TOPIC: CAPITAL GAINS

NAME: Yashvi Agarwal

CLASS: TYBCOM-V
DIV: F
ROLL NO: HTBC0679
SUBJECT: DIRECT TAX
GROUP NO: F1
 Section 2(14): MEANING OF CAPITAL ASSET
Capital Asset is defined to include:
a) Any kind of property held by an assessee, whether or not connected with business or
profession of the assessee.
b) Any securities held by a FII which has invested in such securities in accordance with the
regulations made under the SEBI Act, 1992.
However, the term ‘capital asset’ shall exclude the following:
a) Stock-in-trade, consumable stores, raw materials held for the purpose of business or
profession;
b) Movable property held for personal use of taxpayer or for any member of his family
dependent upon him. However, jewellery, costly stones, and ornaments made of silver,
gold, platinum or any other precious metal, archaeological collections, drawings,
paintings, sculptures or any work of art shall be considered as capital asset even if used
for personal purposes;
c) Specified Gold Bonds and Special Bearer Bonds;
d) Agricultural Land in India, not being a land situated:
a. Within jurisdiction of municipality, notified area committee, town area committee,
cantonment board and which has a population not less than 10,000;
b. Within range of following distance measured aerially from the local limits of any
municipality or cantonment board:
i. not being more than 2 KMs, if population of such area is more than 10,000 but not exceeding 1 lakh;
ii. not being more than 6 KMs , if population of such area is more than 1 lakh but not exceeding 10
lakhs; or
iii. not being more than 8 KMs , if population of such area is more than 10 lakhs.
e) Deposit certificates issued under the Gold Monetisation Scheme, 2015

SECTION 2(47) : MEANING OF TRANSFER

"Transfer”, in relation to a capital asset, includes:
(i) Sale, exchange or relinquishment of the asset;
(ii) Extinguishment of any rights in relation to a capital asset;
(iii) Compulsory acquisition of an asset;
(iv) Conversion of capital asset into stock-in-trade;
(v) Maturity or redemption of a zero coupon bond;
(vi) Allowing possession of immovable properties to the buyer in part performance of the
contract;
(vii) Any transaction which has the effect of transferring an (or enabling the enjoyment of)
immovable property; or
(viii) Disposing of or parting with an asset or any interest therein or creating any interest in
any asset in any manner whatsoever.

Exceptions to Transfer:
Section 2(47) also outlines certain transactions that are not considered transfers under the
Income Tax Act. These exceptions include:
Transfer of capital assets in a tax-neutral transaction: If a transfer of a capital asset takes
place in a tax-neutral transaction, such as a merger, demerger, amalgamation, or
transfer of shares, it is not considered a transfer for the purpose of calculating capital
gains tax.
Distribution of capital assets by a company: If a company distributes its capital assets to its
shareholders as a part of a dividend or a liquidation process, it is not considered a
transfer.
Transfer of a capital asset in case of a Hindu Undivided Family (HUF): A transfer of a
capital asset between members of an HUF is not considered a transfer for the purpose
of calculating capital gains tax.
Transfer of a capital asset under a gift or will: Transfer of a capital asset under a gift or will
is not considered a transfer if it is made without any consideration.
 SECTION 45: profits or gains arising from the transfer of a capital asset
effected in the previous year

(1) Any profits or gains arising from the transfer of a capital asset effected in the previous
year shall, save as otherwise provided in sections
54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, 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.
(1A) Notwithstanding anything contained in sub-section (1), 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—
(i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or
(ii) riot or civil disturbance; or
(iii) accidental fire or explosion; or
(iv) action by an enemy or action taken in combating an enemy (whether with or without
a 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 of the previous year in which such money or other asset was received
and for the purposes of section 48, 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 asset.
(2) Notwithstanding anything contained in sub-section (1), the profits or gains arising from
the transfer by way of conversion by the owner of a capital asset into, or its treatment by him
as stock-in-trade of a business carried on by him shall 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 and, for the purposes of section 48, 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 or
accruing as a result of the transfer of the capital asset.
(2A) Where any person has had at any time during previous year any beneficial interest in
any securities, then, any profits or gains arising from transfer made by the depository or
participant of such beneficial interest in respect of securities shall be chargeable to income-
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 securities by virtue of sub-section (1) of section 10 of the Depositories
Act, 1996, and for the purposes of—
(i) section 48; and
(ii) proviso to clause (42A) of section 2,
the cost of acquisition and the period of holding of any securities shall be determined on the
basis of the first-in-first-out method.
(3) The profits or gains arising from the transfer of a capital asset by a person to a firm or
other association of persons or body of individuals (not being a company or a co-operative
society) in which he is or becomes a partner or member, by way of capital contribution or
otherwise, shall be chargeable to tax as his income of the previous year in which such transfer
takes place and, for the purposes of section 48, the amount recorded in the books of account
of the firm, association or body as the value of the capital asset shall be deemed to be the full
value of the consideration received or accruing as a result of the transfer of the capital asset.
(4) The profits or gains arising from the transfer of a capital asset by way of distribution of
capital assets on the dissolution of a firm or other association of persons or body of
individuals (not being a company or a co-operative society) or otherwise, shall be chargeable
to tax as the income of the firm, association or body, of the previous year in which the said
transfer takes place and, for the purposes of section 48, the fair market value of the asset on
the date of such transfer shall be deemed to be the full value of the consideration received or
accruing as a result of the transfer.
(5) Notwithstanding anything contained in sub-section (1), where the capital gain arises from
the transfer of a capital asset, being a transfer by way of compulsory acquisition under any
law, or a transfer the consideration for which was determined or approved by the Central
Government or the Reserve Bank of India, and the compensation or the consideration for
such transfer is enhanced or further enhanced by any court, Tribunal or other authority, the
capital gain shall be dealt with in the following manner, namely :—
(a) the capital gain computed with reference to the compensation awarded in the first
instance or, as the case may be, the consideration determined or approved in the first
instance by the Central Government or the Reserve Bank of India shall be chargeable
as income under the head "Capital gains" of the previous year in which such
compensation or part thereof, or such consideration or part thereof, was first
received; and
(b) the amount by which the compensation or consideration is enhanced or further
enhanced by the court, Tribunal or other authority shall be deemed to be income
chargeable under the head "Capital gains" of the previous year in which such amount
is received by the assessee :
Provided that 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;
(c) where in the assessment for any year, the capital gain arising from the transfer of a
capital asset is computed by taking the compensation or consideration referred to in
clause (a) or, as the case may be, enhanced compensation or consideration referred to
in clause (b), and subsequently such compensation or consideration is reduced by any
court, Tribunal or other authority, such assessed capital gain of that year shall be
recomputed by taking the compensation or consideration as so reduced by such court,
Tribunal or other authority to be the full value of the consideration.
SECTION 48
The income chargeable under the head "Capital gains" shall be computed, by deducting from
the full value of the consideration received or accruing as a result of the transfer of the capital
asset the following amounts, namely :—
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the asset and the cost of any improvement thereto:
94
Provided that 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 Indian currency.
Provided further that where long-term capital gain arises from the transfer of a long-term
capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or
debentures of, an Indian company referred to in the first proviso, the provisions of clause (ii)
shall have effect as if for the words "cost of acquisition" and "cost of any improvement", the
words "indexed cost of acquisition" and "indexed cost of any improvement" had respectively
been substituted:
Provided also that nothing contained in the second proviso shall apply to the long-term
capital gain arising from the transfer of a long-term capital asset being bond or debenture
other than capital indexed bonds issued by the Government :
Provided also that where shares, debentures or warrants referred to in the proviso to clause
(iii) of section 47 are transferred under a gift or an irrevocable trust, 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 for the purposes of this section :
Provided also that no deduction shall be allowed in computing the income chargeable under
the head "Capital gains" in respect of any sum paid on account of securities transaction tax
under Chapter VII of the Finance (No. 2) Act, 2004.
Explanation.—For the purposes of this section,—
(i) "foreign currency" and "Indian currency" shall have the meanings respectively
assigned to them in section 2 of 95[the Foreign Exchange Management Act, 1999 (42
of 1999)];
(ii) the conversion of Indian currency into foreign currency and the reconversion of
foreign currency into Indian currency shall be at the rate of exchange prescribed in
this behalf;
(iii) "indexed cost of acquisition" means an amount which bears to the cost of acquisition
the same proportion as Cost Inflation Index for the year in which the asset is
transferred bears to the Cost Inflation Index for the first year in which the asset was
held by the assessee or for the year beginning on the 1st day of April, 1981,
whichever is later;
(iv) "indexed cost of any improvement" means an amount which bears to the cost of
improvement the same proportion as Cost Inflation Index for the year in which the
asset is transferred bears to the Cost Inflation Index for the year in which the
improvement to the asset took place;
 (v) "Cost Inflation Index", in relation to a previous year, means such Index as the Central
Government may, having regard to seventy-five per cent of average rise in the for the
immediately preceding previous year to such previous year, by notification 97 in the
Official Gazette, specify, in this behalf.

SECTION 49 Cost with reference to certain modes of acquisition

[(1)] Where the capital asset became the property of the assessee—
(i ) on any distribution of assets on the total or partial partition of a Hindu undivided
family;
(ii ) under a gift or will;
(iii ) (a) by succession, inheritance or devolution 24 , or
[(b) on any distribution of assets on the dissolution of a firm, body of individuals, or
other association of persons, where such dissolution had taken place at any time
before the 1st day of April, 1987, or]
(c) on any distribution of assets on the liquidation of a company, or
(d) under a transfer to a revocable or an irrevocable trust, or
(e) under any such transfer as is referred to in clause (iv) [or clause (v)] 27[or
clause (vi)] [or clause (via )] [or clause (viaa)] [or clause (vica)
or 30a[ clause (vicb)] of section 47];
[(iv) such assessee being a Hindu undivided family, by the mode referred to in sub-
section (2) of section 64 at any time after the 31st day of December, 1969,]
the cost of acquisition of the asset shall be deemed to be the cost for which the previous
owner of the property acquired it, as increased by the cost of any improvement of the assets
incurred or borne by the previous owner or the assessee, as the case may be.
[ Explanation.—In this 33[sub-section] the expression "previous owner of the property" in
relation to any capital asset owned by an assessee means the last previous owner of the
capital asset who acquired it by a mode of acquisition other than that referred to in clause (i)
or clause (ii) or clause (iii) 34 [or clause (iv )] of this 35 [sub-section].]
[(2) Where the capital asset being a share or shares in an amalgamated company which is an
Indian company became the property of the assessee in consideration of a transfer referred to
in clause ( vii) of section 47, the cost of acquisition of the asset shall be deemed to be the cost
of acquisition to him of the share or shares in the amalgamating company.]
[(2A) Where the capital asset, being a share or debenture of a company, became the
property of the assessee in consideration of a transfer referred to in clause (x) or clause (xa)
of section 47 , the cost of acquisition of the asset to the assessee shall be deemed to be that
part of the cost of debenture, debenture-stock, bond or deposit certificate in relation to which
such asset is acquired by the assessee.]
[ (2AA) Where the capital gain arises from the transfer of specified security or sweat equity
shares referred to in sub-clause (vi) of clause (2) of section 17 , the cost of acquisition of such
security or shares shall be the fair market value which has been taken into account for the
purposes of the said sub-clause.]
Section 50 – Capital Gain on Sale of Depreciable Assets

Notwithstanding anything contained in clause (42A) of section 2, where the capital asset is an
asset forming part of a block of assets in respect of which depreciation has been allowed
under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), the provisions
of sections 48 and 49 shall be subject to the following modifications :—
(1) where the full value of the consideration received or accruing as a result of the
transfer of the asset together with the full value of such consideration received or
accruing as a result of the transfer of any other capital asset falling within the block
of the assets during the previous year, exceeds the aggregate of the following
amounts, namely :—
(i) expenditure incurred wholly and exclusively in connection with such transfer
or transfers;
(ii) the written down value of the block of assets at the beginning of the previous
year; and
(iii) 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;
(2) where any block of assets ceases to exist as such, for the reason that all the assets in
that block are transferred during the previous year, the cost of acquisition of the
block of assets shall be the written down value of the block of assets at the beginning
of the previous year, as increased by the actual cost of any asset falling within that
block of assets, acquired by the assessee during the previous year and the income
received or accruing as a result of such transfer or transfers shall be deemed to be the
capital gains arising from the transfer of short-term capital assets.
 SECTION 54

Under Section 54 the IncomeTax Act, an individual or HUF selling a residential property can

avail tax exemptions from Capital Gains if the capital gains are invested in purchase or

construction of residential property.

Taxpayers such as partnership firms, LLP’s, companies or any other association or body

cannot claim tax exemption under section 54. The conditions that need to be satisfied to avail

the benefit of the said section are as follows:

 Asset must be classified as a long-term capital asset.

 The asset sold is a Residential House. Income from such a house should be

chargeable as Income from House Property

 The seller should purchase a residential house either 1 year before the date of

sale/transfer or 2 years after the date of sale/transfer. In case the seller is

constructing a house, the seller has an extended time, ie. the seller will have to

construct the residential house within 3 years from the date of sale/transfer. In

case of compulsory acquisition, the period of acquisition or construction will be

determined from the date of receipt of compensation (whether original or

additional compensation)

 The new residential house should be in India. The seller cannot buy or purchase

a residential house abroad and claim the exemption.

 From 1st April 2023 the capital gains tax exemption under Section 54 to 54F

will be restricted to Rs.10 crore. Earlier, there was no threshold.

 SECTION 54EC Capital gain not to be charged on investment in
certain bonds
(1) Where the capital gain arises from the transfer of a long-term capital asset (the capital
asset so transferred being hereafter in this section referred to as the original asset) and the
assessee has, at any time within a period of six months after the date of such transfer,
invested the whole or any part of capital gains in the long-term specified asset, the capital
gain shall be dealt with in accordance with the following provisions of this section, that is to
say,—
(a) if the cost of the long-term specified asset is not less than the capital gain arising from
the transfer of the original asset, the whole of such capital gain shall not be charged
under section 45;
(b) if the cost of the long-term specified asset is less than the capital gain arising from the
transfer of the original asset, so much of the capital gain as bears to the whole of the
capital gain the same proportion as the cost of acquisition of the long-term specified
asset bears to the whole of the capital gain, shall not be charged under section 45 :
20[Provided that the investment made on or after the 1st day of April, 2007 in the long-term
specified asset by an assessee during any financial year does not exceed fifty lakh rupees.]
The following second proviso shall be inserted after the existing proviso to sub-section (1) of
section 54EC by the Finance (No. 2) Act, 2014, w.e.f. 1-4-2015 :
Provided further that the investment made by an assessee in the long-term specified asset,
from capital gains arising from transfer of one or more original assets, during the financial
year in which the original asset or assets are transferred and in the subsequent financial year
does not exceed fifty lakh rupees.
(2) Where the long-term specified asset is transferred or converted (otherwise than by
transfer) into money at any time within a period of three years from the date of its acquisition,
the amount of capital gains arising from the transfer of the original asset not charged
under section 45 on the basis of the cost of such long-term specified asset as provided in
clause (a) or, as the case may be, clause (b) of sub-section (1) shall be deemed to be the
income chargeable under the head “Capital gains” relating to long-term capital asset of the
previous year in which the long-term specified asset is transferred or converted (otherwise
than by transfer) into money.
Explanation.—In a case where the original asset is transferred and the assessee invests the
whole or any part of the capital gain received or accrued as a result of transfer of the original
asset in any long-term specified asset and such assessee takes any loan or advance on the
security of such specified asset, he shall be deemed to have converted (otherwise than by
transfer) such specified asset into money on the date on which such loan or advance is taken.
21[(3) Where the cost of the long-term specified asset has been taken into account for the
purposes of clause (a) or clause (b) of sub-section (1),—
 (a) a deduction from the amount of income-tax with reference to such cost shall not be
allowed under section 88 for any assessment year ending before the 1st day of April,
2006;
(b) a deduction from the income with reference to such cost shall not be allowed
under section 80C for any assessment year beginning on or after the 1st day of April,
2006.]
Explanation.—For the purposes of this section,—
(a) “cost”, in relation to any long-term specified asset, means the amount invested in such
specified asset out of capital gains received or accruing as a result of the transfer of the
original asset;
22[(b) “long-term specified asset” for making any investment under this section during the
period commencing from the 1st day of April, 2006 and ending with the 31st day of March,
2007, means any bond, redeemable after three years and issued on or after the 1st day of
April, 2006, but on or before the 31st day of March, 2007,—
(i) by the National Highways Authority of India constituted under section 3 of the National
Highways Authority of India Act, 1988 (68 of 1988); or
(ii) by the Rural Electrification Corporation Limited, a company formed and registered
under the Companies Act, 1956 (1 of 1956),22a
and notified23 by the Central Government in the Official Gazette for the purposes of this
section with such conditions (including the condition for providing a limit on the amount of
investment by an assessee in such bond) as it thinks fit:]
24[Provided that where any bond has been notified before the 1st day of April, 2007, subject
to the conditions specified in the notification, by the Central Government in the Official
Gazette under the provisions of clause (b) as they stood immediately before their amendment
by the Finance Act, 2007, such bond shall be deemed to be a bond notified under this clause;]
25[(ba) “long-term specified asset” for making any investment under this section on or after
the 1st day of April, 2007 means any bond, redeemable after three years and issued on or
after the 1st day of April, 2007 by the National Highways Authority of India constituted
under section 3 of the National Highways Authority of India Act, 1988 (68 of 1988) or by the
Rural Electrification Corporation Limited, a company formed and registered under the
Companies Act, 1956 (1 of 1956).25a]
BIBLIOGRAPHY
https://incometaxindia.gov.in/
https://cleartax.in/
https://taxguru.in/