Capital Gains Tax in India – Computation & Exemptions

Capital Gain refers to the profit you earn when you sell or transfer a capital asset for a price higher than its original purchase cost. Common examples of capital assets include real estate, shares, mutual fund units, gold, and other valuable possessions. The difference between the selling price and the initial purchase price of these assets (minus any allowable expenses) is your capital gain.

Table of Contents

1. Basis of Charge
2. Meaning of “Capital Asset”
3. Transfer
4. Computation of Capital Gain
5. Computation of Capital Gains in Special Cases
6. Exemption Under Sections 54 to 54GB

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1. Basis of Charge

Income under the head “Capital gains” is chargeable to tax if the following conditions are satisfied –

1. There is a capital asset.
2. It is transferred during the previous year.
3. Capital gain is generated because of transfer.
4. Capital gain is not exempt from tax.

2. Meaning of “Capital Asset”

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

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

1. 1. Any rights in, or in relation to, an Indian company, including rights of management or control or any other rights whatsoever.
   2. Property of any kind held by an assessee (whether or not connected with his business or profession).
   3. Any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the SEBI Act.
   4. 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).

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

1. 1. Stock-in-trade.
   2. Personal effects.
   3. Agricultural land in a rural area in India.
   4. A few gold bonds and special bearer bonds (this point does not have any practical utility).
   5. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under the Gold Monetisation Scheme, 2015.

2.1 Personal Effects

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.

2.2 Agricultural Land in a Rural Areas in India

It should not be situated in Area A and Area B.

Area A – Any area within the jurisdiction of a municipality or a cantonment board having a population of 10,000 or more.

Area B – 2 kilometres (to be measured aerially) from the local limits of municipality/cantonment board (if population is above 10,000 but not more than 1 lakh) [it is 6 kilometres (if population is above 1 lakh but not more than 10 lakh) or it is 8 kilometres (if population is above 10 lakh)

2.3 Types of Capital Assets

There are two categories of capital assets: short-term and long-term. Effective July 23, 2024, a holding period of more than 24 months is required for an asset to be classified as a long-term capital asset. However, the holding period is reduced to 12 months for the following assets (to become long-term capital assets) –

• Securities¹ (i.e., shares, debentures and bonds) listed on a recognized stock exchange in India.
• Units of an equity-oriented mutual fund, whether listed or unlisted.
• Units of a debt-oriented mutual fund listed on a recognized stock exchange in India.
• Zero coupon bonds, whether listed or unlisted.

3. Transfer

Capital gains arises on transfer of a capital asset. If the asset transferred is not a capital asset, no capital gains will arise. Transfer includes sale, exchange or relinquishment of the asset; or the extinguishment of any rights therein; or the compulsory acquisition thereof under any law^1a. However, the following are not treated as “transfer” (in other words, in the following cases, there is no capital) –

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 a capital asset by an individual/HUF 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 a capital asset, being conversion of gold into Electronic Gold Receipt issued by a Vault Manager, or conversion of Electronic Gold Receipt into gold.
13. 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.
14. 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.
15. Transfer by way of conversion of preference shares of a company into equity shares of that company.
16. Land transferred by a sick industrial company, if a few conditions are satisfied.
17. 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.
18. Transfer of capital assets at the time of conversion of a firm/sole proprietary concern in a company, if a few conditions are satisfied.
19. Any transfer involved in a scheme for lending of any securities, if a few conditions are satisfied.
20. Any transfer of capital asset in a reverse mortgage.
21. 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.
22. 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.
23. 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.
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, made outside India, of a capital asset being rupee denominated bond of an Indian company issued outside India, by a non-resident to another non-resident.
26. 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.
27. Transfer of a capital asset (being an interest in a joint venture) held by a public sector company, in exchange of shares of a company incorporated outside India by the Government of a foreign State, in accordance with the laws of that foreign State.

4. Computation of Capital Gain

4.1 Short-term Capital Gain

It arises on transfer of short-term capital asset and it is calculated as follows – Full value of consideration minus cost of acquisition minus cost of improvement minus expenditure pertaining to transfer incurred by the transferor².

4.2 Long-term Capital Gain

It arises on transfer of long-term capital asset and it is calculated as follows – Full value of consideration minus cost of acquisition³ minus cost of improvement3 minus expenditure pertaining to transfer incurred by the transferor².

4.3 Cost of Improvement

It does not include any expenditure on improvement incurred before April 1, 2001⁴.

4.4 Exempt Capital Gains

In the following cases, capital gain is exempt under section 10 –

• Transfer of units of US64.
• Compulsory acquisition of urban agricultural land in India owned by an individual or HUF, if the land was used for agricultural purposes by the owner (or any of his parents) during 2 years immediately prior to acquisition.
• Capital gains which arise on conversion of an Indian branch of a foreign bank into an Indian subsidiary, if the conversion takes place in accordance with the scheme framed by RBI and subject to the conditions notified by the Central Government.
• Capital gain arising out of any award/agreement under Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013.
• Capital gain arising under Land Pooling Scheme of Andhra Pradesh Government pertaining to the following transactions –

1. 1. Transfer of capital asset (being land or building or both) under land pooling scheme.
   2. 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).
   3. 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. Amount received under a life insurance policy (including bonus) which is exempt under section 10(10D).

5. Computation of Capital Gains in Special Cases

Special cases are —

5.1 When Cost of Asset to the Previous Owner is Taken into Consideration

When an assessee acquired capital asset by any mode given in section 49, then at the time of its transfer, cost of acquisition to the previous owner is taken as cost of acquisition.

• Acquisition mode given under section 49 – In the following cases, cost of acquisition of asset to the previous owner is considered –

1. 1. Acquisition of a property by a member at the time of partition of Hindu undivided family.
   2. Acquisition of a property by gift/Will or by succession, inheritance, etc.
   3. Acquiring a capital asset by a holding company from its 100 per cent subsidiary company or vice versa, if the transferee-company is an Indian company.
   4. Acquisition of a property in a scheme of amalgamation, if the transferee-company is an Indian company.
   5. Acquisition of property under a scheme of conversion of private company/unlisted company into LLP.
   6. Acquisition of property under a scheme of conversion of firm/sole-proprietary concern into company.

• To determine whether the asset is short-term or long-term, the period of holding by the previous owner is also considered.

5.2 Fair Market Value on April 1, 2001

If the capital asset was acquired by the assessee (or by the previous owner in the cases given above) before April 1, 2001, the fair market value of the capital asset on April 1,2001 can be taken (at the option of the assessee) as cost of acquisition.

• Special points – The following are special points –

1. 1. This rule is optional. The assessee may or may not adopt the fair market value on April 1, 2001 as cost of acquisition.
   2. 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.
   3. The option is not available in the case of transfer of following capital assets –depreciable assets, goodwill of a business or profession, trade mark/brand name associated with a business, right to manufacture/produce an article, right to carry on business, route permits and loom hours.

5.3 Depreciable Assets

If a depreciable assets is transferred, capital gain (loss) shall be calculated only in two cases –

• when the written down value of the block of assets on the last day of the previous year becomes zero.
• when the block of assets becomes empty on the last day of the previous year. Only in these two cases, capital gain (loss) arises on the transfer of a depreciable asset. Cost of acquisition in such case will be the depreciated value of the block of assets on the first day of the previous year plus actual cost of assets (falling in the same block of assets) acquired at any time during the previous year.

Other points – Capital gain or loss, which arises on transfer of depreciable assets, is always taken as short-term capital gain or loss.

5.4 Forfeiture of Advance Money

At the time of negotiating transfer of a capital asset, the transferor has forfeited any advance money. It is forfeited because the purchaser could not pay the balance consideration within the stipulated period (or it may be forfeited because of any other non-performance). The tax treatment of advance money so forfeited or retained by the assessee is as follows –

• 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.
• 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.

5.5 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. 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.

5.6 Transfer of Capital Assets to a Firm by Way of Capital Contribution by a Partner

It is treated as transfer. The amount recorded in the books of account is taken as full value of consideration.

5.7 Distribution of Capital Asset/Stock-in-trade by a Firm(or AOP/BOI) to a Partner (or Member) in Connection with Dissolution or Reconstitution of Firm/AOP/BOI

It is treated as transfer (by virtue of section 9B). Capital gain is taxable in the hands of the firm. Fair market value of the asset on the date of distribution is taken as full value of consideration.

5.8 Receipt of Money/Capital Asset by a Partner/Member at the Time of Reconstitution of Firm/AOP/BOI

Any profit or gain arising from receipt of such money/capital asset by the partner/member shall be chargeable to tax in the hands of firm/AOP/BOI by virtue of section 45(4).

5.9 Compulsory Acquisition of a Capital Asset

Initial compensation⁵ is taken as full value of consideration. Capital gain is chargeable to tax in the year in which the initial compensation (or part thereof) is first received.

• When additional compensation is received – If a court/Tribunal/authority enhances compensation, it will be taxable in the year in which enhanced compensation or additional compensation is received. For this purpose, cost of acquisition and cost of improvement are taken as nil. However, litigation expenses or incidental expenditure for obtaining additional compensation are deductible.

5.10 Capital Gain on Transfer of Shares/Debentures in the Hands of Non-residents

If a non-resident acquires shares in, or debentures of, an Indian company by utilizing foreign currency, the gain will be calculated in the same foreign currency, which was initially utilized in acquiring shares/debentures. After calculating capital gain in foreign currency, it will be converted into Indian currency. This rule is not optional, it is compulsory.

5.11 Self Generated Assets

5.12 Bonus Shares

To find out whether (or not) bonus shares are long-term capital assets, the period of holding shall be considered from the date of allotment of bonus shares (not original shares). Cost of acquisition of bonus share is generally taken as zero. However, this rule is subject to a few exceptions and cost of acquisition in different situations shall be determined as follows –

5.13 Transfer of Rights Entitlement

Amount realized by an existing shareholder by selling rights entitlement (i.e., right to acquire additional shares in the company at a pre-determined price) is taxable in the year of transfer of the right entitlement. Cost of acquisition of right entitlement is always taken as zero and the capital gain is deemed as short-term capital gain.

5.14 Conversion of Debentures/Bonds into Shares

Conversion is not taken as transfer. Cost of acquisition of debentures/bonds will become cost of acquisition of shares. To find out whether shares are short-term or long-term capital asset, the period of holding shall be counted from the date of allotment of debenture.

5.15 Securities in Demat Form

The cost of acquisition and period of holding any security in demat form shall be determined on the basis of first-in-first-out (FIFO) method.

5.16 Insurance Compensation

It is taxable on the year in which compensation is received. The amount of compensation will be taken as full value of consideration. However, this rule is applicable only when insurance compensation is received because of damage to, or destruction of, any capital asset because of –

• flood typhoon, hurricane, cyclone, earthquake or other convulsion of nature;
• riot or civil disturbance;
• accidental fire or explosion; or
• action by an enemy or action taken in combating an enemy.

If insurance compensation is received in respect of a capital asset because of any other reason, it is not chargeable to tax.

5.17 Transfer of Sweat Equity Shares

If sweat equity shares are allotted during 1999-2000 or on or after April 1, 2009, cost of acquisition is fair market value on the date of exercise of option. If shares are allotted during April 1, 2007 and March 31, 2009, the fair market value on the date of vesting of option, will be cost of acquisition. If shares are allotted before April 1, 2007 (not being during 1999-2000), cost of acquisition will be the amount actually paid by the employee.

5.18 Transfer Under Scheme of Buy-back of Shares

Tax treatment of buy-back of shares (that takes place on or after October 1, 2024) is given below –

• Under section 56(2) under the head “Income from other sources” – Amount received by a shareholder on account of buy-back of shares is treated as dividend under section 2(22)(f). The entire amount (received by a shareholder on account of buy¬back of shares) is taxable under section 56(2) under the head “Income from other sources”. No deduction is allowed.
• Under section 46A – Buy-back of shares is treated as “transfer” under section 2(47). For computation of capital gain, section 46A provides that the value of consideration received by the shareholder shall be deemed to be nil. Consequently, the quantum of cost of acquisition of such shares will become long-term/short-term capital loss which can be adjusted in the hands of shareholders within the parameters of sections 70, 71 and 74.

5.19 Conversion of Stock-in-trade into Capital Asset and Computation of Capital Gain

The fair market value of the inventory as on the date of its conversion into capital asset, shall be chargeable to tax under the head “Profit and gains of business and profession”.

When such capital asset is transferred, cost of acquisition of such capital asset shall be deemed to be the fair market value on the date of conversion. The period of holding of such capital asset shall be reckoned from the date of its conversion.

5.20 Computation of Capital Gain When Tax is Payable Under Section 112A

Cost of acquisition shall be computed in the manner provided by section 55(2)(ac).

5.21 Transfer of Land and Building [Sec. 50C]

Stamp duty value adopted (or assessed or assessable) shall be taken as full value of consideration, if such stamp duty is more than 110 per cent of sale consideration The transferor before the stamp duty authorities can challenge stamp duty valuation. Alternatively, it can be challenged before the Assessing Officer.

5.22 If Consideration Received or Accruing as a Result of Transfer of a Capital Asset is Not Ascertainable or Cannot be Determined

Fair market value of asset on the date of transfer is taken as “full value of consideration”.

5.23 Transfer of Land/Building Under Joint Development Agreement [Sec. 45(5A)]

• If the land/building owner is an individual/HUF and land/building is transferred to a developer under a joint development agreement, capital gain shall be taxable in the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority. The stamp duty value of the share of owner of land/building in the developed property (on the date of issuing of said certificate of completion) as increased by consideration received in cash or by a cheque or draft or by any other mode, shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.

5.24 Transfer of Unlisted Shares in a Company [Sec. 50CA]

If unlisted shares are transferred at less than the fair market value (FMV), the FMV of such shares shall be deemed to be the full value of consideration.

5.25 Unit Linked Insurance Plan (ULIP) [Sec. 45(1B)]

Nothing is taxable if insurance money is received on the death of a person.

5.26 Unit of a Specified Mutual Fund or Market Linked Debenture or Unlisted Debenture [Sec. 50AA]

Specified mutual fund – If the mutual fund has invested more than 65 per cent of its total proceeds in debt or money market instrument (or in a fund which invests 65 per cent or more of its total proceeds in debt/money market instrument) and the assessee has acquired units of such fund on or after April 1, 2023.

Market linked debenture – It means a security (by whatever name called) which has an underlying principal component in the form of a debt security and where the returns are linked to the market returns on other underlying securities or indices. It includes any security classified or regulated as a market-linked debenture by SEBI.

Unlisted debenture – Unlisted bond or unlisted debenture which is transferred or redeemed or matures on or after July 23, 2024, is covered by the provisions of section 50AA.

• How to calculate capital gain – Capital gain shall be calculated as follows –

6. Exemption Under Sections 54 to 54GB¹⁰

Aggregate amount of exemption cannot exceed the quantum of capital gain.

6.1 Exemption Under Section 54

6.2 Exemption Under Section 54B

6.3 Exemption Under Section 54D

6.4 Exemption Under Section 54EC

6.5 Exemption Under Section 54EE

6.6 Exemption Under Section 54F