amount to be invested in NHAI bonds so as to be exempt
from capital gain tax under the Income-tax Act, 1961.
Question 11
Mr. Roy, aged 55 years owned a Residential House in Ghaziabad. It was acquired by Mr. Roy on 10-
10-2007 for ₹ 24,00,000. He sold it for ₹ 65,00,000 on 4-11-20XX. The stamp valuation authority of
the State fixed value of the property at ₹ 72,00,000. The assessee paid 2% of the sale consideration
as brokerage on the sale of the said property.
Mr. Roy acquired a residential house property at Kolkata on 10-12-20XX for ₹ 7,00,000 and
deposited ₹ 3,00,000 on 10-4-20XY and ₹ 5,00,000 on 15-6-20XY in the capital gains bonds of Rural

CAPITAL GAINS
Electrification Corporation Ltd. He deposited ₹ 4,00,000 on 6-7-20XY and ₹ 9,00,000 on 1-11-20XY

in the capital gain deposit scheme in a Nationalized Bank for construction of an additional floor on
the residential house property in Kolkata.
Compute the Capital Gain chargeable to tax for the Assessment Year 20XY-XZ and income-tax
chargeable thereon assuming Mr. Roy has no other income.
Question 12
Mr. X is in possession of agricultural land situated within urban limits, which is used for agricultural
purposes during the preceding 3 years by his father. On 4.4.20XX, this land is compulsorily acquired
by the Central Government of India on a compensation fixed and paid by it for ₹ 10 lakhs. Advise X
as to the tax consequences, assuming that the entire amount is invested in purchase of shares.
Question 13
Ms. Vimla sold a residential building at Jodhpur for ₹ 15,00,000 on 01-07-20XX. The building was
acquired for ₹ 1,50,000 on 01-06-2010. She paid brokerage @ 2% at the time of sale of the building.
She invested ₹ 7 lakhs in purchase of a residential building in December 20XX and deposited ₹ 2 lakhs
in NHAI Capital Gains Bond in March, 20XY. Compute her taxable capital gain.
CAPITAL GAINS ON SHARES

Question 14
Mr. Mithun purchased 100 shares of M/s Goodmoney Co. Ltd on 01-04-2006 at rate of ₹ 1,000 per
share in public issue of the company. Company allotted bonus shares in the ratio of 1:1 on
01.12.2021. He has also received dividend of ₹ 10 per share on 01.05.20XX. He has sold all the
shares on 01.10.20XX at the rate of ₹ 4,000 per share through a recognized stock exchange and paid
brokerage of 1% and securities transaction tax of 0.02% to celebrate his 75 th birthday.
Compute his total income and tax liability for Assessment Year 20XY-XZ, assuming that he is having
no income other than given above. Fair market value of shares of M/s Goodmoney Co. Ltd. on
31.1.2018 is ₹ 2,000. Answer: Total Income: ₹ 5,94,000; Tax: ₹ 25,270
Question 15
Mr. ‘X’ furnishes the following data for the previous year ending 31.03.20XY. Compute the taxable
capital gain.
(i) Unlisted Equity Shares of AB Ltd., 10,000 in number were sold on 31.5.20XX, at ₹ 500 for each
share.
(ii) The above shares of 10,000 were acquired by ‘X’ in the following manner:
a. Received as gift from his father on 1.6.2000 (5,000 shares) the fair market value on
1.4.2001 ₹ 200 per share.
b. Bonus shares received from AB Ltd. on 21.7.2008 (2,000 shares).

CAPITAL GAINS
c. Purchased on 1.2.2011 at the price of ₹ 350 per share (3,000 shares).

(iii) Purchased one residential house at ₹ 25 lakhs, on 1.5.20XY from the sale proceeds of shares.
(iv) ‘X’ is already owning a residential house, even before the purchase of above house.
COMPUTATION OF CAPITAL GAINS TAX

Question 16
Ms. Paulomi has transferred 1,000 shares of Hetal Ltd. (which she acquired at a cost of ₹ 10,000 in
the financial year 2002-03) to Dhaval, her brother, at a consideration of ₹ 3,12,934 on 15.5.20XX
privately. During the financial year 20XX-XY, she has paid through e-banking ₹ 15,000 towards
medical premium, ₹ 50,000 towards life insurance premium and ₹ 25,000 towards PPF. Assuming she
has no other source of income, compute her total income and tax payable for the AY 20XY-XZ.
Question 17
Mr. Pranav, a resident individual aged 55 years, had purchased a plot of land at a cost of ₹ 75,000 in
June, 2003. He constructed a house for his residence on that land at a cost of ₹ 1,25,000 in August, 2008.
He sold that house in May, 20XX at ₹ 16,00,000 and purchased another residential house in June, 20XX
for ₹ 8,00,000. He furnishes other income and investment as follows :
Particulars ₹
Interest on fixed deposit with a bank (Net of TDS ₹ 5,000) 45,000
Investment in PPF 20,000
You are required to compute taxable income and tax payable by Mr. Pranav for the AY 20XY-XZ.
CAPITAL GAINS ON SLUMP SALE

Question 18
Star Enterprises has transferred its unit R to A Ltd. by way of Slump Sale on January 23, 20XY. The
summarised Balance Sheet of Star Enterprises as on that date is:
Liabilities Amount Assets Amount

(₹ In lacs) (₹ In lacs)
Own Capital 1,750 Fixed Assets:
Accumulated P & L balance 670 Unit P 200
Liabilities: Unit Q 150
Unit P 90 Unit R 600
Unit Q 160 Other Assets:
Unit R 140 Unit P 570
Unit Q 850
Unit R 440
Total 2,810 Total 2,810

CAPITAL GAINS
Using the further information below, compute the Capital Gains arising from slump sale of Unit R
for Assessment year 20XY-XZ.
(i) Slump sale consideration on, transfer of Unit R was ₹ 930 lacs.
(ii) Fixed Assets of Unit R includes land which was purchased at ₹ 110 lacs in the year 2 008 and was
revalued at ₹ 140 lacs.
(iii) Other fixed assets are reflected at ₹ 460 lacs, (i.e., ₹ 600 lacs less value of land) which represents
written down value of those assets as per books. The written down value of these assets is ₹ 430
lacs.
(iv) Unit R was set up by Star Enterprises in Oct, 2007.
Note: Cost Inflation Indices for the financial year 2006-07 and financial year 2018-19 are 122 and 280,
respectively.
REVERSE MORTGAGE
Question 19
Sachin received ₹ 15,00,000 on 23.01.20XY on transfer of his residential building in a transaction of
reverse mortgage under a scheme notified by the Central Government. The building was acquired
in March 2012 for ₹ 8,00,000 Is the amount received on reverse mortgage chargeable to tax in the
hands of Sachin under the head ‘Capital gains’?
Question 20
Mr. Abhishek a senior citizen, pledged his residential house with a bank, under a notified reverse
mortgage scheme. He was getting loan from bank in monthly installments. Mr. Abhishek did not repay
the loan on maturity and hence gave possession of the house to the bank, to discharge his loan. How
will the treatment of long-term capital gain be on such reverse mortgage transaction? [SM]
CAPITAL GAINS WITH DIVIDEND AND LIQUIDATION

Question 21
Ms. Vasumathi purchased 10,000 equity shares of ABC Co. Pvt. Ltd. on 28.2.2017 for ₹ 1,20,000. The
company was wound up on 31.7.2022. The following is the summarized financial position of the
company as on 31.7.2022:
Liabilities ₹ Assets ₹
60,000 Equity shares 6,00,000 Agricultural lands 42,00,000
General reserve 40,00,000 Cash at bank 6,50,000
Provision for taxation 2,50,000
48,50,000 48,50,000
The tax liability was ascertained at ₹ 3,00,000. The remaining assets were distributed to the
shareholders in the proportion of their shareholding. The market value of 6 acres of agricultural
land (in an urban area) as on 31.7.2022 is ₹ 10,00,000 per acre. The agricultural land received above
was sold by Ms. Vasumathi on 28.2.2023 for ₹ 15,00,000. Discuss the tax consequences.

Capital Gains - Chapter Notes - Nikunj Goenka Sir

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“The Expert in anything was once a Beginner”

CA NIKUNJ GOENKA 12.1

3 TYPES OF CAPITAL ASSETS

(ii) TRANSFER OF LAND OR BUILDING AS STOCK

(iii) CAPITAL GAINS TAXABLE ON RECEIPT BASIS

(vi) CAPITAL GAINS ON SLUMP SALE

(vii) CAPITAL GAINS ON TRANSFER OF INTANGIBLE ASSETS

(viii) CAPITAL GAINS ON JOINT DEVELOPMENT AGREEMENTS

(ix) CAPITAL GAINS ON UNQUOTED SHARES

CA NIKUNJ GOENKA 12.2

6 TRANSFER OF SHARES AND SECURITIES

7 TRANSACTIONS NOT REGARDED AS TRANSFER

8 EXEMPTIONS UNDER CAPITAL GAINS

9 CAPITAL GAINS ON LIQUIDATION & BUY-BACK

10 TAX RATES ON CAPITAL GAINS

CA NIKUNJ GOENKA 12.3

INCOME FROM CAPITAL GAINS

PART A: INTRODUCTION AND CHARGING SECTION

CHARGING SECTION [Section 45(1)]

• There should be a Capital Asset; and

DEFINITION OF A CAPITAL ASSET [Section 2(14)]

CA NIKUNJ GOENKA 12.4

SPECIFIC EXCLUSIONS from definition of capital asset

Agricultural Land in Rural Area: [Non-Agricultural land is always a capital asset]

b) Agricultural land not situated in any area as mentioned below

More than 1,00,000 to 10,00,000 Within 6 kms

More than 10,00,000 Within 8 kms

CA NIKUNJ GOENKA 12.5

Specific Inclusions in definition of capital asset

Examples: State whether following are capital assets

Household Machinery and Furniture

Personal Land and Building

Business Motor Car

Agricultural land in Bangalore

MEANING OF TRANSFER [Section 2(47)]

CA NIKUNJ GOENKA 12.6

PART B: TYPES OF CAPITAL ASSETS

Short term Capital Asset Long term Capital Asset

General Capital Assets

Special Capital Assets

CA NIKUNJ GOENKA 12.7

In case of a scheme of an insurance company comprising ULIPs issued on or after 1.2.2021, to

2. Zero Coupon Bond means a bond

SPECIAL CASES FOR CALCULATING PERIOD OF HOLDING

Circumstances Period of Holding

CA NIKUNJ GOENKA 12.8

him in the amalgamating company at the time of

Period of holding in respect of other capital assets

CA NIKUNJ GOENKA 12.9

1. Distribution of Assets on total or partition of HUF / liquidation of company

PART C: MODE OF COMPUTATION OF CAPITAL GAINS [Section 48]

COMPUTATION OF SHORT TERM CAPITAL GAINS

CA NIKUNJ GOENKA 12.10

COMPUTATION OF LONG TERM CAPITAL GAINS

Gross Long term capital gains

Less: Exemption u/s 54B/54/54EC/54EE and others

Taxable Long term capital gains [LTCG]

Meaning of certain terms used above [Section 48 and 55]

2. Net consideration = Sale Consideration – expenses on transfer

3. Indexed Cost of Acquisition [Indexed only in case of LTCG]

CII of the year of transfer

4. Indexed Cost of Improvement = [Indexed only in case of LTCG]