INCOME FROM CAPITAL GAINS UNDER INCOME TAX ACT , 1961

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Basis of Charge - Section 45 (1)

Chargeability to tax

Any profits or gains

arising from
transfer {section 2(47)}
of a capital asset {section 2(14)}
shall be chargeable to income-tax under the head Capital Gain
in the previous year in which the transfer took place.

Such capital gain should not be exempt under section 54, 54B, 54D,
54EC, 54F, 54G or 54GA

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Capital Asset Section 2(14)

Capital Asset means property of any kind held by an assessee, whether or not
connected with his business or profession, but does not include the following:

Stock in trade, consumable stores or raw material held for business

Agricultural land in rural area in India other than urban agricultural land

Items of personal effects i.e. movable property held for personal use
excluding:

Jeweler, Archaeological collections, Drawings, paintings,

work of art etc.

sculpture or any

Special Bearer Bonds , 1991

Certain Gold bonds (which have already matured)

Gold deposit Bonds issued under Gold Deposit Scheme 1999

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Agricultural Land Section 2(14)

Agricultural land in India which is not situated in any area

Which is within jurisdiction of a municipality or a cantonment

board which has a population of 10,000 or more according to the
last preceding census published before 1st day of PY; or

Within 8 kms from local limits of any municipality or cantonment

board referred to in item (a), as the Central Government may,
specify in this behalf by notification in the Official Gazette

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Transfer - Section 2 (47)

Transfer includes:

Sale of asset

Exchange of asset

Relinquishment of asset

Extinguishment of any right on asset

Compulsory acquisition of asset under any law

Conversion of Capital asset into stock in trade.

Maturity and redemption of Zero Coupon Bond

Transaction which involve allowing possession of any immovable

property in part performance of a contract referred to in section 53A of
the Transfer of Property Act, 1882

Allotment or lease under house building scheme of company, society or

other Association

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Capital Gains Computation

Section 48 defines full value of consideration

Particulars
Sale Consideration
Less: Cost of Acquisition (COA)
Cost of Improvement (COI)
Expenditure on transfer
Capital Gains
Less: Exemption U/S 54,54B,54D etc.
Taxable Capital Gains

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Capital Gains Computation Non resident

Applicability if all the following conditions are satisfied :

All non-residents;
Shares or debentures of an Indian Company;
Purchased in foreign currency;
No indexation applicable even if long term capital gains

Computation
Particulars

Convert into

Conversion Rate

Sales Consideration

Foreign currency initially

utilized to purchase

Average of TT Buying and TT

Selling rate on date of sale

Foreign currency initially

utilized to purchase

Average of TT Buying and TT

Selling rate on acquisition date
for Cost and on Transfer date for
expenses

Less
Cost of Acquisition, Expenses on
transfer

Capital Gain Reconverted into

Indian currency

TT Buying rate on date of

transfer

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Types of Capital Assets Short term and

Long Term Capital Assets

Short term capital

assets Section 2(42A)
Capital assets held by an assessee for not
more than 36 months immediately
preceding the date of transfer, except one
mentioned below, for which period is 12
months

Long term capital

assets

Other than Short term capital assets

Equity/ Preference shares in a company

Any listed securities
Units of UTI / notified Mutual Fund
Zero Coupon Bonds

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Transactions not regarded as transfer - I

Partition of a Hindu undivided family
any distribution of capital assets
on total or partial
partition of a Hindu undivided family;

Transfer of a capital asset under a gift or will or an irrevocable Trust

Non applicability

Transfer under a gift or will or an irrevocable trust

of shares, debentures or warrants
allotted by a company to its employees
under ESOP Plan or Scheme
in accordance with the guidelines issued by the Central Government.

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Transactions not regarded as transfer - II

Transfer of a capital asset by a holding company to its subsidiary
Conditions

Parent company or its nominees hold subsidiaries whole share capital

Subsidiary is an Indian company;

Transfer of a capital asset by a subsidiary company to the holding

Company
Conditions

Whole of share capital of subsidiary company is held by holding company, and

Holding company is an Indian company

Both the above clauses are not applicable to transfer of a capital asset as
stock-in-trade

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Transactions not regarded as transfer - III

Transfer, in a scheme of Amalgamation- B merges into A
Capital asset by the amalgamating company to the amalgamated company if the
amalgamated company is an Indian company
Capital asset being shares held in an Indian company by the amalgamating foreign
company to the amalgamated foreign company
at least 25% shareholders in value of amalgamating foreign company continue to
remain its shareholders , and
such transfer does not attract tax on capital gains tax in amalgamating companies
country of incorporation
Transfer of capital asset by amalgamating Banking company to banking institution
sanctioned by CG under Section 45(7) Banking Regulation Act, 1949 (10 of 1949),

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Transactions not regarded as transfer - IV

Transfer in a scheme of Demerger
Capital asset by the demerged company to the resulting company, if the resulting
company is an Indian company
Capital asset, being a share or shares held in an Indian company, by the demerged
foreign company to the resulting foreign company, if
3/4th in value of shareholders of the demerged foreign company continue to
remain shareholders of the resulting foreign company; and
such transfer does not attract tax on capital gains in the country in which the
demerged company is incorporated

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Transactions not regarded as transfer - V

Transactions not regarded as transfer
Transfer of a shares in amalgamating company by a shareholder, in
a scheme of amalgamation, if
Consideration is allotment of shares in the amalgamated
company, and
Amalgamated company is an Indian company;
Transfer of bonds or Global Depository Receipts (GDR) as per
section 115AC, or bonds/ shares of a Public sector company purchased
in foreign currency, outside India by a non-resident to another non
resident

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Transactions not regarded as transfer - VI

Transfer of Following : Work of art, archaeological, scientific or art collection, book, manuscript,
drawing, painting, photograph or print,
To Government or University or the National Museum, National Art Gallery,
National Archives or any such other public museum or institution as may be
notified
To be of national importance or to be of renown throughout any State or States.

Conversion of

Bonds or Debentures, Debenture-stock or deposit certificates in any form, of a company

into shares or debentures of that company

Conversion of Foreign Currency Exchangeable Bonds (FCEBs) into shares or

debentures of any company

Transfer of a Capital Asset in a Reverse Mortgage, in accordance with the Scheme

made and notified by Central Government

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Transactions not regarded as transfer Conversion

of sole proprietor / Firm into company
In case of succession of a sole proprietor by a company, in the business carried on by
it, transfer of capital assets or intangible assets to the company , provided :

All assets & liabilities of sole proprietor concern relating to business become assets
and liabilities of Company
Shareholding of sole proprietor in company is not less than 50% of total voting power
for 5 year from succession date
Sole proprietors consideration is only shares allotment in the company.

In case of succession of a firm by a company, in the business carried on by it, transfer

of capital assets or intangible assets to the company , provided :

All assets & liabilities of firm relating to business become assets and liabilities of
Company
Partners before succession, become shareholders in company in proportion to capital
accounts before succession
Shareholding of partners in company is not less than 50% of total voting power for 5
year from succession date
Partners consideration is only shares allotment in the company.

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Conversion of a Company into LLP

When a Private Limited company or a non listed company transfers a capital asset, or
an intangible asset to a Limited Liability Partnership, it shall not be considered a
transfer where the following conditions are satisfied :

Total sales, turnover or gross receipts of business in company shall not exceed Rs. 60 lakh in
any of 3 preceding PY;

All the assets and liabilities of the company immediately before the conversion becomes the
assets and liabilities of the limited liability partnership;

All the shareholders of the company immediately before the conversion become partners of
the limited liability partnership and their capital contribution and profit sharing ratio are
in same proportion as their shareholding in the company on the date of conversion;

Shareholders do not receive any consideration or benefit other than by way of share in
profit and capital contribution in the limited liability partnership ;

Shareholders of the company, continue to receive atleast 50% of profits of LLP for 5 years
from the date of conversion

No amount is paid to partner out of accumulated profits of the company for three years from
the date of conversion

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Long term capital gains exemption

Section 10(38)
Long term capital gains
From transfer of
Equity share of company or Unit of Equity oriented fund
Shall be exempt from tax
Where such transfer is subject to payment of securities transaction tax

MAT on profit from Long-term capital gain of a company shall however be

such gains
considered as income to compute book profit u/s 115JB
applicable

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Insurance compensation - Section 45(1A)

Profits earned on receipt of insurance compensation, on account of damage to,
or destruction of, any capital asset attributable to following reasons, shall be
taxable under the head Capital gains for previous year in which such money or
other asset was received.
Riot or civil disturbance; or
Flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or
Accidental fire or explosion; or
Action by an enemy or action taken in combating an enemy (whether with or
without a declaration of war),
Sale
consideration

Sum received in Cash or FMV of the asset (where received in

kind) on date of receipt , shall be the full value of the
consideration

No
compensation
received

Asset destruction would be a Capital loss which does not have a

tax treatment

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Conversion of a capital asset into

stock in trade - Section 45(2)
Profits or gains arising from
conversion of a capital asset into stock in trade, or
treatment of such capital asset as stock-in-trade of business by
assessee
shall be chargeable to income-tax as income of the previous year in which
such stock-in-trade is sold or otherwise transferred.
FMV of the asset on the date of such conversion is
Sale
treated as Sales consideration.
consideration
& Capital Gains
Capital Gains are computed by reducing from Sale
consideration, the Cost of Acquisition or Indexed Cost of
Acquisition
FMV above to be treated as cost of acquisition for
Subsequent
computing PGBP income.
sale

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Transfer of a capital asset by partner,

member of Firm/AOP - Section 45(3)

Gains arising from

transfer of a capital assets by partner to the firm or
member to AOPs /BOls
by way of capital contribution or otherwise,
shall be chargeable under Capital Gains
in the PY in which such transfer takes place.

Sale
consideration

The amount recorded in the books of account of the

firm/AOPs/BOls as the value of the assets shall be
deemed as full value of consideration for the purpose
of section 48.

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Distribution of capital assets on the

dissolution of a firm Section 45(4)
Gains arising from distribution of capital assets on the dissolution or otherwise
of
a firm or
other association of persons or
body of individuals (not being a company or a co-operative society),
shall be chargeable to tax as income of the previous year in which transfer
takes place.
Sale
consideration

FMV of asset on date of transfer deemed to be the full value of

the consideration

The word otherwise shall not cover retirement of partner and receipt of share in
partnership including goodwill.

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Compulsory acquisition under any

law - Section 45(5)
Gain arising from
compulsory acquisition of a capital asset under any law, or
transfer for which Consideration was determined by the Central Government /Reserve
Bank of India,
shall be dealt with as under :
Initial Consideration

Gains in first instance shall be chargeable as income of previous year in

which such compensation or part thereof was first received.

Enhanced
compensation

Taxable in the previous year in which such amount is received by the

assessee
Cost of acquisition and the cost of improvement shall be taken to
be nil though litigation expenses are allowed as a deduction
In case of death of original transferor enhanced compensation
shall be chargeable to tax as Capital Gains in the hands of the
recipient

Reduction in
compensation

Assessed capital gain shall be recomputed for the year when it was
received by taking reduced compensation or consideration to be the full
value of the consideration

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Capital gains on distribution of assets

by companies in liquidation - Section 46
Distribution of assets
By a company
to its shareholders
on its liquidation,
shall not be regarded as a transfer for the purposes of section 45.
Taxability in the
hands of
shareholders

Shareholder shall be chargeable to income-tax under the head

Capital gains, based on Sale consideration arrived at as under :Money so received or the market value of the other assets on the
date of distribution,
Less : - Amount assessed as dividend within the meaning of subclause (c) of clause (22) of section 2
Less: COA of the asset .

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Slump Sale - Section 2(42C) and Section 50B

Slump sale means

transfer of one or more undertakings
for a lump sum consideration
without values being assigned to the individual assets and liabilities in
such sales.
Stamp value,
registration value
determination etc.

Determination of value of an asset or liability

Solely for the purpose of payment of stamp duty,
registration fees or other similar taxes or fees
shall not be regarded as assignment of values to
individual assets or liabilities

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Slump Sale - Section 2(42C) and Section 50B

Profits or gains arising from the slump sale, shall be chargeable as long-term capital of the
previous year in which the transfer took place:
Where the undertaking are owned and held for not more than thirty-six months immediately
preceding the date of transfer, these shall be treated as short term capital gains
COA and COI

net worth of the undertaking shall be deemed to be the cost of

acquisition and the cost of improvement and no indexation shall be
available
CA certificate in Form No. 3CEA shall be furnished alongwith ROI
certifying the correct computation of net worth under this section

Net worth

Aggregate value of total assets of the undertaking or division (revaluation

of assets shall be ignored )
depreciable assets, the written down value of the block of assets
expenditure has been allowed or is allowable as a deduction
under section 35AD, nil
other assets, the book value of such assets
Less : -Value of liabilities of such undertaking or division as appearing in
its books of account:

Other Points

Stock transfer shall not give rise to Business Income

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Special provision for full value of

consideration in certain cases - Section 50 C
Applicability

Consideration received on transfer of land or building or both, is

less than the value adopted or assessed or assessable by stamp
valuation authority for payment of stamp duty,

Consequences

Value from Stamp Authorities shall be deemed to be the full value

of the consideration .

Recourse to
Assessee

Accept value so adopted by AO

Dispute it with the Court, in which case, value decided by the
Court shall be treated as FMV
Assesee claims that the value above exceeds FMV; and that he
has not disputed such value before any forum or Court, the AO
may refer the valuation of the capital asset to a Valuation Officer.
In such a case, the value determined above by Stamp authorities
or Valuer, whichever is lower shall be treated as Full value of
consideration.

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Advance money received- Section 51

Applicability

Any capital asset was under negotiations for transfer but could
not be transferred
Assessee received and retained any advance or other
money in respect of such negotiation

Consequences

Money retained above shall be deducted from the cost or WDV or

the fair market value, of the asset in computing the cost of
acquisition.

What if the money

retained exceeds
Cost etc as above.

The deduction shall be to the extent of the Cost/WDV or FMV as

the case may be, and if money received is excess, it shall be a
capital receipt not chargeable to tax

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Reference to Valuation Officer.

- Section 55A
Objective

In order to ascertain the fair market value of a capital asset for

computing capital gains, AO may refer the valuation of capital
asset to a Valuation Officer

Cases when
reference can be
made to Valuation
Officer

Assessees valuation estimated by a registered valuer AO is of

opinion that the value so claimed is less than its fair market
value
Other case - AO is of opinion
FMV of the asset exceeds value claimed by the assess by Rs.
25,000
Nature of the asset and other relevant circumstances requires
valuation to be carried out by a Valuation Officer

Report of the Valuation officer shall be binding on the AO

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Buy back of shares

Section 46 A
Meaning

When a company purchases it own shares from the shareholders,

the process is known as Buy Back of shares.

Taxation

Where a company purchase its own shares, the shareholders

are liable to pay capital Gains tax , since there is a transfer of
shares. Such gains are computed as the difference between
Sale consideration and Cost of Acquisition (indexed as
applicable).

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Indexed Cost of acquisition & indexed

Cost of Improvement
Indexed Cost of acquisition is defined in Explanation iii to Section 48, as the amount, which
bears the same proportion to the cost of acquisition, as cost inflation index of the year when
asset is transferred, bears to the cost inflation index of the year, when asset was first held by
the assessee or April 1., 1981, whichever is earlier.
Cost Inflation Index is notified by the Central Government for various Year as under : -

FY
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91

CII
100
109
116
125
133
140
150
161
172
182

F.Y
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01

CII
199
223
244
259
281
305
331
351
389
406

F.Y
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12

CII
426
447
463
480
497
519
551
582
632
711
785

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Indexation on LTCG
Indexed COA shall be as under:

Mode I - Assets acquired directly by the assessee himself

a) Asset acquired on or after 1.4.1981 = COA X Cost Inflation Index (CII)) of the year of transfer
Cost Inflation Index of the year of acquisition
b) Asset acquired before 1.4.1981= COA or FMV as on 1.4.1981 > X CII of the year of transfer
CII of PY 1981-82 (i.e. 100)

Mode II - Assets acquired from previous owner in mode given under section 49(1)

a) COA to the previous owner

X CII of the year of transfer

CII of the year in which the asset is first held by the assessee

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Shares - Cost of Acquisition

& Holding Period
Mode of purchase of shares

Date of acquisition
/Holding period

Shares originally purchased

(a) Primary market
Allotment date
(b) Secondary market transaction
(a) Through share brokers
Date of brokers note

(b) Between parties

Bonus share

Cost of Acquisition

Allotment price

Date of contract of a sale

Amount paid + Brokerage + Any

forex adjustment , adjusted for
Cum dividend/interest.
As above (excluding brokerage)

Date of allotment

NIL

Shares held depository system FIFO method

(taxable) in hands of beneficial
owner)

FIFO method

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Shares - Cost of Acquisition

& Holding Period
Shares

Date of acquisition
/Holding period

Cost of Acquisition

Right shares subscribed by

Existing shareholders

Allotment Date

Offer price

Right shares acquired by a

person in whose favor existing
shareholder made a
renunciation
Renouncements of right shares
in favor of another person Shareholder

Allotment Date

Offer price + Amount paid for

renouncement to existing
shareholder

Period between date of

offer of such right, until
date of renunciation

NIL

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Capital gains on Self generated assets

Section 55(2)
Meaning

An asset, which does not cost anything to the assesses in terms of

money in its creation or acquisition, Is a self generated asset.

Constituents of self
generated assets

Goodwill of BUSINESS (not of profession);

Tenancy rights;
Route permits;
Loom hours;
Patent, Copy right, Formulae etc.;
Trademark or brand name associated with a business;
Right to manufacture an article product or thing.
Right to carry on any business

FMV as on April 1, 1981

Not Available

Cost of Acquisition

Purchase from a previous owner - Purchase price

Other case - Nil

Cost of improvement

Nil , except actual COI for tenancy right, route, loom hours

Cost of transfer

Actual

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Transfer of Residential House

Exemption u/s 54
Deduction under
Section /
Applicability

Section 54
(Individual or
HUF)

Capital asset
Transferred
(Holding Period)

Capital
Asset to be
Purchased
(Holding
Period)

Residential House
Property (Long
term, i.e held for
more than 36
months)

Residential
House
Property

Quantum of
Deduction

Time limit for Purchase of

the New Capital Asset

Capital Gains /
Cost of New Asset
whichever is less

Within 1 Year Before, or 2

Years After the Date of
Transfer (If Purchased) or 3
Years after the Date of
Transfer (If Constructed).

Balance amount can be invested in capital gains amount scheme on or before due date of
Furnishing Return of Income

If new Asset is sold within 3 years from date of purchase/ construction, for computing Short
term capital gains on new Asset, cost of new asset shall be reduced by the amount of Capital
gains claimed exempt

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Capital Gains on transfer of Agricultural Land

Exemptions - Section 54B
Deduction under
Section /
Applicability

Section 54B
(Individual)

Capital asset
Transferred
(Holding Period)

Capital
Asset to be
Purchased
(Holding
Period)

Agricultural Land
(use for 2 years by
assessee or his
parent)

Agricultural
Land

Quantum of
Deduction

Time limit for Purchase of

the New Capital Asset

Gains / Cost of
New Asset
whichever is
less

Within 2 years after the Date

of Transfer

Balance amount can be invested in Capital Gains Account Scheme , 1998 on or before due
date of Furnishing Return of Income

If new Asset is sold within 3 years from date of purchase/ construction, for computing Short
term capital gains on new Asset, cost of new asset shall be reduced by the amount of Capital
gains claimed exempt

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Compulsory acquisition of Land and building

of an industrial undertaking - Section 54D
Deduction under
Section /
Applicability

Section 54D
(Any Assessee)

Capital asset
Transferred

Capital Asset
to be
Purchased

Quantum of
Deduction

Time limit for Purchase of

the New Capital Asset

Purchase or
construction of
any land/
building

Gains / Cost of
New Asset
whichever is
less

Within 3 years from the date

of Transfer

(Short term or
Long term, both)
Compulsory
acquisition of land
or building of any
industrial
undertaking used
for business
purpose during 2
years immediately
preceding the date
of compulsory
acquisition

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Exemptions from capital gains on transfer of

Long Term capital Asset Section 54EC
Capital asset
Deduction
Transferred
under Section / (Holding
Applicability
Period)

Capital
Asset to be
Purchased

Section 54EC
(Any
Assessee)

Bonds
issued by
NHAI &
RECL on or
after
1.4.2007

Any LongTerm Capital

Asset

Quantum of
Deduction

Time limit for

Purchase of the New
Capital Asset

Capital gains or Within 6 months from

amount
the date of Transfer
invested,
whichever is
less subject to
a maximum of
Rs. 50 lakhs
during a
financial Year

If Capital asset is sold within 3 years, exempted capital gains

will be treated as LTCG of year of sale of New Asset
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Capital gains on transfer of any Long Term

capital Asset other than RP Section 54F
Deduction under
Section /
Applicability

Section 54F
(Individual or
HUF)

Capital asset
Transferred
(Holding Period)

Capital Asset to
be Purchased
(Holding Period)

Quantum of
Deduction

Time limit for

Purchase of the New
Capital Asset

Any Long term

Capital Asset
(Not Being a
Residential
House) Assessee should
not own more
than house
property on date
of transfer)

Residential House
Property
(

Capital Gains X
(Amount
invested/Net
consideration)

Within 1 Year Before,

or 2 Years After the
Date of Transfer (If
Purchased), OR 3
Years After The
Date of Transfer (If
Constructed)

Balance amount can be invested in Capital Gains Account Scheme , 1998 on or before due date of
Furnishing Return of Income

If new Asset is sold within 3 years from date of purchase/ construction, following implications shall
arise : Short term capital gains on transfer of new Asset,
Long term capital gains exempted earlier u/s 54F now taxable as LTCG of year when new
asset transferred

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Section 54 GA P&M or Land and building

of industrial undertaking to SEZ
Deduction under
Section /
Applicability

Section 54GA
(Any assessee
owning an
industrial
undertaking)

Capital asset
Transferred
(Holding
Period)

Capital Asset to
be Purchased
(Holding Period)

Quantum of
Deduction

Land, building,
plant or
machinery - In
course of
shifting an
industrial
undertaking
from urban area
to SEZ

Land, building,
plant or
machinery in SEZ
, or expenses in
order to shift an
undertaking to a
SEZ

Gains / Cost of
New Asset
whichever is less

Time limit for

Purchase of the New
Capital Asset

Within 1 year before,

or 3 years after the
date of transfer

LTCG or STCG
both

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Section 54 GA P&M or Land and building

of industrial undertaking to SEZ
Deduction under
Section /
Applicability

Section 54GA
(Any assessee
owning an
industrial
undertaking)

Quantum of
Deduction

Capital asset
Transferred
(Holding
Period)

Capital Asset to
be Purchased
(Holding Period)

Land, building,
plant or
machinery - In
course of shift
ing an industrial
undertaking
from urban area
to other area

Gains / Cost of
Land, building,
New Asset
plant or
whichever is less
machinery, or
expenses in order
to shift an
undertaking to a
non urban area

Time limit for

Purchase of the New
Capital Asset

Within 1 year before,

or 3 years after the
date of transfer

LTCG or STCG
both

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