INCOME FROM

CAPITAL GAINS
 INTRODUCTION – CAPITAL GAINS
 Sections 45 to 55A of the Income-tax Act, 1961 deal with
capital gains.

 Section 45 of the Act, provides that any profits or gains

arising from the transfer of a capital asset effected in the
previous year shall, save as otherwise provided in various
sections of Sec. 54, be chargeable to income-tax under
the head “Capital Gains” and shall be deemed to be the
income of the previous year in which the transfer took
place.

 Doubts may arise as to whether “Capital Gains” being a

capital receipt can be brought to tax as income. It may be
noted that the ordinary accounting canons of distinctions
between a capital receipt and a revenue receipt are not
always followed under the Income-tax Act. Section 2(24)
of the Income-tax Act specifically provides that “Income”
includes “any capital gains chargeable under Section 45.
 NAVIN CHANDRA MAFATLAL v. C.I.T.
(1955) 27 ITR 245
 The Supreme Court while upholding the
competence of Parliament in legislating with regard
to capital gains as part of income, observed that the
term income should be given the widest
connotation so as to include capital gains within its
scope. The Court reiterated that the words in the
Constitutional enactment conferring legislative
powers should be construed in the most liberal and
widest amplitude.
 CAPITAL GAINS AS PER SECTION 45

The requisites of a charge to income-tax, of capital

gains under Section 45(1) are:

(i) There must be a capital asset.

(ii) The capital asset must have been
transferred.
(iii)The transfer must have been effected in the
previous year.
(iv) There must be a gain arising on such
transfer of a capital asset.
(vi) Such capital gain should not be exempt
under Sections 54, 54B, 54D, 54EC, 54EE,
54ED, 54F, 54G, or 54GA
 CAPITAL ASSET- SECTION 2(14)
Capital Asset means
 Property of any kind held by an assessee, whether or not
connected with his business or profession
 Any securities held by a Foreign Institutional Investor (FII)
which has invested in such securities in accordance with
the regulations made under the SEBI Act, 1992.
But does not include
 (i) any stock-in-trade (other than securities held by FII),
consumable stores or raw-materials held for the purposes
of his business or profession;

This implies that even if the nature of such security in the

hands of the Foreign Institutional 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.
(ii) personal effects that is to say, movable property
(including wearing apparel and furniture ) held for personal
use by the assessee or any member of his family dependent
on him but excludes
a) jewellery;
b) archaeological collections;
c) drawings;
d) paintings;
e) sculptures; or
f) any work of art
For this purpose, the expression ‘jewellery’ includes the
following:
(1) 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;
(2) 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 agriculture land. This land does not include
a) any area within the jurisdiction of a municipality or a
cantonment board and which has a population of not
less than ten thousand; or

b) any area within the distance, measured aerially from

the jurisdiction of a municipality or a cantonment board
–
I. not being more than two kilometres, from the
local limits of any municipality or cantonment board
and which has a population of more than ten
thousand but not exceeding one lakh
II. not being more than six kilometres, from the
local limits of any municipality or cantonment board
and which has a population of more than one lakh
but not exceeding ten lakh
III. not being more than eight kilometres, from the
local limits of any municipality or cantonment board
and which has a population of more than ten lakh.
 (iv)6 per cent Gold Bonds, 1977 or 7 per cent
Gold Bonds, 1980 or National Defence Gold
Bonds, 1980 issued by the Central Government;

 (v)Special Bearer Bonds 1991 issued by the

Central Govt.

 (vi)Gold Deposit Bonds issued under the Gold

Deposit Scheme, 1999 or deposit certificates
issued under the Gold Monetisation Scheme,
2015 notified by the Central Government.
 SHORT TERM AND LONG TERM

ASSETS
Section 2(42A) defines short term capital asset as a
capital asset held by the assessee for not more than
36 months immediately preceding the date of transfer.

 Therefore, an asset which is held by the assessee for

period of more than 36 months immediately preceding
the date of transfer is a long-term capital asset.

 However, a security listed in a recognised stock

exchange or a unit of an equity oriented fund, or of
UTI or a Zero-Coupon Bond, will be considered as a
long-term asset if it is held for period greater than 12
months immediately preceding the date of transfer.
A share of a company not being a share which is
listed on a recognised 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”.
 Assets other than short-term capital assets are
known as ‘long-term capital assets’ and the gains
arising therefrom are known as ‘long-term capital
gains’.

 Anasset should be held for more than 36 months

immediately prior to the date of its transfer to
become a long term capital asset.

 However, where a capital asset, being

Immoveable property (land or building or both) is
transferred on or after April 1, 2017, then it will
be treated as Long Term Capital Asset if it is held
for more than 24 months immediately prior to
the date of its transfer.
 TRANSFER - SECTION 2(47)
 The essential requirement for the incidence of tax on
capital gains is the transfer of a “capital asset”. The Act
contains an inclusive definition of “transfer”, and hence, it
includes:
 Sale, exchange / relinquishment of assets
 extinguishment of any of rights therein – CIT v. Laxmidevi
Ratani
 maturity or redemption of zero coupon bond
 compulsory acquisition thereof under law
 in a case where the asset is converted by the owner
thereof into, or is treated by him as, stock in trade of
business carried on by him, such conversion or treatment
 any transaction involving the allowing of the possession of
any immovable property to be taken or retained in part
performance of a contract of the nature referred to in
section 53A of Transfer of Property Act,1882
 any transactions which have the effect of transferring or
enabling the enjoyment of an immovable property
 WHAT IS NOT TRANSFER- SECTION 47
 Section 47 specifies certain transactions which will not be
regarded as a transfer, as below:
 Any distribution of capital assets on total / partial
partition of HUF
 Transfer of asset from Holding Company to its wholly
owned Indian Subsidiary and vice-versa
 Transfer of capital asset from amalgamating company to
amalgamated company, in a scheme of amalgamation,
as long as the resultant company is an Indian Company
 Transfer of capital asset from demerged company to
resulting company, in a scheme of demerger, as long as
the resultant company is an Indian Company
 Transfer of any capital asset to the Government /
University / National Museum / National Art Gallery, any
work of art, book, manuscript, drawing, painting, print.
 Transfer by way of conversion of bonds / debentures /
preference shares into equity shares of that Company.
 YEAR OF CHARGEABILITY AS
“CAPITAL GAINS”
 Capital gains shall be Chargeable in the Previous Year in
which the transfer takes place. Some exceptions to this Rule
are :
 (i) Insurance Receipts [Section 45(1A)]

Where any person receives at any time during any previous

year any money or other assets under an insurance from an
insurer on account of damage to or destruction of any capital
asset, as a result of
 flood, typhoon, hurricane, cyclone, earthquake or other
convulsion of nature; or
 riot or civil disturbance; or
 accidental fire or explosion; or
 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
the such person for the previous year in which such money or
 (ii)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. This is considered as
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.
 iii)Transfer of beneficial interest in any
securities [Section 45(2A)]

 As per section 45(2A), where any person has had at

any time during the previous year any beneficial
interest in any securities, then, any profits or gains
arising from the transfer made by the Depository or
participant of such beneficial interest in respect of
securities shall be chargeable to tax as the income
of the beneficial owner of the previous year in which
such transfer took place and shall not be regarded
as income of the depository who is deemed to be
the registered owner of the securities by virtue of
Section 10(1) of the Depositories Act, 1996
 (iv) Introduction of capital asset as capital
contribution [Section 45(3)]
 Where a person transfers a capital asset to a firm,
AOP or BOI in which he is already a partner/
member or is to become a partner/ member by way
of capital contribution or otherwise, the profits or
gains arising from such transfer will be chargeable
to tax as income of the previous year in which such
transfer takes place.
 (v) Distribution of capital assets on
dissolution of firm/ AOP or BOI [Section 45(4)]
The profits or gains arising from the transfer of capital
assets by way of
 distribution of capital assets on the dissolution of a
firm or AOP or BOI shall be chargeable to tax as the
income of the firm etc. of the previous year in which
such transfer takes place.
 (vi) 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
or approved by the Central Government or RBI. Such
capital gains are chargeable as income of the previous
year in which such compensation or part thereof 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.
 MODE OF COMPUTATION
 Section 48 of the Act provides that the income chargeable
under the head “capital gains” shall be computed by
deducting from the full value of consideration received or
accruing as a result of the transfer of the capital asset the
following amounts –
 (i) the expenditure[No deduction will be allowed in respect of
Securities Transaction Tax] incurred wholly and exclusively in
connection with such transfer;
 (ii) the cost of acquisition of the capital asset and the cost of
any improvement thereto.
However, in the case of an assessee who is a non-resident,
capital gains arising from the transfer of a capital asset, being
shares in, or debentures of, an Indian company shall be
computed by converting the cost of acquisition, expenditure
incurred wholly and exclusively in connection with such
transfer and the full value of the consideration received or
accruing as a result of the transfer of the capital asset into the
same foreign currency as was initially utilised in the purchase
of the shares or debentures, and the capital gains so
computed in such foreign currency shall be reconverted into
 EXEMPTIONS
 i) Section 10(37) – Exempts capital gains arising
to an individual /HUF from transfer of agricultural
land by way of compulsory acquisition
 Provided that such land has been used for
agricultural purposes for immediately preceding 2
years by such individual or HUF
 ii) Profit on sale of property used for
residence [Section 54]
Conditions for claiming exemption:
 Assessee: Individual or HUF
 Which asset to transfer: Residential house(buildings
or lands appurtenant thereto)
 It must be a long-term capital asset
 Income from such house should be chargeable to
tax under the head “Income from House Property”
Situation 1: Where the amount of capital gains
exceeds Rs. 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.
Situation 2: Where the amount of capital gains
does not exceed Rs. 2 crore
 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.
The exemption under Situation 2 can be applied only
once. 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.
 Amount of Exemption under section 54 will be
lower of:
 Long term capital gains arising on transfer of residential
house; or
 Amount invested in purchase/construction of new
residential house or houses. (including the amount
deposited in CGAS before due date of filing of return
 If till the date of filing the return of income, the LTCG on
such transfer of the house is not utilised (in whole or in
part) to purchase or construct another house, then the
benefit of exemption can be availed by depositing the
unutilised amount into Capital Gains Deposit Account
Scheme (CGAS) with any scheduled bank.
 If the amount deposited in the Capital Gains Account
Scheme in respect of which the assessee has claimed
exemption under section 54 is not utilised within the
specified period for purchase/construction of the
residential house, then the unutilised amount (for which
exemption is claimed) will be taxed as income by way of
long- term capital gains of the year in which the specified
period of 2 years/3 years gets over.
 iii) Transfer of land used for agricultural
purposes [Section 54B]
Conditions for claiming exemption:
 Assessee: Individual or HUF
 There should be a transfer of an urban agricultural
land
 Asset can be either short term or long term capital
asset.
 Such land has been used for agricultural purposes for
immediately preceding 2 years by such Individual or
his parent or HUF
 He should purchase another agricultural land (urban or
rural) within 2 years from date of transfer
 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 CGAS
 Amount utilized by the assessee for purchase of new
asset and the amount so deposited shall be deemed to
Amount of Exemption:

 Ifcost of new agricultural land is more than capital

gains, entire capital gains is exempt.

 Ifcost of new agricultural land is lesser than capital

gains, then cost of new land is exempted from
capital gains
iv) Compulsory acquisition of lands and
buildings [Section 54D]

Conditions for claiming exemption:

 Assessee: Any assessee
 There must be a compulsory acquisition of land &
building or any right in land or building forming part
of an industrial undertaking
 Such land & building should have been used for
business purposes of the industrial undertaking for
2 years immediately preceding the date of transfer.
 The assessee must purchase any another land /
building / construct any building(for shifting or re-
establishing the existing undertaking or setting up a
new industrial undertaking) within 3 years from
date of transfer
 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 CGAS. 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.

 In such a case, if the cost of the new land & building

is greater than the Capital Gains, the entire Capital
gains will be exempt, and if less, then the Capital
gains will be exempt only to the extent of the cost
of new land& building.
v) No tax on long-term capital gains if investments
made in specified bonds [Section 54EC]
Conditions for claiming exemption:
 Assessee: Any assessee
 There should be a transfer of a long-term capital asset
being land or building or both.
 Such asset can also be a depreciable asset held for more
than 36 months
 The capital gains arising from transfer of such asset should
be invested in a long-term specified asset within 6 months
from date of transfer.
 Long-term specified assets would imply, bonds redeemable
after 5 years issued on or after 1.4.2018 by National
Highways Authority of India (NHAI), or Rural Electrification
Corporation Limited or, Power Finance Corporation Ltd.,
Indian Railway Finance Corporation Limited or any other
bond notified by central government in this behalf.
 The assessee should neither transfer nor convert / avail
loan or advance with this bond as security
 In this case, the entire LTCG or amount invested in the
specified bonds, whichever is lower, is exempt.
vi) Tax incentives for start-ups [Section 54EE]

Conditions for claiming exemption:

 Assessee: Any assesse
 Which asset to transfer: One or more Assets
 Investment of Long-term Capital Gains in units of a
specified fund (to finance start-ups in India) issued
before 1st April, 2019 of such fund, as may be
notified by the Central Government in this behalf
 Within 6 months from date of transfer
 Maximum Investment Allowed in any financial year
or years is 50 lakhs
 In such case, the entire capital gains or amount
invested in the bonds, whichever is lower, is
exempt.
vii) Capital gain on the transfer of certain capital
assets not to be charged in case of investment in
residential house [Section 54F]

Conditions for claiming exemption:

 Assessee: Individual or HUF
 There must be a transfer of a long-term capital asset
other than a residential house
 The assessee should purchase one residential house
situated in India within 1 year before OR 2 years after
the date of transfer OR construct one residential
house in India within 3 years from 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.
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.
 If the cost of the investment in a new residential
house is greater than the Net Sale Consideration,
the entire capital gains is exempt, and if cost of the
investment in a new residential house less than Net
Sale Consideration, then, capital gains is exempt
proportionately (that is: Capital Gains * Investment
in New House / Net Sale Consideration).
 There is also a condition, that the assessee should
not own more than one residential house on the
date of transfer and should not purchase any other
residential house within 1 year OR construct any
other residential house within 3 years from date of
transfer of original asset
viii) Exemption of capital gain on transfer of assets of
shifting of industrial undertaking from urban area to a
Special Economic Zone [Section 54GA]

Conditions for claiming exemption:

 Assessee: Any Assessee
 The exemption is available to all categories of assesses in
respect of capital gain arising on the transfer of fixed
assets other than furniture and fittings of industrial
undertaking effected in the course of shifting of such
industrial undertaking to any Special Economic Zone.
 (ii) Asset transferred is machinery, plant, building, land or
any right in building or land used for the business of
industrial undertaking in an urban area;
 (iii) The capital gain arising on the asset transferred may
be short-term or long-term capital gain. Normally, it will be
short-term capital gain because most of the assets of the
industrial undertaking will be depreciable assets;
 (iv) The capital gain is utilized within 1year before or 3
years after the date of transfer for the specified purpose.
 Specified purpose includes the following:

(a) for purchase of new machinery or plant for the

purpose of business of the Industrial Undertaking in
the Special Economic Zone to which the said
undertaking is shifted;
(b) acquisition of building or land or construction of
building for the purposes of the assessee’s business in
the Special Economic Zone;
(c) expenses on shifting of the old undertaking and its
establishment to the Special Economic Zone; and
(d) incurring of expenditure on such other purposes as
specified by the Central Government for this purpose.
 Extensionof Time for Acquiring New Asset or
Depositing or Investing Amount of Capital
Gain (Section 54H)

 Thissection states that where the transfer of the

original asset is by way of compulsory acquisition
under any law and the amount of compensation
awarded for such acquisition is not received by the
assessee on the date of such transfer, the period
of acquiring the new asset by the assessee
referred to in Sections 54, 54B, 54D, 54EC and 54F
or for depositing or investing the amount of capital
gain shall be extended. This extended period shall
be reckoned from the date of receipt of such
compensation.
 TAX ON CAPITAL GAINS- SECTION 112

 Short Term Capital Gains is clubbed with Total

Income and therefore charged to tax at normal
rates.
 However Long Term Capital Gains are taxable at
rates specified in Section 112.
 Difference of treatment of taxability of Long Term
Capital Gains for Resident and Non Resident