Unit - 4: Capital Gains: After Studying This Unit, You Would Be Able To

CAPITAL GAINS 3.
357 a
UNIT – 4 : CAPITAL GAINS
LEARNING OUTCOMES
After studying this unit, you would be able to –
 comprehend the scope of income chargeable under this head;
 comprehend and identify the assets classified as “capital assets” for the
purposes of chargeability under this head;
 comprehend the meaning of short-term capital asset and long-term capital asset;
 compute the period of holding for determining whether an asset is a short-
term capital asset or long-term capital asset;
 identify the transactions to be considered as transfer for the purpose of
capital gains;
 identify the transactions not regarded as transfer;
 compute the capital gains from transfer of capital assets in the manner
prescribed;
 determine the cost of acquisition and indexed cost of acquisition, in case of
long term capital asset for the purpose of computing the capital gains;
 compute capital gains in case of depreciable assets;
 compute capital gains in case of market linked debenture;
 compute capital gains in case of slump sale;
 compute the exemption available for investment of capital gains/net
consideration on transfer of certain assets;
 compute the capital gains chargeable to tax after deducting the
exemptions available in respect of capital gains;
 appreciate the concessional tax treatment available for short-term capital
gains and for long term capital gains on transfer of listed equity
shares/units of an equity oriented fund;
 compute the tax liability applying the special rates of tax on long-term
capital gains and short-term capital gains and the normal rates of tax.
© The Institute of Chartered Accountants of India

a 3.358 INCOME TAX LAW
Proforma for computation of income under the head “Capital Gains”
Particulars Amt Amt

(`) (`)
Full value of consideration received or accruing as a xxx
result of transfer
In case of a Short-term capital asset
Less: Expenditure incurred wholly and exclusively in xxx

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

Less: Cost of acquisition (COA) [Refer table at page 3.459] xxx
Cost of improvement (COI) [Refer table at page xxx xxx
3.462]
Short-term capital gain (STCG) xxx
Less: Exemption under sections 54B/54D xxx
Short-term capital gain chargeable to tax xxx
Full value of consideration received or accruing as a xxx
result of transfer
Less: Expenditure incurred wholly and exclusively in xxx
In case of a Long-term capital asset (LTCA)
connection with such transfer (for e.g., brokerage on sale)

(Note: Deduction on account of STT paid will not be
allowed)
capital asset
Less: Indexed cost of acquisition (ICOA) xxx

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

CAPITAL GAINS 3.359 a
Less: Indexed cost of improvement (ICOI) xxx xxx

CII for the year in which the asset is
Cost of transferred
×
improvement CII for the year in which the
improvement took place
Long-term capital gains (LTCG) xxx
Less: Exemption under sections 54/54B/54D/54EC/54F xxx
[Refer Table at pages 3.463-3.465]
Long-term capital gains chargeable to tax xxx
Rate of tax on Short-term Capital Gains (STCG)
Section Rate of tax

• STCG arising on transfer of listed equity shares, units of equity-
oriented fund and unit of business trust1 - 15%, if STT has been
paid on such sale.
111A • STCG arising from transaction undertaken in foreign currency
on a recognized stock exchange located in an International
Financial Services Centre (IFSC) would be taxable at a
concessional rate of 15%, even though STT is not paid in respect
of such transaction.
Note - STCG arising on transfer of other Short-term Capital Assets would be
chargeable at normal rates of tax.
Rates of tax on Long-term Capital Gains (LTCG)
Section Rate of tax

112A • Tax @10% on LTCG exceeding ` 1,00,000 on the transfer of
following long-term capital assets -
- listed equity shares, if STT has been paid on acquisition and
transfer of such shares
- units of equity oriented fund and unit of business trust1, if STT
has been paid on transfer of such units
• If such transaction is undertaken on a recognized stock
exchange located in an IFSC, LTCG would be taxable at a
concessional rate of 10% where the consideration for transfer is
The provisions relating to business trust would be dealt at Final level.

1

received or receivable in foreign currency, even though STT is not

paid in respect of such transaction.
• Benefit of indexation and currency fluctuation would not be
available.
112 Long-term capital asset Rate of tax
(LTCA)
Unlisted securities, or Non-corporate non-resident/ foreign
shares of a closely held company - 10%, without the benefit of
company indexation and currency fluctuation
Other Assessees - 20%, with indexation
benefit
Listed securities (other - 10%, without the benefit of indexation
than a unit) or a zero- or
coupon bond - 20%, availing the benefit of indexation
whichever is more beneficial to the
assessee
Other Assets - 20%
Notes:
• In case of a resident individual or a Hindu Undivided Family (HUF), the

LTCG taxable u/s 112 or 112A or STCG taxable u/s 111A shall be reduced by
the unexhausted basic exemption limit and the balance shall be subject to tax.
• No deduction under Chapter VI-A can be claimed in respect of such LTCG

chargeable to tax u/s 112 or u/s 112A or STCG chargeable to tax u/s 111A.
• Rebate u/s 87A is not available in respect of tax payable@10% on LTCG

u/s 112A.
• In case the assessee pays tax under default tax regime, enhanced surcharge of
25% would not be levied on dividend income, STCG taxable u/s 111A and LTCG
taxable u/s 112 and u/s 112A.
• In case the assessee exercises the option of shifting out of the default tax
regime under section 115BAC, enhanced surcharge of 25% or 37% would not
be levied on dividend income, STCG taxable u/s 111A and LTCG taxable u/s 112
and u/s 112A.

Period of holding [Section 2(42A)]
•Security (other than unit) listed in a recognized stock

STCA, if held for
exchange (other than market linked debentures and
≤ 12 months
units of specified mutual fund)
LTCA, if held for •Unit of equity oriented fund/unit of UTI
> 12 months
•Zero Coupon bond
STCA, if held for

≤ 24 months •Unlisted shares
LTCA, if held for •Land or building or both
> 24 months
STCA, if held for

≤ 36 months •Unlisted securities other than shares
LTCA, if held for •Other capital assets
> 36 months
Note – Capital gains arising from transfer of market linked debentures and units of
a specified mutual fund would always be capital gains arising from transfer of short
term capital assets irrespective of the period of holding of such assets. This is
provided in section 50AA.
4.1 INTRODUCTION
Section 45 provides that any profits or gains arising from the transfer of a capital
asset effected in the previous year will be chargeable to income-tax under the
head ‘Capital Gains’. Such capital gains will be deemed to be the income of the
previous year in which the transfer took place. In this charging section, two terms
are important. One is “capital asset” and the other is “transfer”.
Hence, in this unit on capital gains, we begin our discussion with the definition of
“capital asset” and “transfer”. Thereafter, we will proceed to discuss the various
circumstances under which capital gains tax is levied. There are certain
transactions which are not to be regarded as transfer for the purposes of capital
gains. These transactions have also been discussed in this chapter. For computing
long-term capital gains, application of cost inflation index is necessary. Again,
there is a separate method of computation of capital gains in respect of
depreciable assets. Also, there are exemptions in cases where capital gains are
invested in specified assets. All these aspects are being discussed in this unit.

4.2 CAPITAL ASSET

Definition: According to section 2(14), a capital asset means –
(a) property of any kind held by an assessee, whether or not connected with his
business or profession;
(b) any securities held by a Foreign Institutional Investor which has invested in
such securities in accordance with the SEBI regulations.
(c) any unit linked insurance policy (ULIP) issued on or after 1.2.2021, to which
exemption under section 10(10D) does not apply on account of premium
payable exceeding ` 2,50,000 for any of the previous years during the term
of such policy.
In a case where premium is payable by a person for more than one ULIP
issued on or after 1.2.2021 and the aggregate of premium payable on such
ULIPs exceed ` 2,50,000 for any of the previous years during the term of any
such ULIP(s), the exemption under section 10(10D) would be available in
respect of any of those ULIPs (at the option of the assessee) whose
aggregate premium payable does not exceed ` 2,50,000 for any of the
previous years during their term. All other ULIPs would be capital assets.
Note – Provisions relating to taxability or otherwise of ULIPs issued on or

after 1.2.2021 are not being made applicable at Intermediate level.
Accordingly, section 45(1B) has been excluded by way of Study Guidelines.
Consequently, reference to such ULIPs has not been made in the discussion of
section 10(10D) and in the definition of equity oriented fund for the purpose
of section 111A and 112A in the Study Material.
However, it does not include—

(i) Stock-in trade: Any stock-in-trade [other than securities referred to in (b)
above], consumable stores or raw materials held for the purpose of the
business or profession of the assessee;
Whether a particular asset is stock-in-trade or capital asset does not depend
upon the nature of the item, but the manner in which the same is held. The
item would be stock-in-trade in the hands of the assessee who deals or
trades in that item; however, the same item would be capital asset for the
assessee who holds it as an investment.

Example: A dealer in real estate holds a piece of land as stock-in-trade. But

the same will be capital asset for an assessee who holds it as an investment.
The exclusion of stock-in-trade from the definition of capital asset is only in

respect of sub-clause (a) above and not sub-clause (b). This implies that even
if the nature of such security in the hands of the Foreign Portfolio Investor is
stock in trade, the same would be treated as a capital asset and the profit on
transfer would be taxable as capital gains.
Further, the Explanatory Memorandum to the Finance (No.2) Bill, 2014
clarifies that the income arising from transfer of such security by a Foreign
Portfolio Investor (FPI) would be in the nature of capital gain, irrespective of
the presence or otherwise in India, of the Fund manager managing the
investments of the assessee.
(ii) Personal effects: Personal effects, that is to say, movable property
(including wearing apparel and furniture) held for personal use by the
assessee or any member of his family dependent on him.
EXCLUSIONS:
(a) jewellery;
(b) archaeological collections;
(c) drawings;
(d) paintings;
(e) sculptures; or
(f) any work of art.
Definition of Jewellery- Jewellery is a capital asset and the profits or gains

arising from the transfer of jewellery held for personal use are chargeable to
tax under the head “capital gains”. For this purpose, the expression
‘jewellery’ includes the following:
(i) Ornaments made of gold, silver, platinum or any other precious metal
or any alloy containing one or more of such precious metals, whether
or not containing any precious or semi-precious stones and whether
or not worked or sewn into any wearing apparel;
(ii) Precious or semi-precious stones, whether or not set in any furniture,
utensil or other article or worked or sewn into any wearing apparel.

(iii) Rural agricultural land in India i.e., agricultural land in India which is not
situated in any specified area.
As per the definition, only rural agricultural lands in India are excluded from
the purview of the term ‘capital asset’. Hence urban agricultural lands
constitute capital assets. Accordingly, the agricultural land described in (a)
and (b) below, being land situated within the specified urban limits, would
fall within the definition of “capital asset”, and transfer of such land would
attract capital gains tax -
(a) agricultural land situated in any area within the jurisdiction of a

municipality or cantonment board having population of not less than
ten thousand, or
(b) agricultural land situated in any area within such distance, measured
aerially, in relation to the range of population as shown hereunder -
Shortest aerial distance Population according to the last

from the local limits of a preceding census of which the
municipality or relevant figures have been
cantonment board referred published before the first day of
to in item (a) the previous year.
(i) ≤ 2 kms > 10,000
(ii) > 2 kms but ≤ 6 kms > 1,00,000
(iii) > 6 kms but ≤ 8 kms > 10,00,000
Example
Area Shortest aerial Population according Is the land

distance from to the last preceding situated in this
the local limits census of which the area a capital
of a municipality relevant figures have asset?
or cantonment been published
board referred before the first day
to in item (a) of the previous year.
(i) A 1 km 9,000 No
(ii) B 1.5 kms 12,000 Yes
(iii) C 2 kms 11,00,000 Yes

(iv) D 3 kms 80,000 No
(v) E 4 kms 3,00,000 Yes
(v) F 5 kms 12,00,000 Yes
(vi) G 6 kms 8,000 No
(vii) H 7 kms 4,00,000 No
(viii) I 8 kms 10,50,000 Yes
(ix) J 9 kms 15,00,000 No
Explanation regarding gains arising on the transfer of urban

agricultural land – Explanation 1 to section 2(1A) clarifies that capital gains
arising from transfer of any agricultural land situated in any non-rural area
(as explained above) will not constitute agricultural revenue within the
meaning of section 2(1A).
In other words, the capital gains arising from the transfer of such urban
agricultural land would not be treated as agricultural income for the
purpose of exemption u/s 10(1). Hence, such gains would be subject to u/s
45.
(iv) Specified Gold Bonds: 6½% Gold Bonds, 1977, or 7% Gold Bonds, 1980, or
National Defence Gold Bonds, 1980, issued by the Central Government;
(v) Special Bearer Bonds, 1991 issued by the Central Government;
(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or
deposit certificates issued under the Gold Monetisation Scheme, 2015 and
Gold Monetisation Scheme, 2019 notified by the Central Government.
Note – ‘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.

a
CAPITAL ASSET
4.366
[Section 2(14)]
Property of any kind held by an Any securities held by a FII which has
assessee, whether or not connected invested in such securities as per SEBI
with his business or profession Regulations
3.366
EXCLUSIONS
Stock-in-trade, Personal Effects Rural 6½ Gold Bonds, Gold Deposit Bonds

consumable [i.e., movable Agricultural 1977, 7% Gold issued under Gold
stores, raw property including Land Bonds, 1980, Deposit Scheme, 1999/
materials held wearing apparel and National Defence Deposit Certificates

for business or furniture held for Gold Bonds, 1980, issued under Gold
profession personal use by the Special Bearer Monetisation Scheme,
assessee or his Bonds, 1991 issued 2015 /2018 notified by
INCOME TAX LAW
family] by the Central Govt. the Central Govt.
EXCLUSIONS FROM PERSONAL EFFECTS
Jewellery Archaeological Drawings Paintings or Any work of art

collections Sculptures
These assets are, hence, capital assets u/s 2(14)

4.3 SHORT TERM AND LONG TERM CAPITAL

ASSETS
• Definition: As per section 2(42A), short-term capital asset means a capital
asset held by an assessee for not more than 36 months immediately
preceding the date of its transfer.
As per section 2(29A), long-term capital asset means a capital asset which is
not a short-term capital asset.
Thus, a capital asset held by an assessee for more than 36 months
immediately preceding the date of its transfer is a long-term capital asset.
• Exceptions: A security (other than a unit) listed in a recognized stock exchange
(other than market linked debenture and unit of a specified mutual fund),
or a unit of an equity-oriented fund or a unit of the Unit Trust of India or a Zero
Coupon Bond will, however, be considered as a long-term capital asset if the
same is held for more than 12 months immediately preceding the date of its
transfer.
Further, a share of a company (not being a share listed in a recognized stock
exchange in India) or an immovable property, being land or building or both
would be treated as a short-term capital asset if it was held by an assessee for
not more than 24 months immediately preceding the date of its transfer.
Thus, the period of holding of unlisted shares or an immovable property,
being land or building or both, for being treated as a long-term capital
asset would be “more than 24 months” instead of “more than 36 months”.
Note – Capital gains arising from transfer of market linked debentures and
units of a specified mutual fund would always be capital gains arising from
transfer of short term capital assets irrespective of the period of holding of
such assets. This is provided in section 50AA.
• Meaning of certain terms:
Term Meaning
Equity A fund set up under a scheme of a mutual fund 2
oriented and
fund
(i) in a case where the fund invested in the units of another
fund which is traded on a recognised stock exchange –
2
Specified under section 10(23D)

I. a minimum of 90% of the total proceeds of such

fund is invested in the units of such other fund;
and
II. 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
(ii) in any other case, a minimum of 65% of the total
proceeds of such fund is invested in the equity shares of
domestic companies listed on a recognised stock
exchange.
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.
Zero a bond
Coupon - issued by any infrastructure capital company or
Bond infrastructure capital fund or infrastructure debt fund 3
[Section or a public sector company or a scheduled bank on or
2(48)] 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.
Note: The income from transfer of a zero coupon bond (not being held as
stock-in-trade) is to be treated as capital gains. Section 2(47)(iva) provides that
maturity or redemption of a zero coupon bond shall be treated as a transfer for
the purposes of capital gains tax.
3
Infrastructure debt fund notified by Central Government under section 10(47)

Period of holding: A summary
•Security (other than unit) listed in a recognized

STCA, if held for stock exchange (other than market linked
≤ 12 months debentures and units of specified mutual
LTCA, if held for fund)
> 12 months •Unit of equity oriented fund/ unit of UTI
•Zero Coupon bond
STCA, if held for ≤

24 months •Unlisted shares
LTCA, if held for > •Land or building or both
24 months
STCA, if held for ≤

36 months •Unlisted securities other than shares
LTCA, if held for > •Other capital assets
36 months
Note – Capital gains arising from transfer of market linked debentures and
units of a specified mutual fund would always be capital gains arising from
transfer of short term capital assets irrespective of the period of holding of
such assets. This is provided in section 50AA.
• Determination of period of holding [Clause (i) of Explanation 1 to

section 2(42A)]: In determining period of holding of any capital asset by the
assessee in the circumstances stated in column (1), the period shall be
determined by considering the period specified in Column (2).
Determination of period of holding
S. Circumstances Period of holding

No. (Column 1) (Column 2)
1 Where shares held in a company in The period subsequent to the
liquidation date of liquidation of company
shall be excluded.
2 Where asset becomes the property The period for which the capital
of an assessee by virtue of section asset was held by the previous
49(1) owner shall be included.
3 Where inventory of business is Period from the date of
converted into or treated as a conversion or treatment as a
capital asset by the assessee capital asset shall be considered.

4 Where share/s in the Indian The period for which the share(s)
company (amalgamated was held by the assessee in the
company), becomes the property of amalgamating company shall be
an assessee in lieu of share/s held included.
by him in the amalgamating
company at the time of transfer
referred under section 47(vii).
5 Where the share or any other Period from the date of
security is subscribed by the allotment of such share or
assessee on the basis of right to security shall be reckoned.
subscribe to any share or security or
by the person in whose favour such
right is renounced by the assessee
6 Where the right to subscribe to any Period from the date of offer of
share or security is renounced in such right by the company or
favour of any other person institution shall be reckoned
7 Where any financial asset is Period from the date of
allotted without any payment and allotment of such financial asset
on the basis of holding of any other shall be reckoned
financial asset
8 Where share/s in the Indian company The period for which the share/s
being a resulting company becomes were held by the assessee in
the property of an assessee in demerged company shall be
consideration of demerger included
9 Where equity share in a company The period for which the
becomes the property of the preference shares were held by
assessee by way of conversion of the assesse shall be included
preference shares into equity
shares referred under section 47(xb)
10 (i) Where Electronic Gold Receipt is The period for which such gold
issued by a Vault Manager in was held by the assessee prior to
respect of gold deposited conversion into the Electronic
[Conversion of gold into Electronic Gold Receipt
Gold Receipt as referred to in
section 47(viid)]
(ii) Where gold is released in respect The period for which such
of an Electronic Gold Receipt Electronic Gold Receipt was held

[Conversion of Electronic Gold by the assessee prior to its

Receipt into gold as referred to in conversion into gold
section 47(viid)]
11 Where any specified security or Period from the date of
sweat equity shares is allotted or allotment or transfer of such
transferred, directly or indirectly, by specified security or sweat
the employer free of cost or at equity shares shall be reckoned
concessional rate to his employees
(including former employees)
“Sweat equity shares” means equity shares issued by a company to
its employees or directors at a discount or for consideration other
than cash for providing know-how or making available rights in the
nature of intellectual property rights or value additions, by whatever
name called.
• 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.
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.
4.4 TRANSFER: WHAT IT MEANS? [SECTION

2(47)]
Section 2(47) 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
Example: Acquisition of industrial undertaking under the Industries

(Development and Regulation) Act, 1951.
(iv) the 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
Example: Where an investor in shares starts a business of dealing in shares

and treats existing investments as stock-in-trade of the newly set up business,
such conversion shall be regarded as transfer for the purpose of capital gains .
(v) the maturity or redemption of a zero coupon bond; or

(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
entire sale consideration to A. A hands over complete rights of possession to
the purchaser since he has received the entire sale consideration. Under the
Income-tax Act, the above transaction is considered as transfer.
(vii) Lastly, there are certain types of transactions which have the effect of
transferring or enabling the enjoyment of an immovable property.
Example:
A 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. For the purpose of income -
tax, the above transaction is a transfer.
ILLUSTRATION 1
How will you calculate the period of holding in case of the following assets?
(1) Shares held in a company in liquidation
(2) Bonus shares
(3) Flat in a co-operative society

SOLUTION
(1) Shares held in a company in liquidation - The period after the date on
which the company goes into liquidation shall be excluded while calculating
the period of holding. Therefore, the period of holding shall commence
from the date of acquisition and end with the date on which the company
goes into liquidation.
(2) Bonus shares - The period of holding shall be reckoned from the date of
allotment of bonus shares and will end with the date of transfer.
(3) Flat in a co-operative society - The period of holding shall be reckoned
from the date of allotment of shares in the society and will end with the
date of transfer.
Note – Any transaction whether by way of becoming a member of, or
acquiring shares in, a co-operative society or by way of any agreement or
any arrangement or in any other manner whatsoever which has the effect of
transferring, or enabling enjoyment of, any immovable property is a transfer
as per section 2(47)(vi).
Hence, it is possible to take a view that any date from which such right is
obtained may be taken as the date of acquisition.
4.5 SCOPE AND YEAR OF CHARGEABILITY

[SECTION 45]
(i) General Provision [Section 45(1)]
Any profits or gains arising from the transfer of a capital asset effected in the
previous year (other than exemptions covered under this chapter) shall be
chargeable to income-tax under this head in the previous year in which the
transfer took place.
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
place4.
Alapati Venkatramiah v. CIT [1965] 57 ITR 185 (SC)

4

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.
(ii) Insurance Receipts [Section 45(1A)]
Where any person receives any money or other assets under any insurance from an
insurer on account of damage to or destruction of any capital asset, as a result of
- flood, typhoon, hurricane, cyclone, earthquake or other convulsion of
nature,
- riot or civil disturbance,
- accidental fire or explosion or
- of action by an enemy or action taken in combating an enemy (whether
with or without declaration of war),
then, any profits or gains arising from receipt of such money or other assets shall
be chargeable to income-tax under the head “Capital gains” and shall be deemed
to be the income of such person for the previous year in which such money or
other asset was received.
Full value of consideration: In order to compute capital gains, the value of any
money or the fair market value of other assets on the date of such receipt shall be
deemed to be the full value of the consideration received or accruing as a result
of the transfer of such capital assets.
(iii) Conversion or treatment of a capital asset as stock-in-trade [Section 45(2)]
A person who is the owner of a capital asset may convert the same or treat it as
stock-in-trade of the business carried on by him. As noted above, the above
transaction is a transfer.
As per section 45(2), notwithstanding anything contained in section 45(1), being
the charging section, the profits or gains arising from the above conversion or
treatment will be chargeable to income-tax as his income of the previous year
in which such stock-in-trade is sold or otherwise transferred by him.
Full value of consideration: In order to compute the capital gains, the fair
market value of the asset on the date of such conversion or treatment shall be
deemed to be the full value of the consideration received as a result of the
transfer of the capital asset.

Components of
income arising Manner of Computation of capital
on sale of gains and business income
stock-in-trade
FMV on the date of conversion (-)

Cost/Indexed Cost of acquisition/
improvement
Capital Gains
Conversion
Indexation benefit would be considered
of capital in relation to the year of conversion of
asset into capital asset into stock-in-trade
stock-in-
trade
Business Sale price of stock-in-trade (-) FMV on

Income the date of conversion
Note – Both Capital Gains and Business income are chargeable to tax in the
year in which stock-in-trade is sold or otherwise transferred.
ILLUSTRATION 2
A is the owner of a car. On 1-4-2023, 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 31-3-2024 and gets a profit of ` 1 lakh. Discuss the
tax implication in his hands under the head “Capital gains”.
SOLUTION
Since car is a personal asset, conversion or treatment of the same as the stock-in-
trade of his business will not be trapped by the provisions of section 45(2). Hence ,
A is not liable to capital gains tax.
ILLUSTRATION 3
X converts his capital asset (acquired on June 10, 2005 for ` 60,000) into stock-in-trade
on March 10, 2023. 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, 2023. Discuss the year of chargeability of capital gain and business income.

SOLUTION
Since the capital asset is converted into stock-in-trade during the previous year
2022-23 relevant to the A.Y. 2023-24, it will be a transfer u/s 2(47) during the
P.Y. 2022-23. However, the profits or gains arising from the above conversion will
be chargeable to tax during the A.Y. 2024-25, since the stock-in-trade has been
sold only on June 10, 2023. For this purpose, the fair market value on the date of
such conversion (i.e. 10 th March, 2023) will be the full value of consideration for
computation of capital gains. The business income of ` 50,000 (i.e., ` 6,00,000 (-)
` 5,50,000, being the fair market value on the date of conversion) would also be
taxable in the A.Y.2024-25. Thus, both capital gains and business income would
be chargeable to tax in the A.Y.2024-25.
(iv) Compensation on compulsory acquisition [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. In that case,
the consideration for the transfer is determined by the Central Government of
RBI. When the Central Government pays the above compensation, capital gains
may arise. Such capital gains are chargeable as income of the previous year in
which such compensation is received.
Enhanced Compensation - Many times, persons whose capital assets have been
taken over by the Central Government and who get compensation from the
Government go to the Court of law for enhancement of compensation. If the
court awards a compensation which is higher than the original compensation, the
difference thereof will be chargeable to capital gains in the year in which the
same is received from the government.
Cost of acquisition in case of enhanced compensation - For this purpose, the
cost of acquisition and cost of improvement shall be taken to be nil.
Compensation received in pursuance of an interim order deemed as income
chargeable to tax in the year of final order - In order to remove the uncertainty
regarding the year in which the amount of compensation received in pursuance of
an interim order of the Court, Tribunal or other authority is to be charged to tax,
it is provided that such compensation shall be deemed to be income chargeable
under the head ‘Capital gains’ in the previous year in which the final order of such
Court, Tribunal or other authority is made.

Reduction of enhanced compensation - Where capital gain has been charged

on the compensation received by the assessee for the compulsory acquisition of
any capital asset or enhanced compensation received by the assessee and
subsequently such 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. This re-computation shall be done by
way of rectification5.
Death of the transferor - It is possible that the transferor may die before he
receives the enhanced compensation. In that case, the enhanced compensation
will be chargeable to tax in the hands of the person who receives the same.
4.6 CAPITAL GAINS ON DISTRIBUTION OF

ASSETS BY COMPANIES IN LIQUIDATION
[SECTION 46]
(1) In the hands of liquidated company: Where the assets of a company are
distributed to its shareholders on its liquidation, such distribution shall not
be regarded as a transfer by the company for the purposes of section 45
[Section 46(1)].
The above section is restricted in its application to the circumstances
mentioned therein i.e., the assets of the company must be distributed in
specie to shareholders on the liquidation of the company. If, however, the
liquidator sells the assets of the company resulting in a capital gain and
distributes the funds so collected, the company will be liable to pay tax on
such gains.
(2) In the hands of shareholders: Shareholders receive money or other assets
from the company on its liquidation. They will be chargeable to income-tax
under the head ‘capital gains’ in respect of the market value of the assets
received on the date of distribution, or the moneys so received by them.
The portion of the distribution which is attributable to the accumulated
profits of the company is to be treated as dividend income under section
2(22)(c), which would be taxable in the hands of shareholders. The same will
5
under section 155

be deducted from the amount received/fair market value for the purpose of
determining the consideration for computation of capital gains.
Capital Gains on distribution

of assets by companies in
liquidation [Section 46]
In the hands of In the hands of

the company shareholders
[Section 46(1)] [Section 46(2)]
Distribution is
not a transfer
Distribution attributable to Money received (+)
accumulated profits of the FMV of assets
company distributed (-) deemed
dividend u/s 2(22)(c)
No capital gains
tax liability
Deemed dividend u/s 2(22)(c) Full value of

consideration for the
purpose of section 48
Taxable in the hands of To be considered for

shareholders as “Income computing Capital
from Other Sources” Gains in the hands
of shareholders
4.7 CAPITAL GAINS ON BUYBACK OF SHARES

OR SPECIFIED SECURITIES [SECTION 46A]
(1) In case of specified securities other than shares: Any consideration
received by a holder of specified securities (other than shares) from any
company on purchase of its specified securities is chargeable to tax in the
hands of the holder of specified securities. The difference between the
cost of acquisition and the value of consideration received by the holder
of securities is chargeable to tax as capital gains in his hands. The

computation of capital gains shall be made in accordance with the

provisions of section 48.
Such capital gains shall be chargeable in the year in which such securities
were purchased by the company. For this purpose, “specified securities”
shall have the same meaning as given in Explanation to section 77A of the
Companies Act, 1956 6.
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.
Note – 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) In case of shares (whether listed or unlisted): In case of buyback of

shares (whether listed or unlisted) by domestic companies, additional
income-tax@20% (plus surcharge @12% and cess@4%) is leviable in the
hands of the company 7.
Consequently, the income arising to the shareholders in respect of such

buyback of shares by the domestic company would be exempt under
section 10(34A), since the domestic company is liable to pay additional
income-tax on the buyback of shares.
Taxation provisions in respect of buyback
(1) (2) (3) (4)

Taxability Buyback of Buyback of Buyback of
in the shares by shares by a specified securities
hands of domestic company, by any company
companies other than a
domestic
company
Company Subject to Not subject to Not subject to tax in
additional tax in the hands the hands of the
income- of the company. company.
[email protected]%.
6
Now section 68 of the Companies Act, 2013
7
Under section 115QA

Shareholder/ Income arising to Income arising Income arising to

holder of shareholders to shareholder holder of specified
specified exempt under taxable as securities taxable as
securities section 10(34A) capital gains capital gains u/s
u/s 46A. 46A.
4.8 TRANSACTIONS NOT REGARDED AS

TRANSFER [SECTION 47]
Section 47 specifies certain transactions which will not be regarded as transfer for
the purpose of capital gains tax:
(1) Total or partial partition of a HUF: Any distribution of capital assets on
the total or partial partition of a HUF [Section 47(i)].
(2) A gift or will or an irrevocable trust: Any transfer of a capital asset under
a gift or will or an irrevocable trust.
However, this clause shall not include transfer under a gift or an irrevocable
trust of a capital asset being shares, debentures or warrants allotted by a
company directly or indirectly to its employees under the Employees' Stock
Option Plan or Scheme offered to its employees in accordance with the
guidelines issued in this behalf by the Central Government [Section 47(iii)].
(3) Transfer of capital asset by holding company to its wholly owned

Indian subsidiary company: Any transfer of capital asset by a company to
its subsidiary company [Section 47(iv)].
Conditions:
(i) The parent company or its nominee must hold the whole of the shares
of the subsidiary company; and
(ii) The subsidiary company must be an Indian company.
(4) Transfer of capital asset by a subsidiary company to its 100% holding
company, being an Indian company: Any transfer of capital asset by a
subsidiary company to the holding company [Section 47(v)].
Conditions:
(i) The whole of shares of the subsidiary company must be held by the
holding company; and

(ii) The holding company must be an Indian company.

Exception - The exemption mentioned in 3 or 4 above will not apply if a
capital asset is transferred as stock-in-trade.
(5) Transfer of capital asset by amalgamating company to amalgamated

Indian company, in a scheme of amalgamation: Any transfer, in a scheme
of amalgamation, of a capital asset by the amalgamating company to the
amalgamated company if the amalgamated company is an Indian company
[Section 47(vi)].
(6) Transfer of capital asset by the demerged company to the resulting

Indian company, in a scheme of demerger: Any transfer in a demerger, of
a capital asset by the demerged company to the resulting company, if the
resulting company is an Indian company [Section 47(vib)].
(7) Transfer or issue of shares by a resulting company, in a scheme of

demerger: Any transfer or issue of shares by the resulting company, in a
scheme of demerger to the shareholders of the demerged company, if the
transfer is made in consideration of the demerger of the undertaking
[Section 47(vid)].
(8) Transfer of shares by a shareholder in a scheme of amalgamation: Any

transfer by a shareholder, in a scheme of amalgamation, of shares held by
him in the amalgamating company [Section 47(vii)].
Conditions:
(i) The transfer is made in consideration of the allotment to him of any

share/s in the amalgamated company, except where the shareholder
itself is the amalgamated company;
(ii) The amalgamated company is an Indian company.
Example:
Let us take a case where A Ltd., an Indian company, holds 60% of shares in B Ltd.
B Ltd. amalgamates with A Ltd. Since A Ltd. itself is the shareholder of B Ltd., A
Ltd., being the amalgamated company, cannot issue shares to itself. However, A
Ltd. has to issue shares to the other shareholders of B Ltd.

ILLUSTRATION 4
M held 2000 shares in a company ABC Ltd., an Indian company. This
company amalgamated with another Indian company XYZ Ltd. during the
previous year ending 31-3-2024. 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?
SOLUTION
In the above example, the transaction is squarely covered by the exemption

explained above and the proposal of the Assessing Officer to treat the
transaction as a transfer is not justified.
(9) Transfer of Government Security outside India by a non-resident to
another non-resident: Any transfer of a capital asset, being a Government
Security carrying a periodic payment of interest, made outside India
through an intermediary dealing in settlement of securities, by a non-
resident to another non-resident [Section 47(viib)]
(10) Redemption of sovereign gold bonds by an Individual: Redemption by
an individual of sovereign gold bonds issued by RBI under the Sovereign
Gold Bond Scheme, 2015 [Section 47(viic)]
(11) Conversion of gold into Electronic Gold Receipt or vice a versa: Any
transfer of a capital asset, being conversion of gold into Electr onic Gold
Receipt issued by a Vault Manager, or conversion of Electronic Gold Receipt
into gold [Section 47(viid)]
(12) Transfer of specified capital asset to the Government or university etc.:
Any transfer of any of the 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 to be of national importance or to be of renown throughout
any State
(i) work of art
(ii) archaeological, scientific or art collection
(iii) book

(iv) manuscript
(v) drawing
(vi) painting
(vii) photograph or
(viii) print [Section 47(ix)].
(13) Transfer on conversion of bonds or debentures etc. into shares or
debentures: 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 [Section 47(x)].
(14) 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 [Section 47(xb)].
(15) Transfer of capital asset under Reverse Mortgage: Any transfer of a
capital asset in a transaction of reverse mortgage under a scheme made and
notified by the Central Government [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.
The loan will be given up to, say, 60% of the value of residential house
property mortgaged. Also, the bank/housing finance company would
undertake a revaluation of the property once every 5 years. The borrower
can use the loan amount for renovation and extension of residential
property, family’s medical and emergency expenditure etc., amongst others
However, he cannot use the amount for speculative or trading purposes.
The Reverse Mortgage Scheme, 2008, now includes within its scope,
disbursement of loan by an approved lending institution, in part or in full, to
the annuity sourcing institution, for the purposes of periodic payments by
way of annuity to the reverse mortgagor. This would be an additional mode
of disbursement i.e., in addition to direct disbursements by the approved

lending institution to the Reverse Mortgagor by way of periodic payments

or lump sum payment in one or more tranches.
An annuity sourcing institution has been defined to mean Life Insurance

Corporation of India or any other insurer registered with the Insurance
Regulatory and Development Authority.
Maximum Period of Reverse Mortgage Loan:
Mode of disbursement Maximum period of loan

(a) Where the loan is disbursed directly 20 years from the date of
to the Reverse Mortgagor signing the agreement by the
reverse mortgagor and the
approved lending institution.
(b) Where the loan is disbursed, in part The residual life time of the
or in full, to the annuity sourcing borrower.
institution for the purposes of
periodic payments by way of
annuity to the Reverse mortgagor
The bank will recover the loan along with the accumulated interest by
selling the house after the death of the borrower. The excess amount will be
given to the legal heirs However, before resorting to sale of the house,
preference will be given to the legal heirs to repay the loan and interest and
get the mortgaged property released.
Therefore, section 47(xvi) clarifies that any transfer of a capital asset in a
transaction of reverse mortgage under a scheme made and notified by the Central
Government would not amount to transfer for the purpose of capital gains.
Exemption of income received in a transaction of reverse mortgage

[Section 10(43)]: Section 10(43), further, provides that the amount received
by the senior citizen as a loan, either in lump sum or in installments, in a
transaction of reverse mortgage would be exempt from income-tax.
ILLUSTRATION 5
In which of the following situations capital gains tax liability does not arise?
(i) Mr. A purchased gold in 1970 for ` 25,000. In the P.Y. 2023-24, 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 P.Y. 2023-24 at the
time of partition of the family. FMV on the date of partition was ` 12,00,000.
(iii) Mr. B purchased 50 convertible debentures for ` 40,000 in 1995 which are
converted into 500 shares worth ` 85,000 in November 2023 by the company.
SOLUTION
We know that capital gains arises only when we transfer a capital asset. The
liability of capital gains tax in the situations given above is discussed as follows:
(i) As per the provisions of section 47(iii), gift of a capital asset is not regarded
as transfer for the purpose of capital gains. Therefore, capital gains tax
liability does not arise in the given situation.
(ii) As per the provisions of section 47(i), distribution of a capital asset (being in
kind) on the total or partial partition of Hindu undivided family is not
regarded as transfer for the purpose of capital gains. Therefore, capital gains
tax liability does not arise in the given situation.
(iii) As per the provisions of section 47(x), conversion of bonds or debentures,
debenture stock or deposit certificates in any form of a company into shares
or debentures of that company is not regarded as transfer for the purpose
of capital gains. Therefore, capital gains tax liability does not arise in the
given situation.
ILLUSTRATION 6
Mr. Abhishek a senior citizen, mortgaged 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?
SOLUTION
Section 47(xvi) provides that any transfer of a capital asset in a transaction of
reverse mortgage under a scheme made and notified by the Central Government
shall not be considered as a transfer for the purpose of capital gain.
Accordingly, the mortgaging of residential house with bank by Mr. Abhishek will
not be regarded as a transfer. Therefore, no capital gain will be charged on such
transaction.

Further, section 10(43) provides that the amount received by the senior citizen as
a loan, either in lump sum or in installment, in a transaction of reverse mortgage
would be exempt from income-tax. Therefore, the monthly installment amounts
received by Mr. Abhishek would not be taxable.
ILLUSTRATION 7
Examine, with reasons, whether the following statements are True or False.
(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 14 months, will be long-
term capital assets.
(iii) Zero Coupon Bond means a bond on which no payment and benefits are
received or receivable before maturity or redemption.
SOLUTION
(i) False: As per section 47(xvi), such alienation in a transaction of reverse
mortgage under a scheme made and notified by the Central Government is
not regarded as "transfer" for the purpose of capital gains.
(ii) True: Section 2(42A) defines the term 'short-term capital asset'. Under the
proviso to section 2(42A), zero coupon bond held for not more than 12
months will be treated as a short-term capital asset. Consequently, such
bond held for more than 12 months will be a long-term capital asset.
(iii) True: As per section 2(48), ‘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 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.
4.9 IMPORTANT DEFINITIONS

(a) Amalgamation [Section 2(1B)] - “Amalgamation”, in relation to
companies, means -
- the merger of one or more companies with another company or

- the merger of two or more companies to form one company

(the company or companies which so merge being referred to as the
amalgamating company or companies and the company with which they
merge or which is formed as a result of the merger, as the amalgamated
company) in such a manner that -
(i) all the property of the amalgamating company or companies

immediately before the amalgamation becomes the property of the
amalgamated company by virtue of the amalgamation;
(ii) all the liabilities of the amalgamating company or companies
immediately before the amalgamation become the liabilities of the
amalgamated company by virtue of the amalgamation;
(iii) shareholders holding not less than three-fourth in value of the shares
in the amalgamating company or companies (other than shares
already held therein immediately before the amalgamation by, or by a
nominee for, the amalgamated company or its subsidiary) become
shareholders of the amalgamated company by virtue of the
amalgamation,
otherwise than as a result of the acquisition of the property of one company

by another company pursuant to the purchase of such property by the other
company or as a result of the distribution of such property to the other
company after the winding up of the first mentioned company.
(b) Demerger [Section 2(19AA)] - “Demerger”, in relation to companies,
means the transfer, pursuant to a scheme of arrangement under sections
230 to 232 of the Companies Act, 2013, by a demerged company of its one
or more undertaking to any resulting company in such a manner that -
(i) all the property of the undertaking, being transferred by the
demerged company, immediately before the demerger, becomes the
property of the resulting company by virtue of the demerger;
(ii) all the liabilities relatable to the undertaking, being transferred by the
demerged company, immediately before the demerger, become the
liabilities of the resulting company by virtue of the demerger;

(iii) the property and the liabilities of the undertaking or undertakings

being transferred by the demerged company are transferred at values
appearing in its books of account immediately before the demerger;
However, this provision does not apply where, in compliance to the
Indian Accounting Standards specified in Annexure to the Companies
(Indian Accounting Standards) Rules, 2015, the resulting company
records the value of the property and the liabilities of the undertaking or
undertakings at a value different from the value appearing in the books
of account of the demerged company, immediately before the demerger.
For the purpose of determining the value of the property, any change
in the value of assets consequent to their revaluation shall be ignored.
(iv) the resulting company issues, in consideration of the demerger, its

shares to the shareholders of the demerged company on a
proportionate basis;
Note - If the resulting company is a shareholder of the demerged

company, it cannot issue shares to itself. However, the resulting
company has to issue shares to the other shareholders of the
demerged company.
(v) the shareholders holding not less than three-fourths in value of the
shares in the demerged company (other than shares already held
therein immediately before the demerger, or by a nominee for, the
resulting company or, its subsidiary) become shareholders of the
resulting company or companies by virtue of the demerger, otherwise
than as a result of the acquisition of the property or assets of the
demerged company or any undertaking thereof by the resulting
company;
(vi) the transfer of the undertaking is on a going concern basis;
(vii) the demerger is in accordance with the conditions, if any, notified 8 by
the Central Government in this behalf.
Reconstruction or splitting up of a public sector company into separate

companies shall be deemed to be a demerger, if such reconstruction or
8
under sub-section (5) of section 72A

splitting up has been made to transfer any asset of the demerged company
to the resulting company and the resulting company –
(a) is a public sector company on the appointed day indicated in such

scheme as may be approved by the Central Government or any other
body authorized under the Companies Act, 1956 or any other law for
the time being in force governing such public sector companies; and
(b) fulfils such other conditions as may be notified by the Central
Government [Explanation 6].
(c) Demerged Company - Demerged company means the company whose
undertaking is transferred, pursuant to a demerger, to a resulting company.
(d) Resulting Company - Resulting company means one or more companies
(including a wholly owned subsidiary thereof) to which the undertaking of
the demerged company is transferred in a demerger and, the resulting
company in consideration of such transfer of undertaking, issues shares to
the shareholders of the demerged company and includes any authority or
body or local authority or public sector company or a company established,
constituted or formed as a result of demerger.
4.10 MODE OF COMPUTATION OF CAPITAL

GAINS [SECTION 48]
(i) Computation of capital gains: The income chargeable under the head
‘Capital gains’ shall be computed by deducting the following items from the
full value of the consideration received or accruing as a result of the transfer
of the capital asset:
(1) Expenditure incurred wholly and exclusively in connection with such
transfer like, brokerage, stamp duty, registration fee, legal expenses
etc.
(2) The cost of acquisition and cost of any improvement thereto.
However, the cost of acquisition of the asset or the cost of improvement

thereto would not include the deductions claimed on interest u/s 24(b)
or under the provisions of Chapter VI-A.

Interest on loan taken for acquisition, construction, repairs, reconstruction of

house property is allowable as deduction under section 24(b). Sections 80EE
and 80EEA in Chapter VI-A provide for deduction of interest payable on loan
taken for acquisition of house property, subject to fulfillment of certain
conditions.
The interest allowed as deduction under section 24(b) while computing
income from house property and interest allowed as deduction under section
80EE or 80EEA of Chapter VI-A would not be included in the cost of
acquisition or cost of improvement while computing capital gains on transfer
of house property.
(ii) No deduction in respect of STT: No deduction shall, however, be allowed
in computing the income chargeable under the head “Capital Gains” in
respect of any amount paid on account of securities transaction tax (STT)
under Chapter VII of the Finance (No.2) Act, 2004.
(iii) Cost inflation index: Under section 48, for computation of long-term
capital gains, the cost of acquisition and cost of improvement will be
increased by applying the cost inflation index (CII). Once the cost inflation
index is applied to the cost of acquisition and cost of improvement, it
becomes indexed cost of acquisition and indexed cost of improvement.
This means an amount which bears to the cost of acquisition, the same
proportion as CII for the year in which the asset is transferred bears to the
CII for the first year in which the asset was held by the assessee or for the
year beginning on 1 st April, 2001, whichever is later.
Similarly, indexed cost of any improvement means an amount which bears
to the cost of improvement, the same proportion as CII for the year in which
the asset is transferred bears to the CII for the year in which the
improvement to the asset took place.
“Cost Inflation Index” in relation to a previous year means such index as

may be notified by the Central Government having regard to 75% of
average rise in the Consumer Price Index (Urban) for the immediately
preceding previous year to such previous year.
Note – The benefit of indexation will not apply to the long-term capital gains
arising from the transfer of bonds or debentures other than –
(1) Capital indexed bonds issued by the Government; or

(2) Sovereign Gold Bond issued by the RBI under the Sovereign Gold Bond
Scheme, 2015.
In case of depreciable assets, unit of a specified mutual fund and marked
linked debenture (discussed later), there will be no indexation and the capital
gains will always be short-term capital gains.
The cost inflation indices for the financial years so far have been
notified as under:
Financial Year Cost Inflation Index

2001-02 100
2002-03 105
2003-04 109
2004-05 113
2005-06 117
2006-07 122
2007-08 129
2008-09 137
2009-10 148
2010-11 167
2011-12 184
2012-13 200
2013-14 220
2014-15 240
2015-16 254
2016-17 264
2017-18 272
2018-19 280
2019-20 289
2020-21 301
2021-22 317
2022-23 331
2023-24 348

(iv) Full value of consideration of shares, debentures or warrants issued

under ESOP in case of transfer under a gift etc. - In case where shares,
debentures or warrants allotted by a company directly or indirectly to its
employees under the Employees' Stock Option Plan or Scheme in accordance
with the guidelines issued in this behalf by the Central Government are
transferred under a gift or irrecoverable trust, then the market value on the
date of such transfer shall be deemed to be the full value of consideration
received or accruing as a result of transfer of such asset.
(v) 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:
• 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.
• 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].
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.
4.11 ASCERTAINMENT OF COST IN SPECIFIED

CIRCUMSTANCES [SECTION 49]
A person becomes the owner of a capital asset not only by purchase but also by
several other methods. Section 49 gives guidelines as to how to compute the cost
under different circumstances.
Section Circumstance Cost of acquisition

49(1) Where the capital asset became Cost for which the previous
the property of the assessee: owner of the property acquired it.
(i) on any distribution of assets Notes –
on the total or partition of a Cost of improvement – To the
HUF; cost of acquisition, the cost of
(ii) under a gift or will; improvement to the asset,
(iii) by succession, inheritance or incurred by the previous owner or
devolution; the assessee on or after 1.4.2001
(iv) on any distribution of assets must be added.
on the liquidation of a Period of holding - It may be
company; noted that section 2(42A) provides
(v) under a transfer to revocable that in all such cases, for
or an irrevocable trust; determining the period for which
the capital asset is held by the
(vi) under any transfer of capital
transferee, the period of holding
asset by a holding company to
of the asset by the previous owner
its wholly owned subsidiary
shall also be considered.
Indian company or by a
subsidiary company to its Benefit of indexation - The
100% holding Indian company, Bombay High Court, in CIT v.
referred to in section 47(iv) Manjula J. Shah 16 Taxman 42,
and 47(v), respectively; held that the indexed cost of
acquisition in case of gifted asset
(vii) under any transfer referred to
has to be computed with reference
in section 47(vi) of a capital
to the year in which the previous
asset by amalgamating
owner first held the asset and not
company to the amalgamated

Indian company, in a scheme the year in which the assessee

of amalgamation; became the owner of the asset.
(viii) under any transfer referred to As per the plain reading of the
in section 47(vib), of a capital provisions of section 48, however,
asset by the demerged the indexed cost of acquisition
company to the resulting would be determined by taking CII
Indian company, in a scheme for the year in which asset is first
of demerger; held by the assessee.
(ix) by conversion by an individual
of his separate property into a
HUF property, by the mode
referred to in section 64(2).
49(2) Where shares in an amalgamated The cost of acquisition to him of
company which is an Indian the shares in the amalgamated
company become the property of company shall be taken as the
the assessee in consideration of cost of acquisition of the shares
the transfer of shares referred to in in the amalgamating company.
section 47(vii) held by him in the
amalgamating company under a
scheme of amalgamation
49(2A) Where a person becomes the That part of the cost of
owner of shares or debentures in a debentures, debenture stock, bond
company during the process of or deposit certificate in relation to
conversion of bonds or which such asset (shares or
debentures, debenture stock or debentures) is acquired by that
deposit certificates referred under person.
section 47(x).
49(2AA) Where the capital gain arises from Fair market value which has been
the transfer of specified security or taken into account for perquisite
sweat equity shares referred to in valuation.
section 17(2)(vi)
49(2AE) Where equity shares of a company, That part of the cost of the
became the property of the preference share in relation to
assessee in consideration of which such equity shares are
transfer by way of conversion of acquired by the assessee.
preference shares of the company
[Section 47(xb)]

49(2C) In case of demerger The cost of acquisition of the

shares in the resulting company
shall be the amount which bears
to the cost of acquisition of
shares held by the assessee in the
demerged company the same
proportion as the net book value
of the assets transferred in a
demerger bears to the net worth
of the demerged company
immediately before such
demerger.
Cost of acquisition of shares in
B
the resulting company = A 
C
A = Cost of acquisition of shares
held in the demerged
company
B = Net book value of the assets
transferred in a demerger
C = Net worth of the demerged
company i.e., the aggregate
of the paid up share capital
and general reserves as
appearing in the books of
account of the demerged
company immediately before
the demerger.
49(2D) In case of demerger The cost of acquisition of the
original shares held by the
shareholder in the demerged
company shall be deemed to
have been reduced by the
amount as so arrived under the
sub-section (2C)
49(4) Where the capital gain arises from The value taken into account for
the transfer of such property which the purposes of section 56(2)(x).
has been subject to tax under
section 56(2)(x)

49(9) Where the capital gain arises from The fair market value of the
the transfer of a capital asset inventory as on the date on such
which was used by the assessee as conversion determined in the
inventory earlier before its prescribed manner
conversion into capital asset
49(10) Where a capital asset, being an The cost of gold in the hands of
Electronic Gold Receipt issued by a the person in whose name
Vault Manager became the Electronic Gold Receipt is issued.
property of the person as
consideration for transfer of gold
[Section 47(viid)]
Where gold is released against an The cost of the Electronic Gold
Electronic Gold Receipt, which Receipt in the hands of such
became the property of the person person.
as consideration for transfer of
Electronic Gold Receipt [Section
47(viid)]
4.12 COST OF ACQUISITION [SECTION 55(2)]

Cost of acquisition is the price that the assessee has paid, or the amount that the
assessee has incurred, for acquisition of the asset. Expenses incurred for
completing the title are a part of the cost of acquisition. For eg: Stamp duty.
Cost of acquisition in relation to the following assets is as follows:
(1) Goodwill of a business or profession or a trademark or brand name
associated with a business or profession or any other intangible asset
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, or any other right
(i) 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.
Example:
If A purchases a stage carriage permit from B for ` 2 lacs, ` 2 lacs will be the
cost of acquisition for A .

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 P.Y.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 P.Y.2019-20) obtained
by the assessee under section 32(1).
(ii) 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 4).

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 P.Y.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 P.Y.2019-20) obtained by the assessee under section 32(1).
(iii) 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 any other
intangible asset 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, or any other right, the cost of acquisition
will be taken to be nil.
(2) Financial assets
Many a time, persons who own shares or other securities become entitled to
subscribe to any additional shares or securities. Further, they are also allotted
additional shares or securities without any payment. Such shares or securities are
referred to as financial assets in Income-tax Act. Section 55 provides the basis for
ascertaining the cost of acquisition of such financial assets.
(i) Original shares (which form the basis of entitlement of rights shares):
In relation to the original financial asset on the basis of which the assessee
becomes entitled to any additional financial assets, cost of acquisition
means the amount actually paid for acquiring the original financial assets.
(ii) Rights entitlement (which is renounced by the assessee in favour of a

person): In relation to any right to renounce the said entitlement to
subscribe to the financial asset, when such a right is renounced by the
assessee in favour of any person, cost of acquisition shall be taken to be nil
in the case of such assessee.
(iii) Rights shares acquired by the assessee: In relation to the financial asset,
to which the assessee has subscribed on the basis of the said entitlement,
cost of acquisition means the amount actually paid by him for acquiring
such asset.

(iv) Bonus Shares: In relation to the financial asset allotted to the assessee
without any payment and on the basis of holding of any other financial
assets, cost of acquisition shall be taken to be nil in the case of such
assessee.
In other words, where bonus shares are allotted without any payment on
the basis of holding of original shares, the cost of such bonus shares will be
nil in the hands of the original shareholder.
Bonus shares allotted before 01.04.2001 - In respect of bonus shares
allotted before 1.4.2001, although the cost of acquisition of the shares is nil,
the assessee may opt for the fair market value as on 1.4.2001 as the cost of
acquisition of such bonus shares.
Bonus shares allotted before 1.2.2018, on which STT has been paid at
the time of transfer – In case of transfer of bonus shares allotted before
1.2.2018 on which STT has been paid at the time of transfer, the cost would be
the higher of –
(i) Actual cost of acquisition (i.e., Nil, in case of bonus shares allotted
on or after 1.4.2001; and FMV on 1.4.2001, in case of business shares
allotted before 1.4.2001)
(ii) Lower of –
(a) FMV as on 31.1.2018; and
(b) Actual sale consideration
(v) Rights shares which are purchased by the person in whose favour the
assessee has renounced the rights entitlement: In the case of any
financial asset purchased by the person in whose favour the right to
subscribe to such assets has been renounced, cost of acquisition means the
aggregate of the amount of the purchase price paid by him to the person
renouncing such right and the amount paid by him to the company or
institution for acquiring such financial asset.
(3) Long-term capital assets referred to in section 112A

The cost of acquisition in relation to the long-term capital assets being,
- equity shares in a company on which STT is paid both at the time of
purchase and transfer or

- unit of equity oriented fund or unit of business trust on which STT is paid
at the time of transfer.
acquired before 1 st February, 2018 shall be the higher of

(i) cost of acquisition of such asset; and
(ii) lower of
(a) the fair market value of such asset; and

(b) the full value of consideration received or accruing as a result of
the transfer of the capital asset.
Meaning of Fair Market value
S.No. Circumstance Fair Market Value

(i) In a case where the capital If there is trading in such asset
asset is listed on any on such exchange on
recognized stock exchange as 31.01.2018
on 31.01.2018 The highest price of the capital
asset quoted on such exchange
on the said date
If there is no trading in such asset
on such exchange on 31.01.2018
The highest price of such asset on
such exchange on a date
immediately preceding 31.01.2018
when such asset was traded on
such exchange.
(ii) In a case where the capital The net asset value of such unit
asset is a unit which is not as on the said date
listed on any recognized stock
exchange as on 31.01.2018
(iii) In a case where the capital An amount which bears to the
asset is an equity share in a cost of acquisition the same
company which is proportion as CII for the financial
- not listed on a recognized year 2017-18 bears to the CII for
stock exchange as on the first year in which the asset
31.01.2018 but listed on was held by the assessee or on
such exchange on the date 01.04.2001, whichever is later.
of 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 under section 47
(4) Any other capital asset

(i) Where the capital asset become the property of the assessee before 1-
4-2001, cost of acquisition means the cost of acquisition of the asset to the
assessee or the fair market value of the asset on 1-4-2001, at the option of
the assessee.
Example: A house property was purchased by Mr. A on 1.1.1992 for ` 30,000

and the fair market value of the same was ` 1,40,000 as on 1.4.2001. Cost of
acquisition of the said property would be ` 1,40,000.
However, in case of capital asset, being land or building or both, the fair
market value of such asset on 1-4-2001 shall not exceed the stamp duty
value, wherever available, of such asset as on 1-4-2001.
Example: In the above example, if the stamp duty value of the property was
` 1,20,000 as on 1.4.2001, cost of acquisition of such property would be
` 1,20,000, being the stamp value as on 1.4.2001 and not ` 1,40,000.
(ii) Where the capital asset became the property of the assessee by any of
the modes specified in section 49(1): The cost of acquisition to the
assessee will be the cost of acquisition to the previous owner. Even in such
cases, where the capital asset became the property of the previous owner
before 1-4-2001, the assessee can opt the fair market value as on 1-4-2001
as the cost of acquisition.
However, in case of capital asset, being land or building or both, the fair
market value of such asset on 1-4-2001 shall not exceed the stamp duty
value, wherever available, of such asset as on 1-4-2001.

Note: The provisions contained in (i) & (ii) of (4) above shall also apply to the
financial assets mentioned in (i) to (v) of (2) and long term capital assets
referred to in section 112A of (3) above.
(iii) Where the capital asset became the property of the assessee on the
distribution of the capital assets of a company on its liquidation and the
assessee has been assessed to capital gains in respect of that asset under
section 46, the cost of acquisition means the fair market value of the asset
on the date of distribution.
(iv) A share or a stock of a company may become the property of an assessee
under the following circumstances:
(a) the consolidation and division of all or any of the share capital of the
company into shares of larger amount than its existing shares.
(b) the conversion of any shares of the company into stock,
(c) the re-conversion of any stock of the company into shares,
(d) the sub-division of any of the shares of the company into shares of
smaller amount, or
(e) the conversion of one kind of shares of the company into another kind.
In the above circumstances the cost of acquisition to the assessee will mean
the cost of acquisition of the asset calculated with reference to the cost of
acquisition of the shares or stock from which such asset is derived.
(5) Where the cost for which the previous owner acquired the property
cannot be ascertained, the cost of acquisition to the previous owner means
the fair market value on the date on which the capital asset became the
property of the previous owner.
Cost of Acquisition of certain assets: At a Glance
Sl. Nature of asset Cost of acquisition
No.
1 Goodwill of business or profession,
trademark, brand name or any
other intangible asset etc.,
- Self generated Nil
- Acquired from previous owner Purchase price

However, in case of capital asset, Purchase price as reduced by the total

being goodwill of a business or amount of depreciation obtained by
profession, in respect of which the assessee under section 32(1).
depreciation u/s 32(1) has been
obtained by the assessee in any
P.Y. (upto P.Y.2019-20)
- became the property of the Purchase price for such previous
assessee by way of distribution of owner
assets on total or partial partition
of HUF, under a gift or will, by
succession, inheritance,
distribution of assets on
liquidation of a company, etc.
and previous owner has acquired
it by purchase
However, in case of capital asset, Purchase price for such previous
being goodwill of a business or owner as reduced by the total amount
profession which was acquired by of depreciation obtained by the
the previous owner by purchase assessee u/s 32(1).
and in respect of which
P.Y. (upto P.Y.2019-20)
2. Bonus Shares:
Allotted before 1.4.2001 FMV as on 1.4.2001
Allotted on or after 1.4.2001 Nil
Bonus shares allotted before The higher of –
1.2.2018, on which STT has been (i) Actual cost of acquisition (i.e., Nil,
paid at the time of transfer in case of bonus shares allotted
on or after 1.4.2001; and
FMV on 1.4.2001, in case of bonus
shares allotted before 1.4.2001)
(ii) Lower of –
(a) FMV as on 31.1.2018; and
(b) Actual sale consideration

3. Rights Shares:
Original shares (which form the Amount actually paid for acquiring the
basis of entitlement of rights original shares
shares)
Rights entitlement (which is Nil
renounced by the assessee in favour
of a person)
Rights shares acquired by the Amount actually paid for acquiring the
assessee rights shares
Rights shares which are purchased Purchase price paid to the renouncer
by the person in whose favour the of rights entitlement as well as the
assessee has renounced the rights amount paid to the company which
entitlement has allotted the rights shares.
4 Long term capital assets being, Cost of acquisition shall be the higher
- equity shares in a company of
on which STT is paid both at (i) actual cost of acquisition of such
the time of purchase and asset; and
transfer or (ii) lower of
- unit of equity oriented fund - the fair market value of such
or unit of business trust on asset; and
which STT is paid at the time of
- the full value of consideration
transfer,
received or accruing as a result of
acquired before 1st February, the transfer of the capital asset.
2018
5 Any other capital asset
Where such capital asset became Cost of the asset to the assessee, or FMV
the property of the assessee before as on 1.4.2001, at the option of the
1.4.2001 assessee.
However, in case of capital asset being
land or building, FMV as on 1.4.2001
shall not exceed stamp duty value as
on 1.4.2001.
Where capital assets became the Cost to the previous owner or FMV as on
property of the assessee by way of 1.4.2001, at the option of the assessee.
distribution of assets on total or However, in case of capital asset
partial partition of HUF, under a gift being land or building, FMV as on
or will, by succession, inheritance,

distribution of assets on liquidation 1.4.2001 shall not exceed stamp duty

of a company, etc. and the capital value as on 1.4.2001.
asset became the property of the
previous owner before 1.4.2001.
The provisions contained in (5) above shall also apply to the assets mentioned
in (3) and (4) above.
6 Where cost of the property in the The FMV on the date on which the
hands of previous owner cannot be capital asset become the property of
ascertained the previous owner would be
considered as cost of acquisition.
ILLUSTRATION 8
Mr. A converts his capital asset acquired for an amount of ` 50,000 in June, 2003 into
stock-in-trade in the month of November, 2022. 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, 2023. What will be the tax treatment?
Financial year Cost Inflation Index

2003-04 109
2022-23 331
2023-24 348
SOLUTION
The capital gains on the sale of the capital asset converted to stock-in-trade is
taxable in the given case. It arises in the year of conversion (i.e. P.Y. 2022-23) but
will be taxable only in the year in which the stock-in-trade is sold (i.e. P.Y. 2023-
24). Profits from business will also be taxable in the year of sale of the stock -in-
trade (P.Y. 2023-24).
The LTCG and business income for the A.Y.2024-25 are calculated as under:
Particulars ` `
Profits and Gains from Business or Profession

Sale proceeds of the stock-in-trade 6,50,000
Less: Cost of the stock-in-trade (FMV on the date of 4,50,000 2,00,000
conversion)

Long Term Capital Gains

Full value of the consideration (FMV on the date of the 4,50,000
conversion)
Less: Indexed cost of acquisition (` 50,000 x 331/109) 1,51,835 2,98,165
Note: For the purpose of indexation, the cost inflation index of the year in which
the asset is converted into stock-in-trade should be considered.
4.13 COST OF IMPROVEMENT [SECTION 55(1)]

(1) Goodwill or any other intangible asset of a business, etc. [Section
55(1)(b)(1)]: In relation to a capital asset being goodwill or any other
intangible asset of a business or a right to manufacture, produce or
process any article or thing, or right to carry on any business or profession
or any other right, the cost of improvement shall be taken to be Nil.
(2) Any other capital asset [Section 55(1)(b)(2)]:
Circumstance Cost of improvement

(i) Where the capital asset became the property of the previous
owner or the assessee before 1.4.2001
(a) In a case covered u/s 49(1), All expenditure of a capital
where the capital asset nature incurred in making any
became the property of the addition or alteration to the
previous owner and the capital asset on or after
assessee before 1.4.2001 1.4.2001 by the assessee.
(b) In a case covered u/s 49(1), All expenditure of a capital
where the capital asset nature incurred in making any
became the property of the addition or alteration to the
previous owner before capital asset on or after
1.4.2001 but became the 1.4.2001 by the previous
property of the assessee on or owner and the assessee.
after 1.4.2001
(c) In a case not covered u/s All expenditure of a capital
49(1) nature incurred in making any
addition or alteration to the
capital asset on or after
1.4.2001 by the assessee.

(ii) Where the capital asset became the property of the previous
owner and the assessee on or after 1.4.2001
(a) In a case covered u/s 49(1) All expenditure of a capital
nature incurred in making any
capital asset by the previous
owner and the assessee.
(b) In a case not covered u/s All expenditure of a capital
49(1) nature incurred in making any
capital asset by the assessee
after it became the assessee’s
property.
In a nutshell, in a case covered under section 49(1), cost of improvement

would include expenditure of a capital nature on addition or alteration to
the capital asset by the previous owner or the assessee or both on or after
1.4.2001. In a case not covered under section 49(1), cost of improvement
would include expenditure of a capital nature on addition or alteration to
the capital asset by the assessee on or after 1.4.2001.
However, cost of improvement does not include any expenditure which is
deductible in computing the income chargeable under the head “Income
from house property”, “Profits and gains of business or profession” or
“Income from other sources”. Routine expenses on repairs and maintenance
do not form part of cost of improvement.
4.14COMPUTATION OF CAPITAL GAINS IN

CASE OF DEPRECIABLE ASSETS
[SECTIONS 50 & 50A]
(1) Transfer of depreciable assets [Section 50]: Section 50 provides for the
computation of capital gains in case of depreciable assets. It may be noted
that where the capital asset is a depreciable asset forming part of a block of
assets, section 50 will have over-riding effect in spite of anything contained
in section 2(42A) which defines a short-term capital asset.

Accordingly, where the capital asset is an asset forming part of a block of

assets in respect of which depreciation has been allowed, the provisions of
sections 48 and 49 shall be subject to the following modification:
• Where the full value of consideration received or accruing for the transfer
of the asset plus the full value of such consideration for the transfer of
any other capital asset falling with the block of assets during previous
year exceeds the aggregate of the following amounts namely:
(1) expenditure incurred wholly and exclusively in connection with
such transfer;
(2) WDV of the block of assets at the beginning of the previous
year;
(3) the actual cost of any asset falling within the block of assets
acquired during the previous year
such excess shall be deemed to be the capital gains arising from the
transfer of short-term capital assets.
• Where all assets in a block are transferred during the previous year,
the block itself will cease to exist. In such a situation, the difference
between the sale value of the assets and the WDV of the block of
assets at the beginning of the previous year together with the actual
cost of any asset falling within that block of assets acquired by the
assessee during the previous year will be deemed to be the capital
gains arising from the transfer of short-term capital assets.
Transfer of depreciable assets : Tax

consequences
No Yes
Is V > C ? Does the block C (-) V
cease to exist? is STCL
Yes No
V (-) C is C (-) V is the Closing
STCG WDV of the block

Symbol Description
V Full value of consideration
C Opening WDV of Block (+) Actual Cost of Asset acquired in the Block
during the P.Y. (+) Expenses in connection with transfer of asset
STCG Short Term Capital Gain
STCL Short Term Capital Loss
WDV Written Down Value
(2) Cost of acquisition in case of power sector assets [Section 50A]: With
respect to the power sector, in case of depreciable assets referred to in
section 32(1)(i), the provisions of sections 48 and 49 shall apply subject to
the modification that the WDV of the asset [as defined in section 43(6)], as
adjusted, shall be taken to be the cost of acquisition.
ILLUSTRATION 9
Singhania & Co., a sole proprietorship owns six machines, put in use for business in
March, 2022. The depreciation on these machines is charged@15%. The opening
balance of these machines after providing depreciation for P.Y. 2022-23 was
` 8,50,000. Three of the old machines were sold on 10th June, 2023 for ` 11,00,000.
A second hand plant was bought for ` 8,50,000 on 30th November, 2023.
You are required to:

(i) determine the claim of depreciation for Assessment Year 2024-25.
(ii) compute the capital gains liable to tax for Assessment Year 2024-25.
(iii) If Singhania & Co. had sold the three machines in June, 2023 for ` 21,00,000,
will there be any difference in your above workings? Explain.
SOLUTION
(i) Computation of depreciation for A.Y.2024-25
Particulars `
Opening balance of the block as on 1.4.2023 [i.e., W.D.V. as 8,50,000
on 31.3.2023 after providing depreciation for P.Y. 2022-23]
Add: Purchase of second-hand plant during the year 8,50,000
17,00,000
Less: Sale consideration of old machinery during the year 11,00,000
W.D.V of the block as on 31.03.2024 6,00,000

Since the value of the block as on 31.3.2024 comprises of a new asset which
has been put to use for less than 180 days, depreciation is restricted to 50%
of the prescribed percentage of 15% i.e. depreciation is restricted to 7½%.
Therefore, the depreciation allowable for the year is ` 45,000, being 7½% of
` 6,00,000.
(ii) The provisions under section 50 for computation of capital gains in the case
of depreciable assets can be invoked only under the following
circumstances:
(a) When one or some of the assets in the block are sold for
consideration more than the value of the block.
(b) When all the assets are transferred for a consideration more than the
value of the block.
(c) When all the assets are transferred for a consideration less than the
value of the block.
Since in the first two cases, the sale consideration is more than the written
down value of the block, the computation would result in short term capital
gains.
In the third case, since the written down value of the block exceeds the sale
consideration, the resultant figure would be a short-term capital loss of the block.
In the given case, capital gains will not arise as the block of asset continues
to exist, and some of the assets are sold for a price which is lesser than the
written down value of the block.
(iii) If the three machines are sold in June, 2023 for ` 21,00,000, then short term
capital gains would arise, since the sale consideration is more than the
aggregate of the written down value of the block at the beginning of the
year and the additions made during the year.
Particulars ` `
Sale consideration 21,00,000
Less: Opening balance of the block as on 1.4.2023 8,50,000
[i.e., W.D.V. as on 31.3.2023 after providing
depreciation for P.Y. 2022-23]
Purchase of second plant during the year 8,50,000 17,00,000
Short term capital gains 4,00,000

4.15 COMPUTATION OF CAPITAL GAINS IN

CASE OF MARKET LINKED DEBENTURES
[SECTIONS 50AA]
(1) Transfer of unit of a Specified Mutual Fund or Market Linked
Debenture: Section 50AA provides for the computation of capital gains in
case of transfer of unit(s) of
- a Specified Mutual Fund acquired on or after 1.4.2023 or
- a Market Linked Debenture.
Section 50AA will have an over-riding effect in spite of anything contained in

section 2(42A) which defines a short-term capital asset.
Accordingly, capital gain arising from the transfer or redemption or maturity

of unit of a Specified Mutual Fund acquired on or after 1.4.2023 or Market
Linked Debenture would be deemed to be short term capital gains and
chargeable to tax at normal rate of tax.
(2) Computation of capital gains: The full value of consideration received or

accruing as a result of the transfer or redemption or maturity of unit of a
Specified Mutual Fund or Market Linked Debenture as reduced by the cost of
acquisition of the debenture or unit and the expenditure incurred wholly and
exclusively in connection with such transfer or redemption or maturity would
be deemed to be the capital gains.
(3) No deduction in respect of STT: No deduction would be allowed in

computing the income chargeable under the head “Capital Gains” in respect
of any sum paid on account of securities transaction tax (STT) under Chapter
VII of the Finance (No.2) Act, 2004.
(4) Meaning of certain terms:
S.No. Term Meaning

(i) Market Linked A security
Debenture (i) which has an underlying principal
component in the form of debt
security; and

(ii) where the returns are linked to

market returns on other underlying
securities or indices.
It includes any security classified or
regulated as a market linked debenture
by the SEBI.
(ii) Specified Mutual Fund A Mutual Fund where not more than
35% of its total proceeds is invested in
the equity shares of domestic
companies.
However, the percentage of equity
shareholding held in respect of the
Specified Mutual Fund shall be
computed with reference to the annual
average of the daily closing figures.
4.16 CAPITAL GAINS IN RESPECT OF SLUMP

SALE SECTION 50B]
(1) 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
values being assigned to the individual assets and liabilities in such transfer.
Term Meaning
Undertaking It includes any part of an undertaking, or a unit or division
[Explanation 1] of an undertaking or a business activity taken as a whole,
but does not include individual assets or liabilities or any
combination thereof not constituting a business activity.
Transfer Meaning assigned to it in section 2(47) [It would include
[Explanation 3] sale, exchange, relinquishment of capital asset,
extinguishment of any rights therein, compulsory
acquisition under any law etc. – See detailed definition in
page 3.371]
Note - The determination of the value of an asset or liability for the sole 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.

(2) Capital gains – Whether long-term or short-term? [Section 50B(1)] -

Any profits or gains arising from the slump sale of one or more
undertakings held for more than 36 months, shall be chargeable to income-
tax as capital gains arising from the transfer of long-term capital assets and
shall be deemed to be the income of the previous year in which the transfer
took place.
Any profits and gains arising from such transfer of one or more
undertakings held by the assessee for not more than 36 months shall be
deemed to be short-term capital gains.
(3) Deemed cost of acquisition and cost of improvement [Section
50B(2)(i)] -The net worth of the undertaking or the division, as the case
may be, shall be deemed to be the cost of acquisition and the cost of
improvement for the purposes of sections 48 and 49 in relation to capital
assets of such undertaking or division transferred. No indexation benefit
would, however, be available, even if the slump sale has taken place of an
undertaking held for more than 36 months, resulting in a long-term capital
gain.
(4) Deemed full value of consideration [Section 50B(2)(ii)] – Fair market
value of the capital assets as on the date of transfer, calculated in the
prescribed manner, shall be deemed to be the full value of the
consideration received or accruing as a result of the transfer of such capital
asset.
Accordingly, the CBDT has prescribed that, for the purpose of section
50B(2)(ii), the fair market value (FMV) of capital assets would be the higher
of –
(i) FMV 1, being the fair market value of capital assets transferred by way
of slump sale (determined on the date of slump sale); and
(ii) 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
(5) Report of a Chartered Accountant [Section 50B(3)] - Every assessee, in
the case of slump sale, shall furnish in the prescribed form on or before 30th
September of the A.Y. [i.e., the specified date referred under section 44AB,
being the date one month prior to the due date for filing return of income

under section 139(1)], a report of a chartered accountant indicating the

computation of net worth of the undertaking or division, as the case may
be, and certifying that the net worth of the undertaking or division has been
correctly arrived at in accordance with the provisions of this section.
(6) Meaning of Certain Terms:
Explanation Term Particulars

1 Net worth Aggregate value of total assets of the
undertaking or division as reduced by
the value of liabilities of such
undertaking or division as appearing in
the books of account.
However, any change in the value of
assets on account of revaluation of
assets shall not be considered for this
purpose
2 Aggregate value In the case of depreciable assets: The
of total assets of written down value of block of assets
undertaking or determined in accordance with the
division provisions contained in sub-item (C) of
item (i) of section 43(6)(c);
In case of capital asset, being
goodwill of a business or profession,
which has not been acquired by the
assessee by purchase from a previous
owner [Self-generated goodwill]: Nil
Capital asset in respect of which
100% deduction is claimed: In case of
capital assets in respect of which the
whole of the expenditure has been
allowed or is allowable as a deduction
under section 35AD: Nil;
For all other assets: Book value

Capital Gains on Slump Sale of an Undertaking [Section 50B]
Is the undertaking held for more than 36 months before transfer?
Yes No
Resultant capital gain is LTCG Resultant capital gain is STCG

(No indexation benefit would be available)
LTCG is taxable@ 20% Normal rates of taxation
Computation of capital gains on slump sale
Full value of Consideration = Fair market

Deemed cost of acquisition/cost
value of the capital asset on the date of (-) of Improvement
transfer (Higher of FMV1 and FMV2)
Net Worth
Aggregate value of total assets Value of liabilities of the

of the undertaking* (-) undertaking appearing in the
books of account
In case of Self-generated In case of capital In case

depreciable goodwill of a assets where the of
assets business or other
whole exp. has
profession assets
been allowed u/s
35AD
WDV as per
section 43(6)(c) (+) Nil (+) Nil (+) Book value
*
Ignore revaluation effect

ILLUSTRATION 10
Mr. A is a proprietor of Akash Enterprises having 2 units. He transferred on 1.4.2023
his Unit 1 by way of slump sale for a total consideration of ` 25 lacs. The fair
market value of capital assets of unit 1 on 1.4.2023 is ` 30 lacs. Unit 1 was started
in the year 2005-06. The expenses incurred for this transfer were ` 28,000. His
Balance Sheet as on 31.3.2023 is as under:
Liabilities Total Assets Unit 1(`) Unit 2 (`) Total

(` ) (` )
Own Capital 15,00,000 Building 12,00,000 2,00,000 14,00,000
Revaluation 3,00,000 Machinery 3,00,000 1,00,000 4,00,000
Reserve (for
building of unit 1)
Bank loan (70% for 2,00,000 Debtors 1,00,000 40,000 1,40,000
unit 1)
Trade creditors Other
(25% for unit 1) 1,50,000 assets 1,50,000 60,000 2,10,000
Total 21,50,000 Total 17,50,000 4,00,000 21,50,000
Other information:
(i) Revaluation reserve is created by revising upward the value of the building of Unit 1.
(ii) No individual value of any asset is considered in the transfer deed.
(iii) Other assets of Unit 1 include patents acquired on 1.7.2021 for ` 50,000 on
which no depreciation has been charged.
Compute the capital gain for the assessment year 2024-25.
SOLUTION
Computation of capital gains on slump sale of Unit 1
Particulars `
Full value of consideration [Higher of FMV of capital assets of 30,00,000
Unit 1 on 1.4.2023 or(+)
FMV of monetary consideration received]
Less: Expenses for transfer 28,000
29,72,000
Less: Net worth (See Note 1 below) 12,50,625
Long-term capital gain 17,21,375

Notes:
1. Computation of net worth of Unit 1 of Akash Enterprises
Particulars ` `
Building (excluding ` 3 lakhs on account of 9,00,000
revaluation)
Machinery 3,00,000
Debtors 1,00,000
Patents (See Note 2 below) 28,125
Other assets (` 1,50,000 – ` 50,000) 1,00,000
Total assets 14,28,125
Less: Creditors (25% of ` 1,50,000) 37,500
Bank Loan (70% of ` 2,00,000) 1,40,000 1,77,500
Net worth 12,50,625
2. Written down value of patents as on 1.4.2023
Value of patents: `
Cost as on 1.7.2021 50,000
Less: Depreciation @ 25% for Financial Year 2021-22 12,500
Balance as on 1.4.2022 37,500
Less: Depreciation for Financial Year 2022-23 9,375
Balance as on 1.4.2023 28,125
For the purposes of computation of net worth, the written down value
determined as per section 43(6) has to be considered in the case of
depreciable assets. The problem has been solved assuming that the Balance
Sheet values of ` 3 lakh and ` 9 lakh (` 12 lakh – ` 3 lakh) represent the
written down value of machinery and building, respectively, of Unit 1.
3. Since the Unit is held for more than 36 months, capital gain arising would
be long term capital gain. However, indexation benefit is not available in
case of slump sale.

4.17 DEEMED FULL VALUE OF CONSIDERATION

FOR COMPUTING CAPITAL GAINS
[SECTIONS 50C, 50CA & 50D]
S. Capital Section Circumstance Deemed Full Value of
No. Asset consideration for
computing Capital
Gains
1. Land or 50C (1) If Stamp Duty Value >110% of Stamp Duty Value
Building consideration received or
or both accruing as a result of transfer
(a) If date of agreement is Stamp Duty Value on

different from the date of the date of agreement
transfer and whole or part
of the consideration is
received by way of
account payee cheque or
account payee bank draft
or ECS or through such
other prescribed
electronic modes (IMPS,
UPI, RTGS, NEFT, Net
banking, debit card, credit
card or BHIM Aadhar Pay)
on or before the date of
agreement
(b) If date of agreement is Stamp Duty Value on

different from the date of the date of transfer
transfer but the whole or
part of the consideration
has not been received by
way of account payee
cheque or account payee
bank draft or ECS or
through such other
prescribed electronic
mode on or before the
date of agreement.

However, if the stamp duty Consideration so

value on the date of agreement received
or the date of transfer, as the
case may be  110% of the sale
consideration received
Example
Let us take a case where for transfer
of building –
• the actual consideration is
` 100 lakh;
• the stamp duty value on the
date of agreement is ` 109 lakh;
and
• the stamp duty value on the
date of transfer is ` 112 lakh
(i) If any part of the
consideration is paid by
prescribed electronic mode on
or before the date of
agreement
The actual consideration of
` 100 lakh would be the full
value of consideration, since
stamp duty value of ` 109 lakhs
on the date of agreement does
not exceed 110% of actual
consideration of ` 100 lakhs.
(ii) If no part of the consideration
is paid by prescribed
electronic mode on or before
the date of agreement
Stamp duty value of ` 112 lakhs
on the date of transfer would be
the full value of consideration,
since the same exceeds 110% of
actual consideration of ` 100
lakhs.
(2) Where the Assessing Officer

refers the valuation to a
Valuation Officer, on the
assessee’s claim that the stamp

duty value exceeds the FMV of

the property on the date of
transfer and the stamp duty
value has not been disputed in
any appeal or revision or no
reference has been made
before any other authority,
court or High Court
(a) If Valuation by Valuation Stamp Duty Value

Officer > Stamp Duty Value
(b) If Valuation by Valuation Valuation by Valuation

Officer < Stamp Duty Value Officer
155(15) (3) If stamp duty value has been Value so revised in

adopted as full value of such appeal or revision
consideration, and subsequently
the value is revised in any appeal
or revision
2. Unquoted 50CA If consideration received or accruing FMV of such share

shares as a result of transfer < FMV of such determined in the
share determined in the prescribed prescribed manner
manner
The provisions of this section would
not, however, be applicable 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.
3. Any 50D Where the consideration received or FMV of the said asset
Capital accruing as a result of the transfer of on the date of transfer
asset a capital asset by an assessee is not
ascertainable or cannot be
determined
Meaning of certain terms:

S. Term Section Meaning
No.
(i) Stamp 50C The value adopted or assessed or assessable by
Duty any authority of a State Government (Stamp
Value Valuation Authority) for the purpose of payment
of stamp duty

(ii) Assessable 50C The term ‘assessable’ has been defined to mean
the price which the stamp valuation authority
would have, notwithstanding anything to the
contrary contained in any other law for the time
being in force, adopted or assessed, if it were
referred to such authority for the purposes of
the payment of stamp duty. The term
“assessable” has been added to cover transfers
executed through power of attorney.
(iii) Quoted 50CA The share quoted on any recognized stock
Shares 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.
Note – The valuation rules prescribed in Rule 11UA for valuation of unquoted
equity shares would be dealt with at the Final level.
4.18 ADVANCE MONEY RECEIVED [SECTION 51]

It is possible for an assessee to receive some advance in regard to the transfer of
capital asset. Due to the break-down of the negotiation, the assessee may have
retained the advance.
Section 51 provides that while calculating capital gains, the above advance
retained by the assessee must go to reduce the cost of acquisition. However, if
advance has been received and retained by the previous owner and not the assessee
himself, then the same will not go to reduce the cost of acquisition of the assessee.
Section 56(2)(ix) provides for the taxability of any sum of money, received as an
advance or otherwise in the course of negotiations for transfer of a capital asset.
Consequently, such sum shall be chargeable to income-tax under the head
‘Income from other sources’, if such sum is forfeited on or after 1 st April, 2014 and
the negotiations do not result in transfer of such capital asset.
In order to avoid double taxation of the advance received and retained, section
51 provides that where any sum of money received as an advance or otherwise in
the course of negotiations for transfer of a capital asset has been included in the
total income of the assessee for any previous year in accordance with section
56(2)(ix), then, such amount shall not be deducted from the cost for which the

asset was acquired or the written down value or the fair market value, as the case
may be, in computing the cost of acquisition.
However, any such sum of money forfeited before 1 st April, 2014, will be deducted
from the cost of acquisition for computing capital gains.
Tax treatment of advance money forfeited on

failure of negotiations for transfer of a capital
asset [Sections 51 & 56(2)(ix)]
If advance was If advance was

received and received and
forfeited before forfeited on or
1-4-2014 after 1-4-2014
Advance forfeited to be deducted

while determining Cost of Advance forfeited to be taxed
acquisition for computing capital under 56(2)(ix) as Income from
gains other sources
Taxability is postponed to Tax liability is attracted

the year of actual transfer in the year of forfeiture
of capital asset. of advance
4.19 EXEMPTION OF CAPITAL GAINS
Exemption of Capital Gains
Exemptions under section

Exemptions under Section 10
54/54B/54D/54EC/54F
I. Exemptions under section 10

Exemption of capital gains on compulsory acquisition of agricultural land
situated within specified urban limits [Section 10(37)]
With a view to mitigate the hardship faced by the farmers whose agricultural land

situated in specified urban limits has been compulsorily acquired, clause (37) of
section 10 exempts the capital gains arising to an individual or a HUF from
transfer of agricultural land by way of compulsory acquisition.
Such exemption is available where the compensation or the enhanced
compensation or consideration, as the case may be, is received on or after 1.4.2004.
The exemption is available only when such land has been used for agricultural
purposes during the preceding two years immediately preceding the date of
transfer by such individual or a parent of his or by such HUF.
II. Exemption of Capital Gains under section 54/54B/54D/54EC/54F
(i) Capital Gains on sale of residential house [Section 54]
Eligible assessees – Individual & HUF
Conditions to be fulfilled
• There should be a transfer of residential house (buildings or lands
appurtenant thereto)
• It must be a long-term capital asset
• Income from such house should be chargeable under the head
“Income from house property”
• Where the amount of capital gains exceeds ` 2 crore
Where the amount of capital gain exceeds ` 2 crore, one residential

house in India should be –
▪ purchased within 1 year before or 2 years after the date of
transfer; (or)
▪ constructed within a period of 3 years after the date of transfer.
Where the amount of capital gains does not exceed ` 2 crore
Where the amount of capital gains does not exceed ` 2 crore, the
assessee i.e., individual or HUF, may at his option,
▪ purchase two residential houses in India within 1 year before

or 2 years after the date of transfer (or)
▪ construct two residential houses in India within a period of 3
years after the date of transfer.

Where during any assessment year, the assessee has exercised the
option to purchase or construct two residential houses in India, he
shall not be subsequently entitled to exercise the option for the same
or any other assessment year.
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
P.Y. 2023-24, 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 P.Y. 2026-27,
even though the capital gains arising on transfer of the residential
house at Jaipur does not exceed ` 2 crore.
• If such investment is not made before the date of filing of return of

income, then, the capital gain has to be deposited under the Capital
Gains Account Scheme (CGAS) [Refer points (vi) and (vii) of this sub-
heading]. However, the capital gain in excess of ` 10 crore would
not be taken into account for the purpose of deposit in CGAS.
• Amount utilized by the assessee for purchase or construction of new
asset and the amount so deposited shall be deemed to be the cost of
new asset. The deemed cost of the new asset would be restricted to ` 10
crores for the purpose of exemption under section 54.
Quantum of Exemption
• If cost of new residential house or houses, as the case may be ≥ long
term capital gains, entire long term capital gains is exempt.
• If cost of new residential house or houses, as the case may be < long
term capital gains, long term capital gains to the extent of cost of new
residential house is exempt.
However, if the cost of new residential house(s) exceeds ` 10 crores, the

amount exceeding ` 10 crore would not be taken into account for exemption.
It means the maximum exemption that can be claimed by the assessee u/s 54
is ` 10 crore.

Examples:
1. If the long-term capital gains is ` 2.05 crore and the cost of the new house
is ` 3 crore, then, the entire long-term capital gains of ` 2.05 crore is
exempt.
2. If long-term capital gains is ` 2.05 crore and cost of new house is ` 1.55
crore, then, long-term capital gains is exempt only upto ` 1.55 crore.
Balance ` 50 lakhs is taxable @20%.
Example
(1) (2) (3) (4) (5)

LTCG Cost of new Amount in Exempt LTCG
S.No. computed residential column (3) or [Lower of
house ` 10 crore, column (2) and
whichever is column (4)]
lower
(1) ` 7 crore ` 12 crore ` 10 crore ` 7 crore
Examples
1. If the LTCG is ` 8 crore and the assessee has incurred ` 5 crore in
construction of new residential house upto the due date u/s 139(1) i.e.,
31.7.2024/ 31.10.2024, as the case may be, then, as per section 54(2),
he can deposit the amount of ` 3 crore not appropriated by him towards
construction of house upto 31.7.2024/31.10.2024, as the case may be, in
Capital Gains Account Scheme (CGAS) for claiming exemption under
section 54. If he deposits, say, ` 2 crore, in CGAS on or before the due
date u/s 139(1), the deemed cost of the new residential house would be
` 7 crore (` 5 crore +` 2 crore). The amount exempt u/s 54 would be ` 7
crore.
2. If the LTCG is ` 14 crore and the assessee has already incurred ` 7 crore
in construction of new residential house upto 31.7.2024/31.10.2024, as
the case may be, then, as per section 54(2), he can deposit the
difference of ` 3 crore (` 10 crore - ` 7 crore) in CGAS for claiming
exemption u/s 54. If he deposits, say, ` 2 crore in CGAS on or before the

due date u/s 139(1), the deemed cost of the new residential house
would be ` 9 crore (` 7 crore + ` 2 crore). The amount exempt under
section 54 would be ` 9 crore.
Consequences of transfer of new asset before 3 years
• If the new asset is transferred before 3 years from the date of its
acquisition or construction, then cost of the asset will be reduced by
capital gains exempted earlier for computing capital gains.
• Example: The long-term capital gains is ` 2.05 crore and the cost of the
new house is ` 3 crore, the entire long-term capital gains of ` 2.05 crore
will be exempt. If the new house was sold after 18 months for ` 5 crore,
then, short term capital gain chargeable to tax would be –
Particulars `
Net Consideration 5,00,00,000

Less: Cost of acquisition minus capital gains exempt
earlier (` 3,00,00,000 – ` 2 ,05,00,000) 95,00,000
Short term capital gains chargeable to tax 4,05,00,000
ILLUSTRATION 11
Mr. Cee purchased a residential house on July 20, 2021 for ` 10,00,000 and made
some additions to the house incurring ` 2,00,000 in August 2021. He sold the house
property in April 2023 for ` 20,00,000. Out of the sale proceeds, he spent
` 5,00,000 to purchase another house property in September 2023.
What is the amount of capital gains taxable in the hands of Mr. Cee for the A.Y.2024-25?
SOLUTION
The house is sold before 24 months from the date of purchase. Hence, the house
is a short-term capital asset and no benefit of indexation would be available.
Particulars `
Sale consideration 20,00,000

Less: Cost of acquisition 10,00,000
Cost of improvement 2,00,000
Short-term capital gains 8,00,000

Note - The exemption of capital gains under section 54 is available only in case of
long-term capital asset. As the house is short-term capital asset, Mr. Cee cannot
claim exemption under section 54. Thus, the amount of taxable short -term capital
gains is ` 8,00,000.
(ii) Capital gains on transfer of agricultural land [Section 54B]
Eligible assessee – Individual & HUF
• There should be a transfer of urban agricultural land.
• Such land must have been used for agricultural purposes by the
assessee, being an individual or his parent, or a HUF in the 2 years
immediately preceding the date of transfer.
• He should purchase another agricultural land (urban or rural) within 2
years from the date of transfer.
income, then the capital gain has to be deposited under the CGAS
(Refer points (vi) and (vii) of this sub-heading.). Amount utilized by the
assessee for purchase of new asset and the amount so deposited shall
be deemed to be the cost of new asset.
Quantum of exemption
• If cost of new agricultural land ≥ capital gains, entire capital gains is
exempt.
• If cost of new agricultural land < capital gains, capital gains to the extent
of cost of new agricultural land is exempt.
Examples:
1. If the capital gains is ` 3 lakhs and the cost of the new agricultural land is ` 4
lakhs, then, the entire capital gains of ` 3 lakhs is exempt.
2. If capital gains is ` 3 lakhs and cost of new agricultural land is ` 2 lakhs,
then, capital gains is exempt only upto ` 2 lakhs.
Consequences of transfer of new agricultural land before 3 years

• If the new agricultural land is transferred before 3 years from the date of
its acquisition, then cost of the land will be reduced by capital gains
exempted earlier for computing capital gains of new agricultural land.

• However, if the new agricultural land is a rural agricultural land, there

would be no capital gains on transfer of such land.
• Continuing in the above example 1, if the new agricultural land (urban

land) is sold after, say, 1 year for ` 6 lakhs, then short term capital gain
chargeable to tax would be –
Particulars `
Net consideration 6,00,000
Less: Cost of acquisition minus capital gains exempt earlier 1,00,000
(` 4,00,000 – ` 3,00,000)
Short-term capital gains chargeable to tax 5,00,000
(iii) Capital Gains on transfer by way of compulsory acquisition of land and

building of an industrial undertaking [Section 54D]
Eligible assessee – Any assessee
• There must be compulsory acquisition of land and building or any
right in land or building forming part of an industrial undertaking.
• The land and building should have been used by the assessee for
purposes of the business of the industrial undertaking in the 2 years
immediately preceding the date of transfer.
• The assessee must purchase any other land or building or construct
any building (for shifting or re-establishing the existing undertaking or
setting up a new industrial undertaking) within 3 years from the date
of transfer.

income, then the capital gain has to be deposited under the CGAS.
(Refer point (vi) and (vii) of this sub-heading). Amount utilized by the
assessee for purchase of new asset and the amount so deposited shall
be deemed to be the cost of new asset.
• If cost of new asset ≥ Capital gains, entire capital gains is exempt.

• If cost of new asset < Capital gains, capital gains to the extent of cost
of new asset is exempt.

Note: 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.
Consequences of transfer of new asset before 3 years

• If the new asset is transferred before 3 years from the date of its
acquisition, then cost of the asset will be reduced by capital gains
exempted earlier for computing capital gains.
(iv) Capital Gains not chargeable on investment in certain bonds [Section 54EC]
Eligible assessee – Any assessee
• There should be transfer of a long-term capital asset being land or
building or both.
• Such asset can also be a depreciable asset (in this case, building) held
for more than 24 months9.
• The capital gains arising from such transfer should be invested in a
long-term specified asset within 6 months from the date of transfer.
• Long-term specified asset means specified bonds, redeemable after
5 years, issued on or after 1.4.2018 by the National Highways
Authority of India (NHAI) or the Rural Electrification Corporation
Limited (RECL) or any other bond notified by the Central Government
in this behalf [Bonds of Power Finance Corporation (PFC) and Indian
Railways Finance Corporation (IRFC)].
• The assessee should not transfer or convert or avail loan or advance

on the security of such bonds for a period of 5 years from the date of
acquisition of such bonds.
• Capital gains or amount invested in specified bonds, whichever is lower.
9
CIT v. Dempo Company Ltd (2016) 387 ITR 354 (SC)

• The maximum investment which can be made in notified bonds or

bonds of NHAI and RECL, out of capital gains arising from transfer of
one or more assets, during the previous year in which the original
asset is transferred and in the subsequent financial year cannot
exceed ` 50 lakhs.
Violation of condition
• In case of transfer or conversion of such bonds or availing loan or
advance on security of such bonds before the expiry of 5 years, the
capital gain exempted earlier shall be taxed as long-term capital gain
in the year of violation of condition.
ILLUSTRATION 12
Long term capital gain of ` 75 lakh arising from transfer of building on
1.5.2023 will be exempt from tax if such capital gain is invested in the bonds
redeemable after five years, issued by NHAI under section 54EC. Examine with
reasons whether the given statement is true or false having regard to the
provisions of the Income-tax Act, 1961.
SOLUTION
False: The exemption under section 54EC has been restricted, by limiting
the maximum investment in long term specified assets (i.e. bonds of NHAI
or RECL or any other bond notified by Central Government in this behalf,
redeemable after 5 years) to ` 50 lakh, whether such investment is made
during the relevant previous year or the subsequent previous year, or both.
Therefore, in this case, the exemption under section 54EC can be availed
only to the extent of ` 50 lakh, provided the investment is made before
1.11.2023 (i.e., within six months from the date of transfer).

Exemption of Long-term capital gains on sale of residential house
Investment in one or two residential Investment in bonds of NHAI/RECL

houses, as the case may be, in India or any other notified bond
Exemption u/s 54 Exemption u/s 54EC*
Purchase within 1 year before or 2

Investment within 6 months
years after and construction within
from the date of transfer
3 years after the date of transfer
Capital Gains or amount invested in

Capital Gains or Cost of new house
bonds, whichever is lower, is exempt
(subject to a maximum of ` 10
maximum upto ` 50 lakhs
crore) whichever is lower, is exempt
*
The exemption under section 54EC is available in respect of capital gains on transfer of
capital asset being land or building or both.
(v) Capital gains in case of investment in residential house [Section 54F]

Eligible assessees: Individuals/ HUF
• There must be transfer of a long-term capital asset, not being a

residential house.
• Transfer of plot of land is also eligible for exemption
• The assessee should -
▪ Purchase one residential house situated in India within a

period of 1 year before or 2 years after the date of transfer; or
▪ Construct one residential house in India within 3 years from

the date of transfer.

▪ If such investment is not made before the date of filing of

return of income, then, the net sale consideration has to be
deposited under the CGAS. (Refer points (vi) and (vii) of this
sub-heading). However, the net consideration in excess of
` 10 crore would not be taken into account for the purpose
of deposit in CGAS.
▪ Amount utilized by the assessee for purchase or construction of

new asset and the amount so deposited shall be deemed to be
the cost of new asset. The deemed cost of new asset would be
restricted to ` 10 crores for the purpose of exemption under
section 54F.
• The assessee should not own more than one residential house on the
date of transfer.
• The assessee should not –
▪ purchase any other residential house within a period of 2 years or
▪ construct any other residential house within a period of 3 years

from the date of transfer of the original asset.
• If cost of new residential house ≥ Net sale consideration of original

asset, entire capital gains is exempt.
• If cost of new residential house < Net sale consideration of original

asset, only proportionate capital gains is exempt i.e.
Amount invested in new residential house
LTCG×
Net sale consideration
However, if the cost of new residential house/ amount invested in new

residential house exceeds ` 10 crore, the amount exceeding ` 10 crore would
not be taken into account for exemption.

Example
(1) (2) (3) (4) (5)
Amount in
Net LTCG Cost of new column (3)
Consider- computed residential or ` 10 Exempt LTCG
ation house crores,
whichever
is lower
(1) ` 15 crore ` 7.5 crore ` 12 crore ` 10 crore ` 7.5 crore x 10/15 =
` 5 crore
(2) ` 20 crore ` 12 crore ` 15 crore ` 10 crore ` 12 crore x 10/20 =
` 6 crore
` 6 crore
` 6 crore
` 5 crore
Examples
1. If the net consideration is ` 9 crore, the capital gain is ` 4.50 crore and
the amount incurred for construction of new residential house upto
31.7.2024/31.10.2024, as the case may be, is ` 5 crore, then, as per
section 54F(4), the assessee can deposit the amount of ` 4 crore (i.e., ` 9
crore – ` 5 crore) not appropriated towards construction upto 31.7.2024/
31.10.2024, as the case may be, in CGAS for claiming exemption u/s 54F.
If the assessee has deposited, say, ` 3 crore on or before 31.7.2024/
31.10.2024, as the case may be, the deemed cost of new residential house
would be ` 8 crore ( ` 5 crore + ` 3 crore). The exemption u/s 54F would
be ` 4 crore [i.e., ` 4.50 crore x ` 8 crore/` 9 crore].
2. If the net consideration is ` 15 crore, the capital gain is ` 7.50 crore and
the amount incurred for construction of new residential house upto
31.7.2024/31.10.2024, as the case may be, is ` 6 crore, the assessee can
deposit ` 4 crore [i.e., ` 10 crore – ` 6 crore] on or before
31.7.2024/31.10.2024, as the case may be, in CGAS for claiming
exemption u/s 54F. If the assessee has deposited, say, ` 3 crore on or

before the due date of filing return u/s 139(1), the deemed cost of new
residential house would be ` 9 crore (` 6 crore + ` 3 crore). The
exemption u/s 54F would be ` 4.50 crore [i.e., ` 7.50 crore x ` 9 crore/
` 15crore].
Consequences where the assessee purchases any other residential house
within a period of 2 years or constructs any other residential house within
a period of 3 years from the date of transfer of original asset:
The capital gains exempt earlier under section 54F shall be deemed to be
taxable as long-term capital gains in the previous year in which such
residential house is purchased or constructed.
Consequences if the new house is transferred within a period of 3 years
from the date of its purchase
• Capital gains would arise on transfer of the new house; and
• The capital gains exempt earlier under section 54F would be taxable as
long-term capital gains.
Note – In case the new residential house is sold after 2 years, the capital gains
would be long-term capital gains and indexation benefit would be available.
(vi) Capital Gains Account Scheme (CGAS)

Under sections 54, 54B, 54D and 54F, capital gains is exempt to the extent
of investment of such gains/ net consideration (in the case of section 54F) in
specified assets within the specified time. If such investment is not made
before the date of filing of return of income, then the capital gain or net
consideration (in case of exemption under section 54F) has to be deposited
under the CGAS. However, the capital gain in excess of ` 10 crore would
not be taken into account for the purpose of deposit in CGAS in case of
section 54 and the net consideration in excess of ` 10 crore would not be
taken into account for the purpose of deposit in CGAS in case of
section 54F.
Time limit
Such deposit in CGAS should be made before filing the return of income or
on or before the due date of filing the return of income, whichever is earlier.
In such cases, the amount already utilized for purchase or construction of
new asset plus the amount deposited under the CGAS on or before due

date u/s 139(1) would be deemed to be the cost of new asset. However, for
the purpose of sections 54 and 54F, the amount so deemed to be the cost of
the new asset cannot exceed ` 10 crore.
Proof of such deposit should be attached with the return. The deposit can
be withdrawn for utilization for the specified purposes in accordance with
the scheme.
Consequences if the amount deposited in CGAS is not utilized within
the stipulated time of 2 years / 3 years
If the amount deposited is not utilized for the specified purpose within the
stipulated period, then the unutilized amount shall be charged as capital
gain of the previous year in which the specified period expires. In the case
of section 54F, proportionate amount will be taxable.
CBDT Circular No.743 dated 6.5.96 clarifies that in the event of death of an
individual before the stipulated period, the unutilized amount is not
chargeable to tax in the hands of the legal heirs of the deceased individual.
Such unutilized amount is not income but is a part of the estate devolving
upon them.
(vii) Extension of time for acquiring new asset or depositing or investing
amount of Capital Gain [Section 54H]
In case of compulsory acquisition of the original asset, where the
compensation is not received on the date of transfer, the period available
for acquiring a new asset or making investment in CGAS under sections 54,
54B, 54D, 54EC and 54F would be considered from the date of receipt of
such compensation and not from the date of the transfer.
4.20 REFERENCE TO VALUATION OFFICER

[SECTION 55A]
Section 55A provides that 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 as claimed by the assessee is in
accordance with the estimate made by a registered valuer, if the Assessing

Officer is of the opinion that the value so claimed is at variance with its fair
market value.
Under this provision, the Assessing Officer can make a reference to the
Valuation Officer in cases where the fair market value is taken to be the sale
consideration of the asset. An 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.
(ii) If the Assessing Officer is of the opinion that 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.
(iii) The Assessing Officer is of the opinion that, having regard to the nature of
asset and other relevant circumstances, it is necessary to make the
reference.
4.21 TAX ON SHORT TERM CAPITAL GAINS IN

RESPECT OF EQUITY SHARES/ UNITS OF AN
EQUITY ORIENTED FUND [SECTION 111A]
(i) Concessional rate of tax in respect of STCG on transfer of certain assets :
This section provides for a concessional rate of tax (i.e. 15%) on the short-
term capital gains on transfer of -
(1) an equity share in a company; or
(2) a unit of a business trust; or 10
(3) a unit of an equity oriented fund
(ii) Conditions: The conditions for availing the benefit of this concessional rate
are –
10
Chapter XII-FA of the Income-tax Act, 1961 and the related provisions dealing with the
taxation aspects of business trust would be dealt with at the Final level.

(1) the transaction of sale of such equity share or unit should be entered
into on or after 1.10.2004, being the date on which Chapter VII of the
Finance (No. 2) Act, 2004 came into force; and
(2) such transaction should be chargeable to securities transaction tax
under the said Chapter.
However, short-term capital gains arising from transactions undertaken in

foreign currency on a recognized stock exchange located in an International
Financial Services Centre (IFSC) would be taxable at a concessional rate of
15% even though STT is not leviable in respect of such transaction.
(iii) Adjustment of Unexhausted Basic Exemption Limit: In the case of
resident individuals or HUF, if the basic exemption is not fully exhausted by
any other income, then, such short-term capital gain will be reduced by the
unexhausted basic exemption limit and only the balance would be taxed at
15%. However, the benefit of availing the basic exemption limit is not
available in the case of non-residents.
(iv) No deduction under Chapter VI-A against STCG taxable under section
111A: Deductions under Chapter VI-A cannot be availed in respect of such
short-term capital gains on equity shares of a company or units of an equity
oriented mutual fund or unit of a business trust included in the total income
of the assessee.
4.22 TAX ON LONG TERM CAPITAL GAINS

[SECTION 112]
(i) Concessional rate of tax: Where the total income of an assessee includes
long-term capital gains, tax is payable by the assessee @20% on such long-
term capital gains. The treatment of long-term capital gains in the hands of
different types of assessees are as follows -
(1) Resident individual or Hindu undivided family: Income-tax payable
at normal rates on total income as reduced by long-term capital gains
plus 20% on such long-term capital gains.
However, where the total income as reduced by such long-term capital
gains is below the maximum amount which is not chargeable to
income-tax then such long-term capital gains shall be reduced by the

amount by which the total income as so reduced falls short of the

maximum amount which is not chargeable to income-tax and the tax
on the balance of such long-term capital gains will be calculated @20%.
(2) Domestic Company: Long-term capital gains will be charged @20%.
(3) Non-corporate non-resident or foreign company:
(i) Long-term capital gains arising from the transfer of a capital

asset, being unlisted securities, or shares of a company not
being a company in which public are substantially interested,
would be calculated at the rate of 10% on the capital gains in
respect of such asset without giving effect to the indexation
provision under second proviso to section 48 and currency
fluctuation under first proviso to section 48.
(ii) In respect of other long-term capital gains, the applicable rate of
tax would be 20%.
(4) Residents (other than those included in (1) above): Long-term
capital gains will be charged @20%.
(ii) Lower rate of tax for transfer of listed securities and zero coupon
bonds: Where the tax payable in respect of any income arising from the
transfer of a listed security (other than a unit) or a zero coupon bond, being
a long-term capital asset, exceeds 10% of the amount of capital gains
before indexation, then such excess shall be ignored while computing the
tax payable by the assessee.
Consequently, long term capital gains on transfer of units and unlisted
securities are not eligible for concessional rate of tax@10% (without
indexation benefit). Therefore, the long-term capital gains, in such cases, is
taxable@20% (with indexation benefit).
However, in case of non-corporate non-residents and foreign companies,

long term capital gains arising from transfer of a capital asset, being
unlisted securities or shares in a company in which public are not
substantially interested are eligible for a concessional rate of tax@10%
(without indexation benefit).
(iii) No Chapter VI-A deduction against LTCG: The provisions of section 112
make it clear that the deductions under Chapter VIA cannot be availed in

respect of the long-term capital gains included in the total income of the
assessee.
Tax on long-term capital gains [Section 112]
Person Rate Particulars
of
tax
1. Resident persons, In case of transfer
other than companies of listed securities
Resident Individuals 20% Unexhausted basic (other than units)
and HUF exemption limit can be and Zero Coupon
exhausted against LTCG Bonds, LTCG
taxable u/s 112 would be taxable
at the lower of
Resident AOPs and 20% Unexhausted basic
the following
BOIs exemption limit cannot
rates –
be adjusted against
LTCG taxable u/s 112
(1) 10% without
Resident Firms and LLPs 20% indexation
2. Domestic companies 20% benefit; and
3. Non-corporate non- 20% Capital assets, other (2) 20% with
residents and foreign than unlisted securities indexation
companies or shares of closely held benefit.
companies
10% Unlisted securities or
shares of closely held
companies (without
benefit of indexation or
foreign currency
fluctuation)
4.23 TAX ON LONG TERM CAPITAL GAINS

ON CERTAIN ASSETS [SECTION 112A]
(i) Concessional rate of tax in respect of LTCG on transfer of certain assets:
In order to minimize economic distortions and curb erosion of tax base,
section 112A provides that notwithstanding anything contained in section

112, a concessional rate of tax @10% will be leviable on the long-term

capital gains exceeding ` 1,00,000 on transfer of –
(a) an equity share in a company; or

(b) a unit of a business trust; or
(c) a unit of an equity oriented fund
(ii) Conditions: The conditions for availing the benefit of this concessional rate are –
(a) In case of equity share in a company, STT has been paid on acquisition
and transfer of such capital asset
(b) In case of unit of an equity oriented fund or unit of business trust, STT
has been paid on transfer of such capital asset.
However, 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.
Further, long-term capital gains arising from transaction undertaken on a
recognized stock exchange located in an International Financial Service
Centre (IFSC) would be taxable at a concessional rate of 10%, where the
consideration for transfer is received or receivable in foreign currency, even
though STT is not leviable in respect of such transaction.
(iii) Adjustment of Unexhausted Basic Exemption Limit: In the case of
resident individuals or HUF, if the basic exemption is not fully exhausted by
any other income, then such long-term capital gain exceeding ` 1 lakh will
be reduced by the unexhausted basic exemption limit and only the balance
would be taxed at 10%.
However, the benefit of adjustment of unexhausted basic exemption limit is
not available in the case of non-residents.
(iv) No deduction under Chapter VI-A against LTCG taxable under section
112A: Deductions under Chapter VI-A cannot be availed in respect of such
long-term capital gains on equity shares of a company or units of an equity
oriented mutual fund or unit of a business trust included in the total income
of the assessee.

(v) No benefit of rebate under section 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.
Subsequent to insertion of section 112A, the CBDT has issued clarification F. No.
370149/20/2018-TPL dated 04.02.2018 in the form of a Question and Answer
format to clarify certain issues raised in different for a on various issues relating
to the new tax regime for taxation of long-term capital gains. The relevant
questions raised and answers to such questions as per the said Circular are given
hereunder:
Q 1. What is the meaning of long term capital gains under the new tax
regime for long term capital gains?
Ans 1. Long term capital gains mean gains arising from the transfer of long-term
capital asset.
It provides for a new long-term capital gains tax regime for the following
assets–
i. Equity Shares in a company listed on a recognised stock exchange;
ii. Unit of an equity oriented fund; and
iii. Unit of a business trust.

The new tax regime applies to the above assets, if–
a. the assets mentioned in (i) and (ii) are held for a minimum period of
12 months from the date of acquisition and the asset mentioned in
(iii) is held for a minimum period of 36 months; and
b. the Securities Transaction Tax (STT) is paid at the time of transfer.
However, in the case of equity shares acquired after 1.10.2004, STT is
required to be paid even at the time of acquisition (subject to notified
exemptions).
Q 2. What is the point of chargeability of the tax?

Ans 2. The tax will be levied only upon transfer of the long-term capital asset on
or after 1st April, 2018, as defined in clause (47) of section 2 of the Act.

Q 3. What is the method for calculation of long-term capital gains?

Ans 3. The 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.
Q 4. How do we determine the cost of acquisition for assets acquired on or
before 31st January, 2018?
Ans 4. The cost of acquisition for the long-term capital asset acquired on or
before 31st of January, 2018 will be the actual cost.
However, if the actual cost is less than the fair market value of such asset as
on 31st of January, 2018, the fair market value will be deemed to be the cost
of acquisition.
Further, 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.
Q 5. Please provide illustrations for computing long-term capital gains in

different scenarios, in the light of answers to questions 4.
Ans 5.The computation of long-term capital gains in different scenarios is
illustrated as under
Scenario 1 – An equity share is acquired on 1st of January, 2017 at ` 100, its
fair market value is ` 200 on 31st of January, 2018 and it is sold on 1st of
April, 2023 at ` 250. As the actual cost of acquisition is less than the fair
market value as on 31st of January, 2018, the fair market value of ` 200 will
be taken as the cost of acquisition and the long-term capital gain will be
` 50 (` 250 – ` 200).
April, 2023 at ` 150. In this case, the actual cost of acquisition is less than
the fair market value as on 31st of January, 2018. However, the sale value is
also less than the fair 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).

April, 2023 at ` 150. In this case, the fair market value as on 31st of January,
2018 is less than the actual cost of acquisition, and therefore, the actual cost
of ` 100 will be taken as actual cost of acquisition and the long-term capital
gain will be ` 50 (` 150 – ` 100).
fair market value is ` 200 on 31st of January, 2018 and it is sold on 1st of April,
2023 at ` 50. In this case, the actual cost of acquisition is less than the fair
market value as on 31st January, 2018. The sale value is less than the fair market
value as on 31st 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) in this case.
Q 6. Whether the cost of acquisition will be inflation indexed?

Ans 6. Third proviso to section 48, provides that the 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 the benefit of inflation indexation
of the cost of acquisition would not be available for computing long-term
capital gains under the new tax regime.
Q 7. What will be the tax treatment of transfer made on or after 1st April 2018?
Ans 7. The long-term capital gains exceeding ` 1 lakh arising from transfer of
these assets made on after 1st April, 2018 will be taxed at 10 per cent.
However, there will be no tax on gains accrued upto 31st January, 2018.
Q8. What is the date from which the holding period will be counted?
Ans 8. The holding period will be counted from the date of acquisition.
Q9. Whether tax will be deducted at source in case of gains by resident tax
payer?
Ans 9. No. There will be no deduction of tax at source from the payment of long -
term capital gains to a resident tax payer.
Q10. What will be the cost of acquisition in the case of bonus shares
acquired before 1st February 2018?
Ans 10. The cost of acquisition of bonus shares acquired before 31st January,
2018 will be determined as per section 55(2)(ac).Therefore, the fair market
value of the bonus shares as on 31st January, 2018 will be taken as cost of

acquisition (except in some typical situations explained in Ans 5), and hence,
the gains accrued upto 31st January, 2018 will continue to be exempt 11.
Q11. What will be the cost of acquisition in the case of right share acquired
before 1st February 2018?
Ans 11. The cost of acquisition of right share acquired before 31st January, 2018
will be determined as per section 55(2)(ac). Therefore, the fair market value
of right share as on 31st January, 2018 will be taken as cost of acquisition
(except in some typical situations explained in Ans 5), and hence, the gains
accrued upto 31st January, 2018 will continue to be exempt 13.
Q12. What will be the treatment of long-term capital loss arising from
transfer made on or after 1st April, 2018?
Ans 12. 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 eight years for set-off against long-term capital gains.
ILLUSTRATION 13
Calculate the income-tax liability for the assessment year 2024-25 in the following cases:
Mr. A Mrs. B Mr. C Mr. D

(age 45) (age 62) (age 81) (age 82)
Status Resident Non-resident Resident Non-resident
Total income 2,40,000 3,10,000 5,90,000 4,80,000

other than long-
term capital gain
Long-term 85,000 10,000 60,000 Nil
capital gain from sale from sale of listed from sale of
of vacant equity shares (STT agricultural
site paid on sale and land in
purchase of shares) rural area
11Subjectto the notification issued by the Central Government to specify the nature of acquis ition of
equity share in a company on which the condition of payment of STT on acquisition would not be
applicable. This notification will be discussed at Final level.

(i) If Mr. A, Mrs. B, Mr. C and Mr. D pay tax under default tax regime u/s 115BAC.
(ii) If Mr. A, Mrs. B, Mr. C and Mr. D exercise the option to shift out of the default
tax regime and pay tax under the optional tax regime as per the normal
provisions of the Act.
SOLUTION
(i) If Mr. A, Mrs. B, Mr. C and Mr. D pay tax under default tax regime u/s
115BAC.
Computation of income-tax liability for the A.Y.2024-25
Particulars Mr. A Mrs. B Mr. C Mr. D

(age 45) (age 62) (age 81) (age 82)
Residential Status Resident Non-resident Resident Non-
resident
Applicable basic ` 3,00,000 ` 3,00,000 ` 3,00,000 ` 3,00,000
exemption limit
Asset sold Vacant site Listed equity Rural -
shares (STT agricultural
paid on both land
sale and
purchase of
shares)
Long-term capital gain ` 85,000 ` 10,000 ` 60,000 -
(on sale of above [Taxable [exempt u/s (Exempt –
asset) 112A since it not a
@20% u/s
112] is less than capital
` 1,00,000] asset)
Other income ` 2,40,000 ` 3,10,000 ` 5,90,000 ` 4,80,000
Tax liability
On LTCG (after adjusting ` 5,000 - - -
unexhausted basic
exemption limit of
` 60,000)
On Other income Nil ` 500 ` 14,500 ` 9,000
` 5,000 ` 500 ` 14,500 ` 9,000

Less: Rebate u/s 87A ` 5,000 - ` 14,500 -
Nil ` 500 Nil ` 9,000

Add: Health & Nil ` 20 Nil ` 360
education cess (HEC)
@4%
Total tax liability Nil ` 520 Nil ` 9,360
Note: Since Mr. A and Mr. C are residents whose total income does not exceed ` 7
lakhs, they are eligible for rebate of ` 25,000 or the actual tax payable, whichever is
lower, under section 87A.
(ii) If Mr. A, Mrs. B, Mr. C and Mr. D exercise the option to shift out of the
default tax regime and pay tax under the optional tax regime as per the
normal provisions of the Act
Computation of income-tax liability for the A.Y.2024-25
Particulars Mr. A Mrs. B Mr. C Mr. D

(age 45) (age 62) (age 81) (age 82)
Residential Status Resident Non-resident Resident Non-
resident
Applicable basic ` 2,50,000 ` 2,50,000 ` 5,00,000 ` 2,50,000
exemption limit
Asset sold Vacant site Listed equity Rural -
shares (STT paid agricultural
on both sale and land
purchase of
shares)
Long-term capital gain ` 85,000 ` 10,000 ` 60,000 -
(on sale of above [Taxable [exempt u/s (Exempt –
asset) 112A since it is not a
@20% u/s
112] less than capital
` 1,00,000] asset)
Other income ` 2,40,000 ` 3,10,000 ` 5,90,000 ` 4,80,000
Tax liability
On LTCG (after ` 15,000 - - -
adjusting unexhausted

basic exemption limit of

` 10,000)
On Other income Nil ` 3,000 ` 18,000 ` 11,500
` 15,000 ` 3,000 ` 18,000 ` 11,500
Less: Rebate u/s 87A ` 12,500 - - -
2,500 ` 3,000 ` 18,000 ` 11,500

Add: Health & 100 ` 120 ` 720 ` 460
education cess (HEC)
@4%
Total tax liability 2,600 ` 3,120 ` 18,720 ` 11,960
Notes:
1. Since Mrs. B and Mr. D are non-residents, they cannot avail the higher basic
exemption limit of ` 3,00,000 and ` 5,00,000 for persons over the age of 60
years and 80 years, respectively. Also, they are not eligible for rebate under
section 87A even though their total income does not exceed ` 5 lakh.
2. Since Mr. A is a resident whose total income does not exceed ` 5 lakh, he is
eligible for rebate of ` 12,500 or the actual tax payable, whichever is lower,
under section 87A.

LET US RECAPITULATE
Scope and year of chargeability [Section 45]

Any profits or gains arising from the transfer of a capital asset effected in the
previous year will be chargeable to tax under the head ‘Capital Gains’, and shall be
deemed to be the income of the previous year in which the transfer took place
[Section 45(1)]
Section Profits and gains P.Y. in which Deemed Full Value of
arising from the income is consideration for
following chargeable to computation of capital
transactions tax gains under section 48
chargeable as
income
45(1A) Money or other asset The previous year The value of money or the
received under an in which such fair market value of other
insurance from an money or other asset received.
insurer on account of asset is received.
damage/destruction
of any capital asset, as
a result of, flood,
hurricane, cyclone,
earthquake or other
convulsion of nature,
riot or civil
disturbance,
accidental fire or
explosion, action by
an enemy or action
taken in combating
an enemy
45(2) Transfer by way of The previous year The fair market value of
conversion by the in which such the capital asset on the
owner of a capital stock-in-trade is date of such conversion
asset into stock-in- sold or otherwise
trade of a business transferred by him
carried on by him.

45(5) Transfer by way of The previous year Compensation or

compulsory in which the consideration determined
acquisition under any consideration or or approved in the first
law, or a transfer, the part thereof is instance by the Central
consideration for first received. Government or RBI
which was
determined or
approved by the
Central Government
or RBI
If the compensation The previous year Amount by which the
or consideration is in which the compensation or
further enhanced amount was consideration is enhanced
by any court, received by the or further enhanced. For
Tribunal or other assessee. this purpose cost of
authority, the acquisition and cost of
enhanced amount improvement shall be
will be deemed to taken as ‘Nil’.
be the income
However, any
amount of
compensation
received in
pursuance of an
interim order of a
court, Tribunal or
other authority
shall be deemed to
be income
chargeable under
the head “Capital
Gains” of the
previous year in
which the final
order of such court,
Tribunal or other
authority is made.

Definitions [Section 2]
Section Term Definition
2(14) Capital Capital Asset means –
Asset (a) property of any kind held by an assessee, whether
or not connected with his business or profession;
(b) any securities held by a Foreign Institutional
Investor which has invested in such securities in
accordance with the regulations made under the
SEBI Act, 1992.
Exclusions from the definition of Capital Asset:
➢ Stock in trade [other than securities referred to in
(b) above], raw materials or consumables held for
the purposes of business or profession;
➢ Personal effects except jewellery, archeological
collections, drawings, paintings, sculptures or any
work of art;
➢ Rural agricultural land in India i.e. agricultural
land not situated within specified urban limits.
The agricultural land described in (a) and (b) below,
being land situated within the specified urban limits,
would fall within the definition of “capital asset”, and
transfer of such land would attract capital gains tax -
(a) agricultural land situated in any area within the
jurisdiction of a municipality or cantonment board
having population of not less than ten thousand, or
(b) agricultural land situated in any area within such
distance, measured aerially, in relation to the
range of population as shown hereunder -
Shortest aerial Population according to
distance from the the last preceding
local limits of a census of which the
municipality or relevant figures have
cantonment board been published before
referred to in item (a) the first day of the
previous year.
(i) ≤ 2 kms > 10,000
(ii) > 2 kms but ≤ 6 kms > 1,00,000
(iii) > 6 kms but ≤ 8 kms > 10,00,000

➢ Gold Deposits Bonds issued under the Gold

Deposit Scheme, 1999 or deposit certificates
issued under the Gold Monetisation Scheme,
2015 and Gold Monetisation Scheme, 2018
notified by the Central Government;
➢ 6½% Gold Bonds, 1977 or 7% Gold Bonds, 1980
or National Defence Gold Bonds, 1980, issued by
the Central Government;
➢ Special Bearer Bonds, 1991 issued by the Central
Government.
Note: ‘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.
2(42A) Short- Asset Period of holding to be
term treated as STCA
capital A security (other than a not more than 12 months
asset unit) listed in a immediately preceding the
recognized stock date of its transfer
exchange in India
(other than market
linked debenture and
unit of a specified
mutual fund), a unit of
UTI or a unit of an
equity oriented fund or
a zero coupon bond
A share of a company not more than 24 months
(not being a share immediately preceding the
listed in a recognized date of its transfer
stock exchange in
India)
An immovable not more than 24 months
property, being land or immediately preceding the
building or both date of its transfer
Any other capital asset not more than 36 months
immediately preceding the
date of its transfer

Note – Capital gains arising from transfer of market linked debenture

and unit of a specified mutual fund would always be capital gains
arising from transfer of short-term capital assets, irrespective of the
period of holding of such assets. This is provided in section 50AA.
2(29A) Long-term Capital asset which is not a short-term capital asset is
capital a long-term capital asset.
asset Asset Period of holding to
be treated as LTCA
A security (other than a More than 12 months
unit) listed in a recognized immediately
stock exchange in India preceding the date of
(other than market linked its transfer
debenture and unit of a
specified mutual fund), a
unit of UTI or a unit of an
equity oriented fund or a
zero coupon bond
A share of a company (not More than 24 months
being a share listed in a immediately
recognized stock exchange preceding the date of
in India) its transfer
An immovable property, More than 24 months

being land or building or immediately preceding
both the date of its transfer
Any other capital asset More than 36 months
immediately preceding
the date of its transfer
Note – Capital gains arising from transfer of market linked debenture
and unit of a specified mutual fund would always be capital gains
arising from transfer of short-term capital assets, irrespective of the
period of holding of such assets. This is provided in section 50AA.

Transactions not regarded as transfer [Section 47]: Some Examples

➢ Any distribution of capital assets on the total or partial partition of a HUF
➢ Any transfer of capital asset under a gift or will or an irrevocable trust
➢ Any transfer of capital asset by a holding company to its 100%
subsidiary Indian company or by a subsidiary company to its 100%
holding Indian company
➢ Any transfer or issue of shares by the resulting company, in a scheme
of demerger to the shareholders of the demerged company
➢ Any transfer by a shareholder in a scheme of amalgamation of shares
held by him in the amalgamating company
➢ Any transfer by an individual of sovereign gold bonds issued by RBI by
way of redemption
➢ Any transfer of a capital asset, being conversion of gold into Electronic
Gold Receipt issued by a Vault Manager, or conversion of Electronic
Gold Receipt into gold.
➢ Any transfer by way of conversion of bonds, debentures, debenture
stock, deposit certificates of a company, into shares or debentures of
that company.
➢ Any transfer by way of conversion of preference shares of a company
into equity shares of that company
➢ Any transfer of a capital asset in a transaction of reverse mortgage
under a scheme made and notified by the Central Government
Mode of computation of Capital Gains [Section 48]
Computation of long-term capital gains
Full value of consideration received or accruing as a result of transfer xx
Less: Expenditure incurred wholly and exclusively in connection with
such transfer (e.g. brokerage on sale) xx
However, the cost of acquisition of the asset or the cost of
improvement thereto would not include the deductions claimed in
respect of interest u/s 24(b) or under the provisions of Chapter VI-A
[i.e., under sections 80EE/ 80EEA]
(Note: Deduction on account of STT paid will not be allowed)
Net Sale Consideration xx
Less: Indexed cost of acquisition and indexed cost of improvement xx
Less: Exemption under sections 54/54B/54D/54EC/54F xx
Long-term capital gains xx

Notes:
(i) Deduction on account of securities transaction tax paid will not be allowed.
(ii) Indexed Cost of Acquisition =
CII for the year in which the asset is transferred
Cost of
× CII for the year in which the asset was first held by
acquisition
the assessee or 2001-02, whichever is later
(iii) Indexed Cost of Improvement =
CII for the year in which the asset is transferred
Cost of
× CII for the year in which the improvement took
improvement
place
(iv) Benefit of indexation will, however, not be available in respect of long
term capital gains from transfer of bonds or debentures other than
capital indexed bonds issued by the Government and sovereign gold
bonds issued by RBI and in respect of long-term capital gains chargeable
to tax under section 112A.
Computation of short-term capital gains

Full value of consideration received or accruing as a result of xxx
transfer
Less: Expenditure incurred wholly and exclusively in connection
with such transfer (e.g. brokerage on sale) xxx
However, the cost of acquisition of the asset or the cost of
improvement thereto would not include the deductions
claimed on account of interest u/s 24(b) or under the
provisions of Chapter VI-A [i.e., under the provisions of
sections 80EE/80EEA]
(Note: Deduction on account of STT paid will not be allowed)
Less: Cost of acquisition and cost of improvement xxx
Less: Exemption under sections 54B/54D xxx
Short-term capital gains xxx

Capital Gains: Special Provisions

Section Particulars
50 Any income from transfer of depreciable assets is deemed to be
capital gains arising from transfer of short-term capital
assets, irrespective of the period of holding (i.e., indexation
benefit would not be available even if the period of holding of
such assets is more than 36 months).
50AA Any income from transfer of unit of a Specified Mutual Fund or
Market Linked Debenture is deemed to be capital gains arising
from transfer of short-term capital assets.
50B Capital Gains on Slump Sale
Any profits and gains arising from slump sale effected in the previous
year shall be chargeable to income-tax as capital gains arising from
the transfer of capital assets and shall be deemed to be the income
of the previous year in which the transfer took place.
Where the undertaking being transferred under slump sale is held for
more than 36 months, the resultant gain is long-term; However, no
indexation benefit would be available. If the undertaking is held for
less than 36 months, the resultant gain is short-term.
Net worth is deemed to be the cost of acquisition and the cost
of improvement - ‘Net worth’ shall be aggregate value of total
assets minus value of liabilities of such undertaking as per books of
account.
Fair market value is deemed to be the full value of
consideration - Fair market value of the capital asset as on the date
of transfer, calculated in the prescribed manner, shall be deemed to
be the full value of the consideration received or accruing as a
result of the transfer of such capital asset.
Accordingly, the CBDT has prescribed that, for the purpose of
section 50B(2)(ii), the fair market value (FMV) of capital assets would
be the higher of –
(i) FMV 1, being the fair market value of capital assets
transferred by way of slump sale (determined on the date of
slump sale); and
(ii) 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
Capital gains = Fair market value – Net Worth

Aggregate value of total assets would be the aggregate of the

following :
i) Written Down Value of depreciable assets;
ii) Nil, in case of self generated goodwill
iii) Nil, in case of capital assets in respect of which the whole of
the expenditure has been allowed or is allowable as
deduction under section 35AD; and
iv) Book value for other assets.
Revaluation of assets shall be ignored for computing Net Worth.
50C Computation of capital gains on sale of land or building or both
Sl. Condition Deemed Sale

No. Consideration
1. Stamp Duty Value > Actual

Consideration
If Stamp Duty Value > 110% of
Stamp Duty Value
actual consideration
If Stamp Duty Value  110% of
Actual sale consideration
actual sale consideration
2. Actual Consideration > Stamp Actual Sale Consideration

Duty Value
3. Value ascertained by Valuation Stamp Duty Value

Officer > Stamp Duty Value
4. Value ascertained by Valuation Value ascertained by

Officer < Stamp Duty Value Valuation Officer
Note – If the date of agreement is different from the date of

transfer, stamp duty value on the date of agreement can be
considered, if whole or part of the consideration is received by way
of account payee cheque/bank draft or ECS or prescribed
electronic modes (IMPS, UPI, RTGS, NEFT, Net banking, debit card,
credit card or BHIM Aadhar Pay) on or before the date of
agreement. Otherwise, stamp duty value on the date of transfer has
to be considered.

50CA Fair Market Value deemed to be full value of consideration in

case of transfer of unlisted shares in certain cases
If consideration received or accruing FMV of such share

as a result of transfer of unquoted determined in the
share < FMV of such share prescribed manner would
determined in the prescribed manner be deemed as the full
The provisions of this section value of consideration
would not, however, be applicable
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.
50D Fair Market Value deemed to be full value of consideration in
certain cases
Where the consideration received FMV of the said asset on
or accruing as a result of the the date of transfer would
transfer of a capital asset by an be deemed as the full
assessee is not ascertainable or value of consideration
cannot be determined
51 Advance money received and forfeited upto 31.3.2014

Where the assessee has received advance money on an earlier
occasion for transfer of capital asset, but the transfer could not
be effected due to failure of negotiations, then, the advance
money forfeited by the assessee has to be reduced from the cost
of acquisition (and indexation would be calculated on the cost so
reduced) while computing capital gains, when the capital asset is
transferred or sold.
Advance money received and forfeited on or after 1.4.2014
Such advance money received on or after 1.4.2014 would be
taxable under section 56(2) under the head “Income from other
sources”. Therefore, advance money received and forfeited on or
after 1.4.2014 should not be deducted from the cost for
determining the indexed cost of acquisition while computing
capital gains arising on transfer of the asset.

111A Tax on short-term capital gains on transfer of equity shares

and units of equity oriented fund on which STT is chargeable
➢ Any short-term capital gains on transfer of equity shares or
units of an equity oriented fund shall be liable to tax @15%,
if securities transaction tax has been paid on such sale.
➢ In case of resident individuals and HUF, the short-term
capital gain shall be reduced by the unexhausted basic
exemption limit and the balance shall be taxed at 15%.
➢ No deduction under Chapter VI-A can be claimed in
respect of such short-term capital gain.
➢ Short-term capital gains arising from transaction undertaken
in foreign currency on a recognized stock exchange located
in an International Financial Services Centre (IFSC) would be
taxable at a concessional rate of 15% even when STT is not
paid in respect of such transaction.
112 Tax on long-term capital gains
➢ Any long-term capital gains, other than long term capital gains
taxable under section 112A, shall be liable to tax@20%.
➢ In case of resident individuals and HUFs, the long-term capital
gain shall be reduced by the unexhausted basic exemption
limit, and the balance shall be subject to tax at 20%.
➢ In case of non-corporate non-resident or foreign company,
capital gains arising from the transfer of a capital asset,
being unlisted securities, or shares of a closely held company
shall be chargeable to tax @10% without giving effect to the
indexation provision under second proviso to section 48 and
currency conversion under first proviso to section 48.
➢ Capital gains on transfer of listed securities (other than
units) or zero coupon bonds shall be chargeable to
tax@10% computed without the benefit of indexation or
@20% availing the benefit of indexation, whichever is
more beneficial to the assessee.
➢ No deduction under Chapter VI-A can be claimed in
respect of long-term capital gains.
112A Tax on long-term capital gains on certain assets
➢ Any long-term capital gains exceeding ` 1,00,000 on
transfer of equity shares or units of an equity oriented fund
shall be liable to tax @10% on such capital gain, if securities

transaction tax has been paid on acquisition and such sale

in case of equity share, and on such sale in case of units of
an equity oriented mutual fund.
➢ In case of resident individuals and HUF, the long-term
capital gain shall be reduced by the unexhausted basic
exemption limit and the balance shall be taxed at 10%.
➢ No deduction under Chapter VI-A or rebate under section
87A can be claimed in respect of such long-term capital gain.
Long-term capital gains (in excess of ` 1,00,000) arising from
transaction undertaken on a recognized stock exchange located
in an International Financial Services Centre (IFSC) would be
taxable at a concessional rate of 10%, where the consideration for
transfer is received or receivable in foreign currency, even when
STT is not paid in respect of such transaction.
Cost of Acquisition [Section 55]
Sl. Nature of asset Cost of acquisition
No.
1 Goodwill of business or profession,
trademark, brand name or any other
intangible asset etc.,
- Self generated Nil
- Acquired from previous owner Purchase price
However, in case of capital asset, Purchase price as reduced by
being goodwill of a business or the total amount of
profession, in respect of which depreciation obtained by the
depreciation u/s 32(1) has been assessee under section 32(1).
P.Y. (upto P.Y.2019-20)
- became the property of the Purchase price for such
assessee by way of distribution of previous owner
assets on total or partial partition
of HUF, under a gift or will, by
succession, inheritance,
distribution of assets on
liquidation of a company, etc. and
previous owner has acquired it by
purchase
However, in case of capital asset, Purchase price as reduced by
being goodwill of a business or the total amount of

profession which was acquired by depreciation obtained by the

the previous owner by purchase assessee under section 32(1).
and in respect of which
P.Y. (upto P.Y.2019-20)
The cost of improvement of such
assets would be Nil.
2. Bonus shares
If bonus shares are allotted before FMV on 1.4.2001
1.4.2001
If bonus shares are allotted on or Nil
after 1.4.2001
Bonus shares allotted before 1.2.2018, The higher of –
on which STT has been paid at the (i) Actual cost of acquisition
time of transfer (i.e., Nil, in case of bonus
shares allotted on or after
1.4.2001; and
FMV on 1.4.2001, in case
of bonus shares allotted
before 1.4.2001)
(ii) Lower of –
(a) FMV as on 31.1.2018;
and
(b) Actual sale
consideration
3. Rights Shares
Original shares (which forms the basis Amount actually paid for
of entitlement of rights shares) acquiring the original shares
Rights shares subscribed for by the Amount actually paid for
assessee acquiring the rights shares
Rights entitlement (which is Nil
renounced by the assessee in favour
of a person)
Rights shares which are purchased by Purchase price paid to the
the person in whose favour the renouncer of rights entitlement as
assessee has renounced the rights well as the amount paid to the Co.
entitlement which has allotted the rights shares.

4. Long term capital assets being, Cost of acquisition shall be the

- equity shares in a company on higher of -
which STT is paid both at the (i) cost of acquisition of such
time of purchase and transfer or asset; and
- unit of equity oriented fund on (ii) lower of
which STT is paid at the time of - the FMV of such asset
transfer. on 31.1.2018; and
acquired before 1st February, 2018 - the full value of
consideration recd or
accruing as a result of
the transfer of the
capital asset.
5. Any other capital asset Cost of the asset to the
Where such capital asset became the assessee, or FMV as on
property of the assessee before 1.4.2001, at the option of the
1.4.2001 assessee. However, in case of
capital asset being land or
building, FMV as on 1.4.2001
shall not exceed stamp duty
value as on 1.4.2001.
Where capital assets became the Cost to the previous owner or
property of the assessee by way of FMV as on 1.4.2001, at the option
distribution of assets on total or of the assessee. However, in case
partial partition of HUF, under a gift or of capital asset being land or
will, by succession, inheritance, building, FMV as on 1.4.2001
distribution of assets on liquidation of shall not exceed stamp duty
a company, etc and the capital asset value as on 1.4.2001.
became the property of the previous
owner before 1.4.2001.
The provisions contained in (5) above shall also apply to the assets
mentioned in (3) and (4) above.
Cost of the property in the hands of The FMV on the date on which
previous owner cannot be the capital asset become the
ascertained property of the previous
owner would be considered as
cost of acquisition.

Cost of improvement of certain assets [Section 55]

Sl. Nature of asset Cost of improvement
No.
1 Goodwill or any other Nil
intangible asset of a business,
right to manufacture, produce
or process any article or thing,
right to carry on any business
or profession or any other
right.
2 Where the capital asset All expenditure of a capital nature
became the property of the incurred in making any addition or
previous owner or the alteration to the capital asset on or
assessee before after 1.4.2001 by the previous owner or
1-4-2001 the assessee.
3 In relation to any other capital All capital expenditure incurred in
asset making additions or alterations to the
capital asset on or after 1.4.2001 –
- by the assessee after it became his
property; and
- by the previous owner [in a case
where the assessee acquired the
property by modes specified in
section 49(1)].
Capital Gains: Exemptions under section 10
Section Particulars
10(37) Where any individual or HUF owns urban agricultural land which
has been used for agricultural purposes for a period of two
years immediately preceding the date of transfer by such
individual or a parent of his or by such HUF and the same is
compulsorily acquired under any law or the consideration for such
transfer is determined or approved by the Central Government or
the RBI, resultant capital gain will be exempt provided the
compensation or consideration for such transfer is received on or
after 1.4.2004.
10(43) The amount received by the senior citizen as a loan, either in
lump sum or in installments, in a transaction of reverse mortgage
would be exempt from income-tax.

a
4.463
Exemption of Capital Gains [Sections 54 to 54F]
S. Particulars Section 54 Section 54B Section 54D Section 54EC Section 54F
No.
1 Eligible Individual/ HUF Individual/ HUF Any assessee Any assessee Individual/ HUF
Assessee
2 Asset Residential Urban Land & building Land or building Any LTCA other than
transferred House (LTCA) Agricultural forming part of an or both (LTCA) Residential House.
Land industrial
undertaking
3 Other Income from Land should be Land & building have - Assessee should not own
Conditions such house used for been used for business more than one residential
of undertaking for at

should be agricultural house on the date of
least 2 years
chargeable purposes by transfer. He should not
immediately preceding
under the head assessee or his purchase within 2 years
the date of transfer.
“Income from parents or HUF or construct within 3
The transfer should be
house property” for 2 years years after the date of
CAPITAL GAINS
by way of compulsory
immediately acquisition of the transfer, another
preceding the industrial undertaking residential house.
date of transfer
4 Qualifying One Residential Land for being Land or Building or Bonds of NHAI or One Residential House
asset i.e., asset House situated in used for right in land or RECL or any other situated in India
3.463
in which India/Two agricultural building bond notified by

capital gains residential purpose C.G. (Redeemable
has to be houses in India, (Urban/ Rural) after 5 years)
invested at the option of
a
the assessee,
where capital
gains does not
exceed ` 2 crore
5 Time limit for Purchase within Purchase within Purchase/ construct Purchase within a Purchase within 1 year
purchase/ 1 year before or a period of 2 within 3 years after period of 6 before or 2 years after
3.464
construction 2 years after the years after the the date of transfer, months after the the date of transfer
date of transfer date of transfer for shifting or re- date of transfer (or)
(or) establishing the Construct within 3 years
existing undertaking after the date of transfer
construct within
3 years after the or setting up a new
date of transfer industrial
undertaking.
Capital Gain or Cost of new Residential

6 Amount of Cost of new Cost of new Cost of new asset or
Exemption Residential Agricultural Capital Gain, amount invested in House ≥ Net sale
House or two Land or Capital whichever is lower. specified bonds, consideration of original
whichever is lower.
INCOME TAX LAW
houses, as the Gain, whichever asset, entire Capital gain

Maximum is exempt.
case may be or is lower, is
permissible
Capital Gain, exempt Cost of new Residential
investment out of
whichever is House < Net sale
capital gains arising
lower, is exempt. in any financial year consideration of original
However, if the is ` 50 lakhs, asset, proportionate
cost of new whether such capital gain is exempt.
residential investment is made However, if the cost of
house exceeds ` in the current FY or new residential house
subsequent FY or exceeds ` 10 crore, the
10 crore, the
both.
amount amount exceeding ` 10
a
exceeding ` 10 crore would not be

crore would not taken into account for
be taken into exemption.
account for
exemption. The
maximum
exemption that
can be claimed
by the assessee
is ` 10 crore.

CAPITAL GAINS
3.465
TEST YOUR KNOWLEDGE

1. Mr. Mithun purchased 100 equity shares of M/s Goodmoney Co. Ltd. on 01-
04-2007 at rate of ` 1,000 per share in public issue of the company by
paying securities transaction tax.
Company allotted bonus shares in the ratio of 1:1 on 01.12.2022. He has also
received dividend of ` 10 per share on 01.05.2023.
He has sold all the shares on 01.10.2023 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%.
Compute his total income and tax liability for A.Y. 2024-25 if Mr. Mithun
pays tax under default tax regime, 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.
2. Aarav converts his plot of land purchased in July, 2004 for ` 80,000 into
stock-in-trade on 31 st March, 2023. The fair market value as on 31.3.2023 was
` 3,00,000. The stock-in-trade was sold for ` 3,25,000 in the month of
January, 2024.
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. 2022-23: 331; F.Y. 2023-24: 348.
3. Mrs. Harshita purchased a land at a cost of ` 35 lakhs in the F.Y. 2004-05 and
held the same as her capital asset till 20th March, 2023.
She started her real estate business on 21st March, 2023 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,
2024. She sold 10 flats at ` 30 lakhs per flat in March, 2024. The remaining 5
flats were held in stock as on 31st March, 2024.

She invested ` 50 lakhs in bonds issued by National Highways Authority of

India on 31st March, 2024 and another ` 50 lakhs in bonds of Rural
Electrification Corporation Ltd. in April, 2024.
Compute the amount of chargeable capital gain and business income in the
hands of Mrs. Harshita arising from the above transactions for
A.Y. 2024-25 indicating clearly the reasons for treatment for each item.
[Cost Inflation Index: F.Y. 2004-05: 113; F.Y. 2022-23: 331; F.Y. 2023-24: 348].
4. Mr. A is an individual carrying on business. His stock and machinery were
damaged and destroyed in a fire accident.
The value of stock lost (total damaged) was ` 6,50,000. Certain portion of the
machinery could be salvaged. The opening balance of the block as on
1.4.2023 (i.e., WDV as on 31.3.2023 after providing depreciation for
P.Y. 2022-23) was ` 10,80,000.
During the process of safeguarding machinery and in the fire fighting
operations, Mr. A lost his gold chain and a diamond ring, which he had
purchased in April, 2005 for ` 1,20,000. The market value of these two items
as on the date of fire accident was ` 1,80,000.
Mr. A received the following amounts from the insurance company:
(i) Towards loss of stock ` 4,80,000
(ii) Towards damage of machinery ` 6,00,000
(iii) Towards gold chain and diamond ring ` 1,80,000
You are requested to briefly comment on the tax treatment of the above three
items under the provisions of the Income-tax Act, 1961.
5. Mr. Sarthak entered into an agreement with Mr. Jaikumar to sell his
residential house located at Kanpur on 16.08.2023 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 15.12.2023
and the registration process was completed on 14.01.2024. He paid the sale
proceeds as per the sale agreement.
The value determined by the Stamp Duty Authority-
(a) on 16.08.2023 was ` 1,70,00,000;
(b) on 15.12.2023 was ` 1,71,00,000; and
(c) on 14.01.2024 was ` 1,71,50,000.
Mr. Sarthak had acquired the residential house at Kanpur on 01.04.2001 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 24.3.2024
and another in Delhi for ` 35,00,000 on 28.5.2024.
Compute the income chargeable under the head "Capital Gains" of
Mr. Sarthak for the Assessment Year 2024-25.
Cost Inflation Index for Financial Year(s): 2001-02 - 100; 2023-24 - 348
6. Mrs. Yuvika bought a vacant land for ` 80 lakhs in May 2005. 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 2007-08.
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 01.08.2023 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 14-1-2024 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 acquisition/investments:

(i) Acquired two residential houses at Delhi and Chandigarh for ` 130
lakhs and ` 50 lakhs, respectively, on 31.1.2024 and 15.5.2024
(ii) Acquired a residential house at UK for ` 180 lakhs on 23.3.2024.
(iii) Subscribed to NHAI capital gains bond (approved under section 54EC)
for ` 50 lakhs on 29-3-2024 and for ` 40 lakhs on 12-5-2024.
Compute the income chargeable under the head 'Capital Gains' of
Mrs. Yuvika for A.Y.2024-25. The choice of exemption must be in the manner
most beneficial to the assessee.
Cost Inflation Index: F.Y. 2005-06 – 117; F.Y. 2007-08 – 129; F.Y. 2023-24 - 348.
7. 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, 2008, 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 2015, 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, 2015, Mr. Shiva constructed the first
floor by incurring a cost of ` 3,90,000.
On November 15, 2023, 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, 2024. 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 15 th November, 2023 was ` 39,00,000 and on 20 th
February, 2024 was ` 41,00,000.
Compute the capital gains in the hands of Mr. Shiva for A.Y.2024-25.
CII for F.Y. 2001-02: 100; F.Y. 2008-09: 137; F.Y. 2015-16: 254; F.Y. 2023-24: 348

ANSWERS
1. Computation of total income & tax liability of Mr. Mithun for A.Y. 2024-25
Particulars `
Long term capital gains on sale of original shares
Gross sale consideration (100 x ` 4,000) 4,00,000
Less: Brokerage@1% 4,000
Net sale consideration 3,96,000
Less: Cost of acquisition (100 x ` 2,000) (Refer Note 2) 2,00,000
Long term capital gains 1,96,000
Short term capital gains on sale of bonus shares
Gross sale consideration (100 x ` 4,000) 4,00,000
Less: Brokerage@1% 4,000
Less: Cost of acquisition of bonus shares NIL
Short term capital gains 3,96,000
Income from other sources
Dividend received from M/s Goodmoney Co. Ltd. is taxable in 2,000
the hands of shareholders [200 shares x 10 per share]
Total Income 5,94,000
Tax Liability
Tax on dividend (since it is lower than the basic exemption Nil
limit)
Tax on STCG u/s 11A
15% of (` 3,96,000 - ` 2,98,000, being unexhausted basic 14,700
exemption limit)
Tax on LTCG u/s 112A
10% of (` 1,96,000 - ` 1,00,000) 9,600
24,300
Less: Rebate u/s 87A 14,700
9,600
Add: Health and education cess @4% 384
Tax liability 9,984
Tax liability (rounded off) 9,980

Notes:
(1) Long-term capital gains exceeding ` 1 lakh on sale of original shares
through a recognized stock exchange (STT paid at the time of
acquisition and sale) is taxable under section 112A at a concessional
rate of 10%, without indexation benefit.
(2) Cost of acquisition of such equity shares acquired before 1.2.2018 is higher
of
- Cost of acquisition i.e., ` 1,000 per share and
- lower of
Fair market value of such asset i.e., ` 2,000 per share and
Full value of consideration i.e., ` 4,000 per share.

Therefore, the cost of acquisition of original share is ` 2,000 per share.
(3) Since bonus shares are held for less than 12 months before sale, the
gain arising therefrom is a short-term capital gain chargeable to
tax@15% as per section 111A after adjusting the unexhausted basic
exemption limit (` 3,00,000 less ` 2,000, being the amount of
dividend). Since Mr. Mithun is paying tax under default tax regime, he
is entitled for a basic exemption limit of ` 3,00,000 for A.Y. 2024-25.
(4) Brokerage paid is allowable since it is an expenditure incurred wholly
and exclusively in connection with the transfer. Hence, it qualifies for
deduction under section 48(i).
(5) Cost of bonus shares will be Nil as such shares are allotted after
1.04.2001.
(6) Securities transaction tax is not allowable as deduction.
2. Conversion of a capital asset into stock-in-trade is a transfer within the
meaning of section 2(47) in the previous year in which the asset is so
converted. However, the capital gains will be charged to tax only in the year
in which the stock-in-trade is sold.
The cost inflation index of the financial year in which the conversion took
place should be considered for computing indexed cost of acquisition.
Further, the fair market value on the date of conversion would be deemed
to be the full value of consideration for transfer of the asset as per section

45(2). The sale price less the fair market value on the date of conversion
would be treated as the business income of the year in which the stock-in-
trade is sold.
Therefore, in this problem, both capital gains and business income would be
charged to tax in the A.Y. 2024-25.
Particulars `
Capital Gains
Full value of consideration (Fair market value on the date of 3,00,000
conversion)
Less: Indexed cost of acquisition (` 80,000 × 331/113) 2,34,336
Long-term capital gain 65,664
Profits & Gains of Business or Profession
Sale price of stock-in-trade 3,25,000
Less: Fair market value on the date of conversion 3,00,000
25,000
Computation of taxable income of Mr. Aarav for A.Y.2024-25
Particulars `
Profits and gains from business or profession 25,000

Long term capital gains 65,664
Taxable Income 90,664
3. Computation of capital gains and business income of

Harshita for A.Y. 2024-25
Particulars `
Capital Gains
Fair market value of land on the date of conversion deemed as 2,10,00,000
the full value of consideration for the purposes of section 45(2)
Less: Indexed cost of acquisition [` 35,00,000 × 331/113] 1,02,52,212
1,07,47,788
Proportionate capital gains arising during A.Y. 2024-25 71,65,192
[` 1,07,47,788 x 2/3]

Less: Exemption under section 54EC 50,00,000

Capital gains chargeable to tax for A.Y.2024-25 21,65,192
Business Income
Sale price of flats [10 × ` 30 lakhs] 3,00,00,000
Less: Cost of flats
Fair market value of land on the date of conversion 1,40,00,000
[` 210 lacs × 2/3]
Cost of construction of flats [10 × ` 10 lakhs] 1,00,00,000
Business income chargeable to tax for A.Y.2024-25 60,00,000
Notes:
(1) The conversion of a capital asset into stock-in-trade is treated as a
transfer under section 2(47). It would be treated as a transfer in the
year in which the capital asset is converted into stock-in-trade (i.e.,
P.Y.2022-23, in this case).
(2) As per section 45(2), the capital gains arising from the transfer by way
of conversion of capital assets into stock-in-trade will be chargeable
to tax only in the year in which the stock-in-trade is sold.
(3) The indexation benefit for computing indexed cost of acquisition

would, however, be available only up to the year of conversion of
capital asset into stock-in-trade (i.e., P.Y.2022-23) and not up to the
year of sale of stock-in-trade (i.e., P.Y.2023-24).
(4) For the purpose of computing capital gains in such cases, the fair
market value of the capital asset on the date on which it was
converted into stock-in-trade shall be deemed to be the full value of
consideration received or accruing as a result of the transfer of the
capital asset.
In this case, since only 2/3rd of the stock-in-trade (10 flats out of 15
flats) is sold in the P.Y.2023-24, only proportionate capital gains (i.e.,
2/3rd) would be chargeable to tax in the A.Y.2024-25.
(5) On sale of such stock-in-trade, business income would arise. The

business income chargeable to tax would be the difference between

the price at which the stock-in-trade is sold and the fair market value
on the date of conversion of the capital asset into stock-in-trade.
(6) In case of conversion of capital asset into stock-in-trade and

subsequent sale of stock-in-trade, the period of 6 months is to be
reckoned from the date of sale of stock-in-trade for the purpose of
exemption under section 54EC [CBDT Circular No.791 dated 2.6.2000].
In this case, since the investment in bonds of NHAI has been made
within 6 months of sale of flats, the same qualifies for exemption under
section 54EC. With respect to long-term capital gains arising on land or
building or both in any financial year, the maximum deduction under
section 54EC would be ` 50 lakhs, whether the investment in bonds of
NHAI or RECL are made in the same financial year or next financial year
or partly in the same financial year and partly in the next financial year.
Therefore, even though investment of ` 50 lakhs has been made in bonds
of NHAI during the P.Y. 2023-24 and investment of ` 50 lakhs has been
made in bonds of RECL during the P.Y. 2024-25, both within the stipulated
six month period, the maximum deduction allowable for A.Y. 2024-25, in
respect of long-term capital gain arising on sale of long-term capital
asset(s) during the P.Y. 2023-24, is only ` 50 lakhs.
4. (i) Compensation towards loss of stock: Any compensation received
from the insurance company towards loss/damage to stock in trade is
to be construed as a trading receipt. Hence, ` 4,80,000 received as
insurance claim for loss of stock has to be assessed under the head
“Profit and gains of business or profession”.
Note - The assessee can claim the value of stock destroyed by fire as
revenue loss, eligible for deduction while computing income under the
head “Profits and gains of business or profession”.
(ii) Compensation towards damage to machinery: The question does
not mention whether the salvaged machinery is taken over by the
Insurance company or whether there was any replacement of
machinery during the year. Assuming that the salvaged machinery is
taken over by the Insurance company, and there was no fresh addition
of machinery during the year, the block of machinery will cease to
exist. Therefore, ` 4,80,000 being the excess of written down value (i.e.

` 10,80,000) over the insurance compensation (i.e. ` 6,00,000) will be

assessable as a short-term capital loss.
Note – If new machinery is purchased in the next year, it will

constitute the new block of machinery, on which depreciation can be
claimed for that year.
(iii) Compensation towards loss of gold chain and diamond ring: Gold
chain and diamond ring are capital assets as envisaged by section
2(14). They are not “personal effects”, which alone are to be excluded.
If any profit or gain arises in a previous year owing to receipt of
insurance claim, the same shall be chargeable to tax as capital gains.
The capital gains has to be computed by reducing the indexed cost of
acquisition of jewellery from the insurance compensation of
` 1,80,000.
5. Computation of income chargeable under the head “Capital Gains”
of Mr. Sarthak for A.Y. 2024-25
Particulars `
Capital Gains on sale of residential house
Actual sale consideration ` 1,50,00,000
Value adopted by Stamp Valuation ` 1,70,00,000
Authority on the date of agreement
[As per section 50C, where the actual sale consideration is
less than the value adopted by the Stamp Valuation
Authority for the purpose of charging stamp duty, and
such stamp duty value exceeds 110% of the actual sale
consideration, then, the value adopted by the Stamp
Valuation Authority shall be taken to be the full value of
consideration.
In a case where the date of agreement is different from the
date of registration, stamp duty value on the date of
agreement can be considered provided the whole or part
of the consideration is paid by way of account payee
cheque/bank draft or by way of ECS through bank account
or through such other electronic mode as may be
prescribed, on or before the date of agreement.
In this case, since 20% of ` 150 lakhs is paid through
account payee bank draft on the date of agreement, stamp

duty value on the date of agreement would be considered

for determining the full value of consideration]
Full value of sale consideration [Stamp duty value on the 1,70,00,000
date of agreement, since it exceeds 110% of the actual sale
consideration]
Less: Indexed cost of acquisition of residential house
[` 30 lakhs x 348/100] 1,04,40,000
Long-term capital gains [Since the residential house 65,60,000
property was held by Mr. Sarthak for more than 24 months
immediately preceding the date of its transfer]
Less: Exemption u/s 54 55,00,000
Since, long-term capital gains does not exceed ` 2 crore,
he would be eligible for exemption in respect of both the
residential house properties purchased in India. The capital
gain arising on transfer of a long-term residential property
shall not be chargeable to tax to the extent such capital
gain is invested in the purchase of these residential house
properties in India within one year before or two years
after the date of transfer of original asset. Thus, he would
be eligible for exemption of ` 55,00,000 being ` 20,00,000
and ` 35,00,000 invested on acquisition of residential
house property in Kanpur and Delhi, respectively.
Long term capital gains chargeable to tax 10,60,000
6. Computation of income chargeable under the head “Capital Gains” of

Mrs. Yuvika for A.Y.2024-25
Particulars ` (in ` (in

lakhs) lakhs)
Capital Gains on sale of residential building
Actual sale consideration ` 810 lakhs
Value adopted by Stamp Valuation Authority ` 890
lakhs
[Where the actual sale consideration is less than the
value adopted by the Stamp Valuation Authority for
the purpose of charging stamp duty, and such stamp
duty value exceeds 110% of the actual sale
consideration, then, the value adopted by the Stamp

Valuation Authority shall be taken to

be the full value of consideration as per section 50C.
However, where the date of agreement is different
from the date of registration, stamp duty value on
the date of agreement can be considered provided
the whole or part of the consideration is received by
way of account payee cheque/bank draft or by way
of ECS through bank account or through prescribed
electronic modes on or before the date of
agreement.
In this case, since advance of ` 80 lakh is received by
RTGS, i.e., one of the prescribed modes, stamp duty
value on the date of agreement can be adopted as
the full value of consideration. However, in the
present case since stamp duty value on the date of
agreement does not exceed 110% of the actual
consideration, actual sale consideration would be
taken as the full value of consideration]
Gross Sale consideration (Actual consideration, since 810.00
stamp duty value on the date of agreement does not
exceed 110% of the actual consideration)
Less: Brokerage @1% of sale consideration (1% of
` 810 lakhs) 8.10
Net Sale consideration 801.90
Less: Indexed cost of acquisition
- Cost of vacant land, ` 80 lakhs, plus 261.74
registration and other expenses i.e., ` 8
lakhs, being 10% of cost of land [` 88
lakhs × 348/117]
- Construction cost of residential building
(` 100 lakhs x 348/129) 269.77 531.51
Long-term capital gains 270.39
Since the residential house property was held by
Mrs. Yuvika for more than 24 months immediately
preceding the date of its transfer, the resultant gain
is a long-term capital gain]

Less: Exemption under section 54 130.00

Where long-term capital gains exceed ` 2
crore, the capital gain arising on transfer of a
long-term residential property shall not be
chargeable to tax to the extent such capital
gain is invested in the purchase of one
residential house property in India, one year
before or two years after the date of transfer of
original asset.
Therefore, in the present case, the exemption
would be available only in respect of the one
residential house acquired in India and not in
respect of the residential house in UK. It would
be more beneficial for her to claim the cost of
acquisition of residential house at Delhi, i.e.,
` 130 lakhs as exemption.
Less: Exemption under section 54EC 50.00
Amount invested in capital gains bonds of
NHAI within six months after the date of
transfer (i.e., on or before 13.7.2024), of long-
term capital asset, being land or building or
both, would qualify for exemption, to the
maximum extent of ` 50 lakhs, whether such
investment is made in the current financial year
or subsequent financial year. Therefore, in the
present case, exemption can be availed only to
the extent of ` 50 lakh out of ` 90 lakhs, even if
the both the investments are made on or
before 13.7.2024 (i.e., within six months after
the date of transfer).
Long term capital gains chargeable to tax 90.39
Note: Advance of ` 20 lakhs received from Mr. Johar, would have been
chargeable to tax under the head “Income from other sources”, in the
A.Y. 2016-17, as per section 56(2)(ix), since the same was forfeited on or after
01.4.2014 as a result of failure of negotiation. Hence, the same should not be
deducted while computing indexed cost of acquisition.

7. Computation of Capital gains in the hands

of Mr. Shiva for A.Y. 2024-25
Particulars Amount Amount
(`) (`)
Actual sale consideration 30,50,000
Valuation as per Stamp duty Authority on the 39,00,000
date of agreement
(Where the actual sale consideration is less than
the value adopted by the Stamp Valuation
Authority for the purpose of charging stamp
duty, and such stamp duty value exceeds 110%
of the actual sale consideration then, the value
adopted by the Stamp Valuation Authority shall
be taken to be the full value of consideration as
per section 50C.
However, where the date of agreement is different
from the date of registration, stamp duty value on
the date of agreement can be considered, provided
the whole or part of the consideration is received
by way of account payee cheque/bank draft or by
way of ECS through bank account or such other
electronic mode as may be prescribed on or before
the date of agreement.
In the present case, since part of the payment is
made by account payee cheque on the date of
agreement, the stamp duty value on the date of
agreement would be considered as full value of
consideration)
Deemed Full value of consideration [Since 39,00,000
stamp duty value on the date of agreement
exceeds 110% of the actual consideration, stamp
duty value would be deemed as Full Value of
Consideration]
Less: Expenses on transfer (Brokerage @1% of 30,500
` 30,50,000)
Less: Indexed cost of acquisition (Note 1) 33,37,320
Less: Indexed cost of improvement (Note 2) 5,34,331 38,71,651
Long term capital loss (2,151)

Notes:
(1) Computation of indexed cost of acquisition
Particulars Amount (`) Amount (`)

Cost of acquisition, 10,70,000
Being the higher of
(i) lower of Fair market value i.e., 10,70,000
` 11,85,000 and Stamp duty value
i.e., ` 10,70,000, on April 1, 2001
(ii) Actual cost of acquisition 3,59,000
(` 3,24,000 + ` 35,000, being stamp
duty @10% of ` 3,50,000)
Less: Advance money taken from
Mr. Mohan and forfeited 1,11,000
Cost of acquisition for indexation 9,59,000
Indexed cost of acquisition 33,37,320
(` 9,59,000 x 348/100)
(2) Computation of indexed cost of improvement

Particulars Amount (`)
Cost of construction of first floor in August, 2015 3,90,000
Indexed cost of improvement (` 3,90,000 x 348/254) 5,34,331
(3) Where advance money has been received by the assessee, and retained
by him, as a result of failure of the negotiations, section 51 will apply. The
advance retained by the assessee will go to reduce the cost of
acquisition. Indexation is to be done on the cost of acquisition so arrived
at after reducing the advance money forfeited [i.e. ` 10,70,000 –
` 1,11,000 (being the advance money forfeited during the P.Y.2008-09) =
` 9,59,000]. However, where the advance money is forfeited during the
previous year 2014-15 or thereafter, the amount forfeited would be
taxable under the head “Income from Other Sources” and such amount
will not be deducted from the cost of acquisition of such asset while
calculating capital gains. Hence, ` 1,51,000, being the advance received
from Ms. Deepshikha and retained by him, would have been taxable
under the head “Income from other sources” in the hands of Mr. Shiva in
A.Y.2016-17.

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CAPITAL GAINS 3.

UNIT – 4 : CAPITAL GAINS

© The Institute of Chartered Accountants of India

Proforma for computation of income under the head “Capital Gains”

Particulars Amt Amt

Less: Expenditure incurred wholly and exclusively in xxx

Net Sale Consideration xxx

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

Less: Indexed cost of acquisition (ICOA) xxx

© The Institute of Chartered Accountants of India

Less: Indexed cost of improvement (ICOI) xxx xxx

Rate of tax on Short-term Capital Gains (STCG)

Section Rate of tax

Rates of tax on Long-term Capital Gains (LTCG)

Section Rate of tax

The provisions relating to business trust would be dealt at Final level.

© The Institute of Chartered Accountants of India

received or receivable in foreign currency, even though STT is not

• In case of a resident individual or a Hindu Undivided Family (HUF), the

• No deduction under Chapter VI-A can be claimed in respect of such LTCG

• Rebate u/s 87A is not available in respect of tax payable@10% on LTCG

© The Institute of Chartered Accountants of India

Period of holding [Section 2(42A)]

•Security (other than unit) listed in a recognized stock

STCA, if held for

STCA, if held for

© The Institute of Chartered Accountants of India

4.2 CAPITAL ASSET

Note – Provisions relating to taxability or otherwise of ULIPs issued on or

However, it does not include—

© The Institute of Chartered Accountants of India

Example: A dealer in real estate holds a piece of land as stock-in-trade. But

The exclusion of stock-in-trade from the definition of capital asset is only in

Definition of Jewellery- Jewellery is a capital asset and the profits or gains

© The Institute of Chartered Accountants of India

(a) agricultural land situated in any area within the jurisdiction of a

Shortest aerial distance Population according to the last

(i) ≤ 2 kms > 10,000

(ii) > 2 kms but ≤ 6 kms > 1,00,000

(iii) > 6 kms but ≤ 8 kms > 10,00,000

Area Shortest aerial Population according Is the land

(ii) B 1.5 kms 12,000 Yes

(iii) C 2 kms 11,00,000 Yes

© The Institute of Chartered Accountants of India

(iv) D 3 kms 80,000 No

(v) E 4 kms 3,00,000 Yes

(v) F 5 kms 12,00,000 Yes

(vi) G 6 kms 8,000 No

(vii) H 7 kms 4,00,000 No

(viii) I 8 kms 10,50,000 Yes

(ix) J 9 kms 15,00,000 No

Explanation regarding gains arising on the transfer of urban

© The Institute of Chartered Accountants of India

Stock-in-trade, Personal Effects Rural 6½ Gold Bonds, Gold Deposit Bonds

© The Institute of Chartered Accountants of India

family] by the Central Govt. the Central Govt.

EXCLUSIONS FROM PERSONAL EFFECTS

Jewellery Archaeological Drawings Paintings or Any work of art

These assets are, hence, capital assets u/s 2(14)