INCOME FROM

CAPITAL GAINS
Denoted as the net profit that an investor makes after selling a capital
asset exceeding the price of purchase. The entire value earned from
selling a capital asset is considered as taxable income. To be eligible for
taxation during a financial year, the transfer of a capital asset should take
place in the previous year.
Capital assets are the property you
own and can be transferred, like
land, buildings, shares, patents,
trademarks, jewelry, leasehold
rights, machinery, vehicles, etc.
Capital asset is defined in S. 2(14).
Capital asset are of two types.
Long-term capital assets are those held for more than 36 months and then sold off.
Immovable property sold after 24 months would be categorized as a long-term capital
asset. In the case of equity shares, securities, mutual fund units, etc., however, the holding
period of 12 months is applicable.
Capital Assets Holding Period

Equity Shares or Preference Shares in a company (listed) 12 months

Equity Shares or Preference Shares in a company (unlisted) 24 months

Immovable Property (land or building or both) 24 months

Securities like bonds, debentures, derivatives, and government 12 months

securities (listed)

Units of UTI (Unit Trust of India) (listed or unlisted) 12 months

Units of equity-oriented mutual funds (listed or unlisted) 12 months

Units of debt-oriented mutual funds (listed or unlisted) 36 months

Zero coupon bonds (listed or unlisted) 12 months

Short-term capital assets are those held for less than or equal to 36
months. This means that if you sell off the asset within 36 months of
buying it, it would be called a short-term capital asset. However, in
some cases, the holding period is reduced to 24 months and 12
months. These cases include the following –

Capital Asset Holding Period

Immovable property like 24 months
houses, land, and buildings.
Equity Shares of a company 12 months
listed on the stock
exchange, units of UTI,
zero-coupon bonds, and
equity-oriented mutual
funds.
 LTCG v. STCG

Long Term Capital Gains Short Term Capital Gains

 Section 2(29B).  Section 2(42B).
 Capital gain arising  Capital gain arising
from transfer of a on transfer of short
long term capital term capital asset.
asset.
 TRANSFER OF CAPITAL ASSET
 Defined in Section 2(47).
•Sale or exchange: Selling or trading a capital asset for something else.
•Relinquishment: Giving up ownership or rights to the asset.
•Compulsory acquisition: The government taking ownership of the asset.
•Conversion to stock-in-trade: Treating a capital asset as part of your business
inventory.
•Maturity or redemption of a zero coupon bond: When a zero coupon bond
matures or is redeemed.
•Transfer of possession under a contract: Transferring ownership of property as
part of a specific type of contract.
•Any transaction that effectively transfers ownership: Any action that results
in someone else taking ownership or control of the property.
 CHARGEABILITY- S. 45(1)
 Tax liability under capital gains arises only when-
 1. there should be a capital asset.
 2. The capital asset is transferred by the assessee.
 3. Such transfer takes place during the PY.
 4. Any profit or gain arises as a result of transfer.
 5. Such profit or gain is not exempt from tax under relevant sections.
 Scope of Chargeability-
 Section 45(1) is a general provision. There are specific provisions regarding
charging given under Section 45(2) to 45(6).
Sub Transaction Consideration
Section
of S. 45

1. Transfer of a capital asset. Consideration for the transfer.

2. Conversion of a capital asset into stock-in-trade. Fair market value as on the date of
conversion.

2A. Transfer of securities made by the depository who is deemed to be the Consideration for the transfer, chargeable
registered owner under the Depositories Act, 1996. in the case of beneficial owner and not in
the case of depository.

3. Transfer of a capital asset by a partner to the firm or by a member to the The value of the asset recovered in the
other association of persons or body of individuals by way of capital books of the firm or the other association
contribution of otherwise. of persons or the body of individuals.
4. Transfer of a capital asset by way of distribution on dissolution or Fair market value as on the date of
otherwise of a firm or association of persons. transfer.
5. Transfer of a capital asset by way of compulsory acquisition under any law. The initial compensation or enhanced
compensation, as the case maybe.
6. Repurchase of mutual fund units referred to in S. 80CCB. Repurchase price. Difference between
repurchase price and amount invested
shall be deemed as capital gain.
 EXEMPTIONS
 Section 54: Sale of House Property on Purchase of Another House Property
 The exemption on two house properties shall be available once in a lifetime to a taxpayer, provided
the capital gains do not exceed Rs. 2 crores.
 The exemption under Section 54 will be limited to the total capital gain on sale if the purchase
price of the new property is higher than the number of capital gains.
 The following conditions must be met to enjoy the benefit:
• The new property can be purchased either one year before or two years after the previous property
has been sold.
• Gains can also be invested in property construction, but construction must be completed within
three years of the sale date.
 If the house acquired is sold within 3 years from date of purchase/construction, the capital gain
previously exempted, shall be taxed as short term capital gain along with capital gain, if any on the
sale of such house.
 To get full exemption, has to invest capital gain not utilised before due date of filing return of
income in a bank authorised by Central Govt. under “capital gains account scheme”.
 Amount so deposited can be withdrawn for reinvestment in house prop within prescribed time. If
not utilised, such amount shall be deemed as income of PY and shall be taxed as LTCG.
 54B: Transfer of Land Used for Agricultural Purposes
 Capital gain, short term or long term arising from the transfer of agricultural land, which
the assessee or his parents have been using for agricultural purposes for a period of at least
two years immediately preceding the year of transfer, is exempt from tax, to the extent that
such gain is reinvested in the purchase of agricultural land within a period of two years
from date of such transfer, is exempted.
 If the land purchased by reinvesting capital gain is transferred within 3 years from the date
of purchase, capital gain previously exempted will be taxable as short term capital gain
along with capital gain on the transfer of new land.
• The new agricultural land purchased to claim capital gains exemption should not be sold
within three years of its purchase date.
• If you cannot purchase agricultural land before the due date for filing your income tax
return, the number of capital gains must be deposited in any branch (except rural branches)
of a public sector bank or IDBI Bank before the due date.
• If the amount deposited under the Capital Gains Account Scheme was not used to purchase
agricultural land, it should be treated as capital gains of the year in which the period of two
years from the date of sale of land elapsed.
 54D: Exemption on capital gains arising from the compulsory acquisition of land
and buildings used for industrial purposes.
 Capital gain from compulsory acquisition of any arising land or building therein,
forming part of an industrial undertaking, which has been used by assessee for atleast
two years preceding date of acquisition, is exempt, to the extent such gain has been
reinvested in the purchase of any other land or building, within three years of gaining
such capital.
 if the new land or building is sold withing three years, not exempted.
 To claim full exemption, deposit in bank.
 If amount deposited is not utilised for purchase or construction of new asset within
specified period, amount not utilised shall be deemed to be income of PY in which
specified period ends and shall be taxable as long term capital gain.
 Exemption Under Sections 54 E, 54EA, and  Exemption Under Section 54EC – Profits
54EB – Profits from Investments in Certain from the Sale of a Long-term Capital Asset
Securities are Exempt from Tax if Reinvested in Specific
 This capital gains exemption applies to capital Long-term Assets.
gains derived from the transfer of long-term  Long-term capital gains on the sale of long-term
capital assets. Individuals can take advantage of assets would be qualified for long-term capital
such long-term capital gain exemptions if they gain exemption. Individuals will be eligible for
reinvest in securities such as targeted debentures, such exemptions if they reinvest their proceeds
UTI units, government securities, government in assets of either the Rural Electrification
bonds, etc. Corporation or the NHAI.
 The following conditions must be met–  Such capital exemptions are available if and
• Individuals must reinvest in such new securities only if the following conditions are met:
within six months of the transfer of capital assets. • Individuals reinvest the proceeds into specified
• If the individual plans to sell the new securities assets within six months of the asset's sale.
before 36 months, the previously offered • Capital gains should not exceed the amount
exemption would be deducted from the total cost invested. If only a portion of the gains were
to determine the capital gains. reinvested, the capital gain exemption would
 It is important to note that any loan availed apply only to the reinvested amount.
against these securities before 3 years would be • Specific assets must be held for a minimum of
treated as a capital gain. 36 months.
 54ED- Profits from transfer of certain listed securities or unit not to be charged in
certain cases
 Where the capital gain arises from the transfer of a long term capital asset, before 1st
April, 2006, such asset being listed securities or unit, and assessee has within a period
of 6 months after such date of transfer, invested the whole or any part of the capital
gain in acquiring equity shares,
 In such case, such capital gain shall be dealt as follows:
- If cost of specified equity shares is not less than the capital gain arising from transfer
original asset, whole of such capital gain shall not be charged u/s 45;
- If cost of specified equity shares is less than capital gain arising, only the portion of the
profit that corresponds to the cost of the new shares will be taxed. The remaining profit
will be tax-free.
 Exemption Under Section 54EE –  Exemption Under Section 54F: Capital
Profits from a Transfer of Investments. Gains on the Sale of Any Asset Other
 Capital gains derived from the transfer of Than a Home.
long-term capital assets would be eligible  Exemption under Section 54F is available
for a capital gain exemption if – when capital gains are realized from the
• Individuals reinvest their proceeds within sale of a long-term asset other than a
six months of receiving them. home. To qualify for this exemption, you
must invest the entire sale consideration,
• If individuals sell their new securities not just the capital gain, in purchasing a
before 36 months, the previously offered new residential house property. Purchase
exemption is subtracted from the cost to the new property either one year before
calculate capital gains. or two years after the previous one. You
• If a loan is taken out against new securities can also use the profits to fund the
before 36 months, the capital gains are construction of a home. The construction,
taxed. however, must be completed within three
years of the date of sale.
• In the current and following fiscal years,
such investments should not exceed Rs. 50
lakh.
 54G: Profits from re-investment of  54H: Extension of time limit for
capital gain arising from the shifting of acquiring new asset
industrial undertaking from urban areas  Where the transfer of the original asset
to non-urban areas
is by way of compulsory acquisition
 Capital gain, arising from transfer of plant and the amount of compensation
and machinery, land, building or any right awarded is not received by the assessee
therein, in connection with shifting of on the date of such transfer, the period
industrial undertaking from urban to rural of acquiring new asset by the assessee
areas shall be exempted . or the period available for depositing or
 investing the amount, shall be
Proviso: such capital gain should be
calculated from the date of receipt of
reinvested within a period of 1 yr before
such compensation.
or 3 years after date of transferrin the
purchase of new machinery, plant, etc.
 If not reinvested before due date for filing
of return, deposit in bank.
 If amount deposited not utilised , shall be
deemed to be income of PY.
 CALCULATION OF CAPITAL GAINS
LTCG STCG
Full Value of Consideration- Full Value of Consideration-
Less Less
Expenses incurred in transferring asset Expenses incurred on transferring the
asset
Indexed cost of acquisition
Cost of acquisition (S. 49, 51, 55)
Indexed cost of the improvement
Cost of the improvement (S. 55)
Expenses allowed to be deducted from
the value of the consideration Exemption provided u/s. 54B, 54D, 54G.
Exemptions available u/S. 54, 54B, 54E, TOTAL- short term capital gains
54EA, 54EB, 54F, 54G, 54H.
TOTAL- Long term capital gains
 MODE OF COMPUTATION: S. 48- find full value of consideration and then
deduct- (a) expenditure incurred wholly and exclusively in connection with
such transfer, (b) cost of acquisition and (c) cost of improvement. From this,
exemptions are deducted resulting in net capital gain.
 FULL VALUE OF CONSIDERATION: whole price without any deductions.
 EXPENDITURE ON TRANSFER: necessary to effect the transfer. Example-
brokerage or commission paid, cost of stamp, registration fees, travel fee..
 COST OF IMPROVEMENT: S. 55(1)(b)-
(i)- cost of improvement in relation to goodwill of a business or a right to
manufacture, produce, process any article is taken to be nil.
(ii)- in relation to any other capital asset- all expenses incurred in
addition/alteration
 COST OF ACQUISITION:
1. If assessee has acquired by modes like gift, will, partition, cost to previous
owner shall be adopted as cost of acquisition.
2. If assessee has acquired asset by any other mode, cost incurred by him.
 INDEXED COST OF ACQUISITION AND IMPROVEMENT: adjustment of cost with
respect to the cost inflation index of the year of acquisition or improvement.
 TAX ON CAPITAL GAINS
According to the amendment in Budget 2024, with effect from 23rd July 2024 tax on long term and short term Capital Gains are to be taxed as follows:

Tax Type Condition Applicable Tax

Long-term capital gains tax Sale of: 12.5% over and above Rs
(LTCG) - Listed Equity shares (If 1.25 lakh
STT has been paid on
purchase and sale of such
shares)
- units of equity oriented
mutual fund (If STT has
been paid on sale of such
units)

Others 12.5%
Short-term capital gains tax When Securities Transaction Normal slab rates
(STCG) Tax (STT) is not applicable

When STT is applicable 20%.