Income From Capital Gains – Capital Gain Tax

Table of Contents

1. What is the basis of charge [Sec. 45]

2. What is included and excluded from capital asset?

3. What is transfer of capital asset?

4. Capital Gains – How computed? [Sec. 48]

5. What is the full value of consideration? [Sec. 48]

6. How to find out expenditure on transfer?

7. What is cost of acquisition?

8. What is cost of improvement?

9. How to convert cost of acquisition/improvement into indexed cost of acquisition/improvement?

10. Capital gain in special cases – How to find out?

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1. What is the basis of charge? [Sec. 45]

Any gain arising from the transfer of a capital asset during a previous year is chargeable to tax under the head “Capital gains” in the immediately following assessment year, if it is not eligible for exemption under sections 54, 54B, 54D, 54EC, 54F, 54G, 54GA and 54GB†. In other words, capital gain’s tax liability arises only when the following conditions are satisfied :

Condition 1	There should be a capital asset.	See para 2.
Condition 2	The capital asset is transferred by the assessee.	For meaning of transfer, see para 3.
Condition 3	Such transfer takes place during the previous year.	See para 3.2.
Condition 4	Any profit or gains arises as a result of transfer.	For computation of capital gain, see para 4.
Condition 5	Such profit or gains is not exempt from tax under sections 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA and 54GB.	See para 103.

If the aforesaid conditions are satisfied, then capital gain is taxable in the assessment year relevant to the previous year in which the capital asset is transferred.

However, in a few cases different rules are applicable. These cases are narrated briefly in para 10.

2. What is included in and excluded from capital asset?

“Capital asset” is defined by section 2(14).

1. Positive list – “Capital asset” means property of any kind, whether fixed or circulating, movable or immovable, tangible or intangible. Besides, it includes the following –

• • Any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.
  • 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 which has invested in such securities in accordance with the regulations made under the SEBI Act.
  • Any unit-linked insurance plan (ULIP policy) issued on or after February 1, 2021 to which exemption under section 10(10D) does not apply (i.e., if insurance premium payable in any previous year during the term of such policy exceeds Rs. 2.50 lakh).

2. Negative list – The following assets are excluded from the definition of “capital assets” –

• • Stock-in-trade (other than securities referred to in point 3 above).
  • Personal effects (movable assets).
  • Agricultural land in a rural area in India.
  • A few gold bonds and special bearer bonds (this point does not have any practical utility).
  • Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under the Gold Monetisation Scheme, 2015.

 

2.1 Stock-in-trade is not a capital asset

Any stock-in-trade (not being securities held by a Foreign Institutional Investor), consumable stores or raw material held for the purpose of business or profession is not a capital asset. This is because of the fact that any surplus arising on sale or transfer of stock-in-trade, consumable stores or raw material is chargeable to tax as business income under section 28. What shall be included in the term “stock-in-trade” must always be dependent upon the nature of the business of the taxpayer. For instance, if the taxpayer deals in house properties, then such properties are stock-in-trade and, consequently, they are not capital asset. If a dealer in properties transfers his stock-in-trade (i.e., house properties), the resulting profit is business income not capital gains. Conversely, if a doctor transfers a house property, the resulting income is taxable under the head “Capital gains”.

2.2 Personal effects (being movable assets) are not capital assets –

Any movable property (including wearing apparel and furniture) held for personal use of the owner or for the use of any member of his family dependent upon him, is not a “capital asset” for the purpose of income under the head “Capital gains”. However, the following are not “personal effects” (in other words, the following are “capital assets”) even if these are for personal use—jewellery, archaeological collections, drawings, paintings, sculptures, or any work of art.

2.3 Agricultural land situated in rural area is not a capital asset

Agricultural land in India in a rural area† is not capital asset.

2.4 Short-term/long-term capital assets

“Short-term capital asset” means a capital asset held by an assessee for not more than 36 months, immediately prior to its date of transfer. In other words, if a capital asset is held by an assessee for more than 36 months, then it is known as “long-term capital asset”.

• • When such period is taken as 12 months/ 24 months – If a capital asset is transferred after 36 months, it is known as long-term capital asset. However, in the following cases a capital asset becomes long-term capital asset if it is transferred after 12 months or 24 months –

Category A – Period of holding more than 12 months (if transfer takes place after July 10, 2014) –

1. Equity or preference shares in a company (listed in a recognised stock exchange in India).

2. Securities (like debentures, bonds, Government securities, derivatives, etc.) listed in a recognised stock exchange in India.

3. Units of UTI (whether quoted or not).

4. Units of an equity oriented mutual fund (whether quoted or not).

5. Zero coupon bonds (whether quoted or not).

Category B – Period of holding more than 24 months–

1. Equity or preference shares in a company (unlisted) (if transfer takes place on or after April 1, 2016).

2. Immovable property (being land or building or both) (if transfer takes place on or after April 1, 2017).

• • How to determine period of holding – Specific rules are provided by the Income-tax Act to determine period of holding of a capital asset in a few cases.
  • Why capital assets are divided in short/long-term assets – The tax incidence under the head “Capital gains” depends upon whether the capital gain is short-term or long-term. Long-term capital gain is generally taxable at a lower rate. If the asset transferred is a short-term capital asset, capital gain will be short-term capital gain. Conversely, long-term capital gain arises on transfer of a long-term capital asset.

1. 

3. What is transfer of capital asset?

Transfer, in relation to a capital asset, includes sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law [sec. 2(47)]‡.

3.1 Certain transactions not included in transfer

For the purpose of section 45, the following transactions are not regarded as transfers (in other words, in the following cases†, there is no capital gain) –

1. 1. Distribution of assets in kind by a company to its shareholders on its liquidation.
   2. Any distribution of capital assets in kind by a Hindu undivided family to its members at the time of total or partial partition.
   3. Any transfer of capital asset under a gift or a will or an irrevocable trust (exception — gift of ESOP* shares is chargeable to tax).
   4. Transfer of capital asset between holding company and its 100 per cent subsidiary company, if the transferee-company is an Indian company.
   5. Transfer of capital asset in the scheme of amalgamation/demerger, if the transferee-company is an Indian company.
   6. Transfer of shares in amalgamating company/demerged company in lieu of allotment of shares in amalgamated company/resulting company in the above case.
   7. Transfer of capital asset in a scheme of amalgamation of a banking company with a banking institution.
   8. Any transfer in a business reorganization, of a capital asset by the predecessor co-operative bank to the successor co-operative bank or the converted banking company.
   9. Transfer of shares in an Indian company held by a foreign company to another foreign company in a scheme of amalgamation/demerger of the two foreign companies, if a few conditions are satisfied.
   10. Transfer of a capital asset by a non-resident of foreign currency convertible bonds or Global Depository Receipts to another non-resident if the transfer is made outside India and if a few conditions are satisfied.
   11. Transfer by an individual of Sovereign Gold Bond (issued by RBI under the Sovereign Gold Bond Scheme, 2015) by way of redemption.
   12. Transfer of any work of art, archaeological, scientific or art collection, book, manuscript, drawing, painting, photograph or print, to the Government or a University or the National Museum, National Art Gallery, National Archives or any other notified public museum or institution.
   13. Any transfer by way of conversion of bonds or debentures, debenture-stock or deposit certificate in any form, of a company into shares or debentures of that company.
   14. Transfer by way of conversion of preference shares of a company into equity shares of that company.
   15. Land transferred by a sick industrial company, if a few conditions are satisfied.
   16. Transfer of a capital asset by a private company/unlisted public company to a limited liability partnership in the case of conversion of company into LLP, if a few conditions are satisfied.
   17. Transfer of capital assets at the time of conversion of a firm/sole proprietary concern in a company, if a few conditions are satisfied.
   18. Any transfer involved in a scheme for lending of any securities, if a few conditions are satisfied.
   19. Any transfer of capital asset in a reverse mortgage.
   20. Transfer of a capital asset (being a Government security carrying periodic payment of interest) made outside India through an intermediary dealing in settlement of securities by a non-resident to another non-resident.
   21. Transfer of a capital asset (being share of a special purpose vehicle) to a business trust in exchange of units allotted by that trust to the transferor.
   22. Any transfer by a unitholder of units held by him in the consolidating scheme of a mutual fund, made in consideration of the allotment to him of units in the consolidated scheme of the mutual fund, if the consolidation is of two or more schemes of equity oriented fund or of two or more schemes of a fund other than equity oriented fund.
   23. Transfer by a unitholder of units held by him in the consolidating plan of a mutual fund scheme, made in consideration of the allotment to him of units, in the consolidated plan of that scheme of the mutual fund.
   24. Transfer by a unitholder of units held by him in the consolidating plan of a mutual fund scheme, made in consideration of the allotment to him of units, in the consolidated plan of that scheme of the mutual fund.
   25. Transfer of capital asset [being bonds/GDR referred to in section 115AC(1) or rupee denominated bond of an Indian company or derivative or notified securities made by a non-resident on a recognised stock exchange located in any international financial services centre and where the consideration is paid/payable in foreign currency.

3.2 Transfer when complete and effective

Generally, capital gain is taxable in the year in which capital asset is transferred. Different rules are applicable in case of movable/immovable assets to find out when a capital asset is “transferred”.

• • Immovable property when documents are registered – Title to immovable assets will not pass till the conveyance deed is executed or registered.
  • Immovable property when documents are not registered – Even if the documents are not registered but the following conditions of section 53A of the Transfer of Property Act are satisfied, ownership in an immovable property is “transferred”—

(a) there should be a contract in writing;

(b) the transferee has paid consideration or is willing to perform his part of the contract; and

(c) the transferee should have taken possession of the property.
When these conditions are satisfied, the transaction will constitute “transfer” for the purpose of capital gains.

• • Movable property – Title to a movable property passes at the time when property is delivered pursuant to a contract to sell.

4. Capital Gains – How computed? [Sec. 48]

Computation of capital gain depends upon the nature of capital asset transferred, viz.,short-term capital asset or long-term capital asset. Capital gain arising on transfer of a short-term capital asset is short-term capital gain, whereas transfer of long-term capital asset generates long-term capital gain. The tax incidence is generally higher in the case of short-term capital gain as compared to long-term capital gain.

The method of computation of short-term and long-term capital gain is as follows :

Computation of short-term capital gain	Computation of long-term capital gain
1. Find out full value of consideration [see para 5]	1. Find out full value of consideration [see para 5]
2. Deduct the following :	2. Deduct the following :
a. expenditure incurred wholly and exclusively in connection with such transfer [see para 6];	a. expenditure incurred wholly and exclusively in connection with such transfer [see para 6];
b. cost of acquisition [see para 7]; and	b. indexed cost of acquisition—see para 9 [in some cases cost of acquisition is deducted — see para 4.1]; and
c. cost of improvement [see para 8].	c. indexed cost of improvement—see para 9 [in some cases cost of improvement is deducted — see para 4.1].
3. From the resulting sum deduct the exemption provided by sections 54B, 54D, 54G and 54GA	3. From the resulting sum deduct the exemption provided by sections 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA and 54GB
4. The balance amount is short-term capital gain.	4. The balance amount is long-term capital gain.

Notes –

1. 1. Securities transaction tax is not deductible while computing income under the head “Capital gains”.
   2. From the assessment year 2021-22, amount chargeable to tax under section 45(4) in the hands of specified entity (which is attributable to the capital asset being transferred by the specified entity) (calculated as per rule 8AB) shall be deducted to compute long-term or short-term capital gains [see para 10.7].

4.1 When the benefit of indexation is not available in the case of long-term capital asset –

In the following cases, the benefit of indexation is not available even if a long-term capital asset is transferred:

Capital assets	Who is the transferor
Bonds or debentures* [other than (a) capital indexed bonds issued by the Government or (b) Sovereign Gold Bond issued by RBI under the Sovereign Gold Bond Scheme, 2015]	Any person
Shares in or debentures of an Indian company acquired by utilizing convertible foreign exchange as mentioned in first proviso to section 48†	Non-resident
Equity share in a company or a unit of equity oriented mutual fund or a unit of a business trust referred to in section 112A [see para 104.2]	Any person
Depreciable asset (other than an asset used by a power generating unit eligible for depreciation on straight line basis)	Any person
Undertaking/division transferred by way of slump sale as covered by section 50B†	Any person
Units purchased in foreign currency as given in section 115AB†	Offshore fund
Global Depository Receipts (GDR) purchased in foreign currency as given in section 115AC†	Non-resident
Global Depository Receipts (GDR) purchased in foreign currency as given in section 115ACA†	Resident individual
Securities as given in section 115AD†	Foreign Institutional Investors [FII]

Note: In the above cases, the provisions relating to indexed cost of acquisition and indexed cost of improvement are not applicable.

4.2 Capital gains exempt from tax

In the cases given below, capital gains are not chargeable to tax by virtue of section 10. Conversely, in the cases given below if assets are transferred at a loss, such capital loss is not taken into consideration.

4.2.1 Capital gain in the case of insurance policy [SEC. 10(10D)]

Amount received under a life insurance policy (including bonus) is exempt from tax except in the cases given below –

1. 1. Any payment under a keyman insurance policy.
   2. Any payment under section 80DD(3) or section 80DDA(3).
   3. Any payment under insurance policy issued during April 1, 2003 to March 31, 2012 where annual insurance premium is more than 20 per cent of capital sum assured.
   4. Any payment under insurance policy issued after March 31, 2012 where annual insurance premium is more than 10 per cent of capital sum assured.
   5. Any payment under insurance policy issued after March 31, 2013 to a person covered under section 80U or 80DDB where annual insurance premium is more than 15 per cent of capital sum assured.
   6. Any payment under unit-linked insurance policy, issued on or after February 1, 2021, if the amount of premium payable for any of the previous year during the term of such policy exceeds Rs. 2,50,000 [fourth proviso to section 10(10D)].

• Other points – The following points are noted –

1. 1. If the premium is payable, by a person, for more than one unit-linked insurance policies, issued on or after February 1, 2021, the exemption under section 10(10D) shall apply only with respect to those unit-linked insurance policies, where the aggregate amount of premium does not exceed Rs. 2,50,000 in any of the previous year during the term of any of those policies [fifth proviso to section 10(10D)].
   2. Amount received on the death of a person in respect of insurance policy is exempt from tax in all cases [except in the case of keyman insurance policy and payment under section 80DD(3) or section 80DDA(3)].

4.2.2 Capital gain on transfer of US64 [Sec. 10(33)]

Any income arising from the transfer of a capital asset being a unit of US 64 is not chargeable to tax where the transfer of such assets takes place on or after April 1, 2002. This rule is applicable whether the capital asset (US64) is long-term capital asset or short-term capital asset.

4.2.3 Long-term Capital gain on transfer of BSE-500 equity shares [Sec. 10(36)]

This exemption is available if the following conditions are satisfied –

1. 1. Capital gain arises on transfer of long-term equity shares (being shares in a BSE-500 Index of the Bombay Stock Exchange, as on March 1, 2003).
   2. These shares were purchased on or after March 1, 2003 but before March 1, 2004.
   3. Capital gain arises on transfer of these shares in a recognized stock exchange.

4.2.4 Capital gain on compulsory acquisition of urban agriculture land[SEC. 10(37)]

Section 10(37) is applicable if the following conditions are satisfied—

1. 1. The assessee is an individual or a Hindu undivided family.
   2. He or it owns an agriculture land situated in urban area mentioned in section 2(14)(iii)(a)/(b).
   3. There is transfer of the agriculture land by way of compulsory acquisition or the consideration for transfer is approved or determined by the Central Government (not by a State Government) or RBI.
   4. The agriculture land was used by the assessee (and/or his parents if the land was owned by an individual) for agricultural purposes during 2 years immediately prior to the date of transfer.
   5. The asset may be long-term capital asset or short-term capital asset.
   6. Capital gain arises from compensation (and/or additional compensation) or consideration which is received by the assessee after March 31, 2004.

• If the above conditions are satisfied, capital gain (short-term or long-term) is exempt from tax.

4.2.5 Capital gain arising under land pooling scheme of andhra pradesh government [sec. 10(37a)]

In Land pooling scheme (of Andhra Pradesh Government), the compensation in the form of reconstituted plot or land is provided to landowners. For this scheme, capital gain exemption is available (from the assessment year 2015-16) under section 10(37A) if the following conditions are satisfied –

1. 1. Taxpayer is an individual/Hindu undivided family.
   2. He/it owns land or building or both on June 2, 2014.
   3. The above land/building is transferred under the Andhra Pradesh Capital City Land Pooling Scheme, 2015.
   4. If the above conditions are satisfied, capital gains arising from following transfer shall not be chargeable to income-tax –

• • • Transfer of capital asset (being land or building or both) under land pooling scheme.
    • Sale of land pooling ownership certificate issued under the above land pooling scheme (such certificate is given to the land owner in lieu of land transferred under the scheme).
    • Sale of reconstituted plot or land by said persons within 2 years from the end of the financial year in which the possession of such plot or land was handed over to the said persons.

4.2.6 Long-term capital gain on transfer of securities in cases covered by securities transaction tax [SEC. 10(38)]

Exemption under section 10(38) is not available from the assessment year 2019-20. Long-term capital gain is taxable according to the provisions of section 112A.

4.2.7 Compensation under section 96 of rfctlarr act, 2013

Capital gain arising out of any award/agreement under Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, is exempt from tax.

4.2.8 Capital gain exemption under section 115JG(1)

Under section 115JG(1) capital gains which arise on conversion of an Indian branch of a foreign bank into an Indian subsidiary, is not chargeable to tax. The exemption is available only if the conversion takes place in accordance with the scheme framed by RBI and subject to the conditions notified by the Central Government.

5. What is the full value of consideration? [Sec. 48]

Full value of consideration is the consideration received or receivable by the transferor in lieu of assets, which he has transferred. Such consideration may be received in cash or in kind. If it is received in kind, then fair market value of such assets is taken as full value of consideration. Full value of consideration does not mean market value of that asset which is transferred.

• • Adequacy of consideration – Adequacy or inadequacy of consideration is not a relevant factor for the purpose of determining full value consideration. However, in the case of transfer of land or building (or both), if stamp duty value is more than 110 per cent of sale consideration, the stamp duty value is taken as full value of consideration.
  • Receipt of consideration – It makes no difference whether (or not) “full value of consideration” is received during the previous year. Even if consideration is not received, capital gain is chargeable to tax in the year of transfer.
  • If consideration is not determinable – Where in the case of a transfer, consideration for the transfer of a capital asset(s) is not determinable, then for the purpose of computing capital gains, the fair market value of the asset shall be taken to be the full market value of consideration [sec. 50D].

6. How to find out expenditure on transfer?

Expenditure incurred wholly and exclusively in connection with transfer of capital asset is deductible from full value of consideration. The expression “expenditure incurred wholly and exclusively in connection with such transfer” means expenditure incurred which is necessary to effect the transfer.

Examples of such expenses are: brokerage or commission paid for securing a purchaser, cost of stamp, registration fees borne by the vendor, travelling expenses incurred in connection with transfer, litigation expenditure for claiming enhancement of compensation awarded in the case of compulsory acquisition of assets.

7. What is cost of acquisition?

Cost of acquisition of an asset is the value for which it was acquired by the assessee. Expenses of capital nature for completing or acquiring the title to the property are includible in the cost of acquisition. Interest on money borrowed to purchase asset is part of actual cost of asset.

The amount paid for discharge of a mortgage is part of “cost of acquisition”, if the mortgage was not created by the transferor. For instance, on June 1, 2017, X took a loan of Rs. 5 lakh by mortgaging his house property. X could not repay the loan during his lifetime and after his death on July 2, 2019, the property (with mortgage) is transferred to Mrs X. Mrs X transfers the property on May 2, 2021 and before transfer, a sum of Rs. 7.2 lakh is paid to clear the mortgage. Rs. 7.2 lakh will be deductible as part of cost of acquisition of the property while calculating capital gains in the hands of Mrs X. If, however, loan is taken by Mrs X, then repayment of loan will not be deductible as part of cost of acquisition of the property while calculating capital gains in the hands of Mrs X.

8. What is cost of improvement?

Cost of improvement is capital expenditure incurred by an assessee in making any additions/improvement to the capital asset. It also includes any expenditure incurred to protect or complete the title to the capital assets or to cure such title. Any expenditure incurred to increase the value of the capital asset is treated as cost of improvement.

• Improvement cost incurred before April 1, 2001 – Cost of improvement incurred before April 1, 2001 is never taken into consideration. This rule does not have any exception.

9. How to convert cost of acquisition/improvement into indexed cost of acquisition/improvement?

Indexed cost of acquisition is calculated as follows –

	Cost of acquisition	×	Cost inflation index for the year in which the asset is transferred
	Cost inflation index (CII) for the year in which asset was first held by the assessee* or 2001-02, whichever is later

*or the previous owner in cases specified under section 49(1) [see para 10.1].

• Indexed cost of improvement is calculated as follows –

	Cost of improvement	×	Cost inflation index for the year in which the asset is transferred
	CII for the year in which improvement took place

• Cost inflation index for different previous years –

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

10. Capital gain in special cases – How to find out?

In the following cases, the method of computation is different from what is discussed in the above paras –

10.1 Cost to the previous owner [Sec 49(1)]

If a person has acquired a capital asset in the circumstances specified under section 49(1), then to calculate capital gain at the time of transfer of such asset cost to the previous owner is taken as cost of acquisition. This rule is always applicable and does not have any exception. Circumstances specified by section 49(1) are as follows–

(a) acquisition of property on any distribution of assets on the total or partial partition of a Hindu undivided family;

(b) acquisition of property under a gift or will;

(c) acquisition of property—

i. by succession, inheritance or devolution, or

ii. 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 before April 1, 1987, or

iii. on any distribution of assets on the liquidation of a company, or

iv. under a transfer to a revocable or an irrevocable trust, or

v. by a wholly-owned Indian subsidiary company from its holding company, or

vi. by an Indian holding company from its wholly-owned subsidiary company, or

vii. under a scheme of amalgamation, or

viii. under a scheme of demerger; or

ix. under a scheme of conversion of private company/unlisted company into LLP; or

x. on any transfer in the case of conversion of firm/sole-proprietary concern into company; or

xi. on any transfer, in relocation, of a capital asset by the original fund to the resulting fund which comes under section 47(viiac)/(viiad); or

xii. on any transfer which comes under section 47(viiae)/(viiaf); or

(d) acquisition of property, by a Hindu undivided family where one of its members has converted his self-acquired property into joint family property after December 31, 1969.

• Other points – The following points should be duly considered —

1. 1. No option- If a capital asset was acquired in any one of the modes given above, then cost to the previous owner shall be taken as “cost of acquisition” for the purpose of calculating capital gain at the time of its transfer. There is no option in this regard.
   2. Last previous owner- Where the previous owner has acquired the property in the aforesaid manner, the previous owner of the property means the last previous owner who had acquired the property by means other than those discussed above. Cost of any improvement of the asset borne by the previous owner, or the assessee, will be added to such cost.

1. 3. Period of holding of previous owner – In order to find out whether the capital asset is short-term or long-term in the above cases, the period of holding of the previous owner shall be taken into consideration.
   4. Indexation – The benefit of indexation will be available from the year in which the asset was first held by the previous owner*.

10.2 Cost of acquisition being the fair market value as on April 1, 2001

In the following cases, the assessee may take at his option, either actual cost or the fair market value of the asset as on April 1, 2001 as cost of acquisition :

1. 1. where the capital asset became the property of the assessee before April 1, 2001; or
   2. where the capital asset became the property of the assessee by any mode referred to in section 49(1) and the capital asset became the property of the previous owner before April 1, 2001.

• The following points should be duly considered —

1. 1. In the case of land and building, fair market value on April 1, 2001 cannot exceed stamp duty value (wherever available) of such assets on April 1, 2001.
   2. 2. Adopting fair market value on April 1, 2001 (in place of actual cost of acquisition) is optional. An assessee may (or may not) opt for it.
   3. The option is available only when an asset was acquired by the assessee [or by the previous owner in case section 49(1) is applicable] before April 1, 2001.
   4. When option is available, the cost of the asset or fair market value as on April 1, 2001, whichever is higher, is taken as the cost of acquisition.
   5. The option is not available in the case of depreciable assets.
   6. Further option is not available in respect of transfer of a capital asset being goodwill of a business or profession; trade mark/brand name associated with a business; right to manufacture, produce or process any article or thing; right to carry on business/profession; tenancy right; route permits or loom hours (whether self generated or otherwise).

10.3 Capital gain in the case of transfer of depreciable assets [Sec. 50]

The following rules† are applicable –

• Capital gain arises only in two cases – If a depreciable asset is transferred, capital gain (or loss) will arise only in the following two cases –

1. 1. When on the last day of the previous year written down value of the block of assets is zero [sec. 50(1)].
   2. When the block of assets is empty on the last day of the previous year [sec. 50(2)].
      In no other case capital gain is chargeable to tax, when a depreciable asset is transferred. This rule is equally applicable whether depreciation is allowed in the current year (or any of earlier years).

• Cost of acquisition – In the above two cases, cost of acquisition shall be the aggregate of the following–

Step 1	Find out written down value of block of assets at the beginning of the previous year††.
Step 2	Add Actual cost‡ of any asset(s) falling within that block of asset acquired by the assessee during the previous year (whether put to use or not).

• Always short-term – On transfer of depreciable assets gain (or loss) is always short-term capital gain (or loss). It can never be treated as long-term capital gain (or loss).

10.4 When advance money was forfeited earlier [Sec. 51]

In the course of negotiations for transfer of a capital asset, the assessee (i.e., transferor) received advance money. Later on the prospective purchaser could not pay the balance consideration and the advance money is retained or forfeited by the assessee or advance money is forfeited by the assessee because of some other reason. The tax treatment of advance money so forfeited or retained by the assessee is as follows –

1. 1. If advance money is forfeited during the previous year 2013-14 (or any earlier previous year) – It is not taxable in the hands of recipient till the capital asset (in respect of which advance money was received and forfeited) is transferred. If capital asset is not transferred during his lifetime, advance money forfeited by him will not be chargeable to tax. Conversely, if the capital asset is transferred during his lifetime, the advance money will 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.
   2. If advance money is forfeited during the previous year 2014-15 (or any subsequent previous year) – It is taxable in the hands of recipient under section 56(2)(ix) under the head “Income from other sources” in the year in which advance money is forfeited. Consequently, it will not be deducted from cost of acquisition when the capital asset is ultimately transferred.

10.5 Conversion of capital asset into stock-in-trade

If capital asset is converted into stock-in-trade during a previous year relevant to the assessment year 1985-86 (or any subsequent year), the following special rules are applicable–

1. 1. It will be assumed that capital asset is transferred in the year in which conversion takes place.
   2. Fair market value of the asset on the date of conversion will be taken as full value of consideration.
   3. However, capital gain will not be taxable in the year of conversion. It will be taxable in the year in which stock-in-trade is transferred.

10.6 Transfer of capital asset by a partner to a firm

A capital asset is transferred by a partner to his partnership firm by way of his capital contribution (or otherwise). It is treated a “transfer” and capital gain will be taxable in the hands of the partner. The amount recorded in the books of account is taken as full value of consideration. This rule is also applicable when a member transfers a capital assets to his association of persons or body of individuals.

10.7 Transfer of capital asset by a firm to its partner [Secs. 9B and 45(4)]

Section 9B has been inserted and section 45(4) has been substituted by the Finance Act, 2021 (with effect from the assessment year 2021-22) to cover cases when money/capital asset/stock-in-trade are given by a firm to a partner at the time of dissolution or reconstitution of the firm.

In order to understand sections 9B and 45(4), a few definitions are relevant (which are given below) –

• • Specified entity – For the purpose of sections 9B and 45(4), specified entity means a firm or other association of persons or body of individuals (not being a company or a co-operative society).
  • Specified person – Specified person means a person who is partner of a firm or member of other association of persons or body of individuals (not being a company or a co-operative society) in any previous year.
  • Reconstitution of specified entity – “Reconstitution of specified entity” means, where

– one or more of its partners (or members) of such specified entity ceases to be partners (or members); or

– one or more new partners (or members) are admitted in such specified entity in such circumstances that one or more of the persons who were partners (or members) of the specified entity, before the change, continue as partner or partners (or member or members) after the change; or

– all the partners (or members) of such specified entity continue with a change in their respective share or in the shares of some of them.

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† Exemption under these sections can be claimed even by an assessee who opts for the alternative tax regime.

†Rural area for the above purpose is any area which is outside the jurisdiction of a municipality or cantonment board having a population of 10,000 or more and also which does not fall within distance (to be measured aerially) given below –

2 kilometers from the local limits of municipality/cantonment board	If the population of the municipality/cantonment board is more than 10,000 but not more than 1 lakh
6 kilometers from the local limits of municipality/cantonment board	If the population of the municipality/cantonment board is more than 1 lakh but not more than 10 lakh
8 kilometers from the local limits of municipality/cantonment  board	If the population of the municipality/cantonment board is more than 10 lakh.

For the above purpose, “population” means the population according to the last preceding census of which the relevant figures have been published before the first day of the previous year.

*In the case of gift of ESOP shares, fair market value on the date of gift is taken as full value of consideration.

†Provisions of sections 46 and 47 are given in brief (keeping in view the requirement of undergraduate/IPC students).

‡ The definition of “transfer” under section 2(47) shall also apply for the purpose of computation of tax under section 115BBH pertaining to income from transfer of any virtual digital asset (whether capital asset or not).

*Preference shares (redeemable or non-redeemable) are not bonds or debentures and indexation benefit is available.

† Exemption under these sections can be claimed even by an assessee who opts for the alternative tax regime.

†In these cases, indexation benefit is not available. No option is given to the taxpayer to opt out of the special provisions of sections 48 (first proviso), 50B, 115AB, 115AC, 115ACA and 115AD and claim indexation benefit.

*The Bombay High Court in CIT v. Manjula J. Shah [2012] 204 Taxman 691 has held that indexed cost of acquisition has to be computed with reference to the year in which the previous owner first held the asset and not the year in which the current assessee became the owner of asset. Practical problems are solved in the book on the basis of this ruling of Bombay High Court.

†These rules are not applicable in the case of transfer of assets by a power generating unit which claims depreciation on straight line basis.

†Where goodwill of a business or profession forms part of a block of asset for the assessment year 2020-21 and depreciation thereon has been obtained by the assessee, the written down value of that block of asset and short-term capital gain, if any, shall be determined as per rule 8AC. For this purpose, reduction of the amount of goodwill of a business/profession, from the block of asset shall be deemed to be transfer.

‡Where an assessee incurs any expenditure for acquisition of any depreciable asset in respect of which a payment (or aggregate of payments made to a person in a day), otherwise than by an account payee cheque/draft or use of electronic clearing system through a bank account (or through prescribed electronic mode#), exceeds Rs. 10,000, such payment shall not be eligible for this purpose.

# As per rule 6ABBA, prescribed modes of electronic payment are : (a) credit card, (b) debit card, (c) net banking, (d) IMPS (Immediate Payment Service), (e) UPI (Unified Payment Interface), (f) RTGS (Real Time Gross Settlement), (g) NEFT (National Electronic Funds Transfer) and (h) BHIM (Bharat Interface for Money) Aadhaar Pay.

Dive Deeper:
Frequently Asked Questions (FAQs) on Capital Gains
Guide to Profits and Gains of Business or Profession under Income Tax Act
What is Advance Tax? How to Calculate and Due Dates of It