CAPITAL GAINS

-Compiled By: Dr Bhupendra Jain

Sec. 45(1) Chargeability

Any profits or gains arising from the transfer of a capital asset effected in the previous
year shall be changed to tax under the head “Capital Gains” in the previous year in which the
transfer took place.
Conditions:
1) there must be a capital asset;
2) the capital assets must have been transferred;
3) there must be profit or gain on such transfer,
4) Such assets should not be exempt u/s 54, 54B, 54D, 54EC, 54ED, 54F, 54G & 54GA.

Sec 2(14) Capital assets

Capital asset means property of any kind held by an assessee, whether or not connected
with his business or profession but does not include:

1) Stock-in-trade
2) Personal effects include only movable property (including wearing appeal and furniture)
Exclusion -
(a) Jewellery,
(b) archaeological collections,
(c) drawing,
(d) paintings,
(e) sculpture,
(f) any art of work.

“Jewellery” includes
a. ornament 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
stone, and whether or notworked or sewn into any wearing apparel;
b. precious or semi-precious stones, whether or not set in any furniture, utensil, other article or
worked sewn into any wearing apparel
Note:
(a) Immovable property in which the assessee resides is not a personal effect even the
assessee uses the immovable property for his personal purpose.

(b) Movable assets used for personal purposes e.g., car, television, fridge, etc. are
personal effects and are not treated as capital assets. Consequently, the gain arising
from the sale of personal effects is not taxable under the head capital gains or under
any other head of income.

3) Rural agricultural land in India i.e., agricultural land in India which is not situated in
any specified area.
As per the definition, only rural agricultural lands in India are excluded from
the purview of the term ‘capital asset’. Hence urban agricultural lands
constitute capital assets. Accordingly, the agricultural land described in (a)
and (b) below, being land situated within the specified urban limits, would fall
within the definition of “capital asset”, and the transfer of such land would
attract capital gains tax -
(a) agricultural land situated in any area within the jurisdiction of a municipality
or cantonment board having a population of not less than ten thousand, or

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 (b) agricultural land situated in any area within such distance, measured
aerially, in relation to the range of population as shown hereunder -

Shortest aerial distance from Population according to the last

the local limits of a preceding census of which the
municipality or cantonment
relevant figures have been published
board referred to in item (a)
before the first day of the
previous year.
(i) ≤ 2 kilometers > 10,000 ≤ 1,00,000
(ii) ≤ 6 kilometers > 1,00,000 ≤ 10,00,000
(iii) ≤ 8 kilometers > 10,00,000

Examples

Are Shortest aerial Population according Is the land

a distance from the to the last preceding situated in this
local limits of a census of which the area a capital
municipality or relevant figures have asset?
cantonment been published
board referred to before the first day of
in item (a) the previous year.

(i) A 1 km 9,000 No
(ii) B 1.5 kms 12,000 Yes
(iii) C 2 kms 11,00,000 Yes
(iv) D 3 kms 80,000 No
(v) E 4 kms 3,00,000 Yes
(v) F 5 kms 12,00,000 Yes
(vi) G 6 kms 8,000 No
(vii) H 7 kms 4,00,000 No
(viii) I 8 kms 10,50,000 Yes
(ix) J 9 kms 15,00,000 No

4) Gold Deposit Bonds.

5) Special Bearer Bonds 1991
6) Specified Gold Bond

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 Type of capital assets: Capital assets are of two types -
1) Short-term capital assets.
2) Long-term capital assets.

Type of capital assets Assets held immediately preceding transfer

➢ Securities (other than unit) listed in -For < 12 months it is short term assets.
recognized stock exchange,
➢ Unit of equity-oriented fund/units of UTI, -For > 12 months it is long term assets
➢ Zero coupon binds
➢ Unlisted shares -For < 24 months it is short term assets.
➢ Land or Building or Both -For > 24 months it is long term assets

Any other assets -For < 36 month it is short-term assets

-For > 36 month it is long term assets.

Sec. 2(47) “Transfer” includes-

a) sale, exchange on relinquishment of a capital assets; or
Relinquishment – surrender his right in favor of another person.
b) extinguishment of any rights therein; or
c) compulsory acquisition of a capital assets; or
d) conversion of a capital assets into stock-in-trade; or
e) the maturity or redemption of a zero-coupon bond; or
f) part-performance of the contract: Sometimes, possession of an immovable property
is given in consideration of part-performance of a contract.
g) Lastly, there are certain types of transactions which have the effect of transferring or
enabling the enjoyment of an immovable property.

Transactions not regarded as transfer (Sec. 46 and 47)

1. distribution of a capital asset in a total or partial partition of a H.U.F. [Sec. 47(i)]

2. transfer of a capital assets by way of gift or will or irrevocable trust. [Sec. 47(iii)]

3. transfer of a capital asset by holding company to its subsidiary company or

vice versa if
(a) entire share capital of holding company hold by the subsidiary company;
(b) the transferee company should be an Indian Company. [Sec. 47(iv) & (v)]

4. ransfer of a capital asset in a scheme of amalgamation, if the amalgamated

company is an Indian Company. [Sec. 47(vi)]

5. any transfer, in a demerger, of a capital asset by the demerged company tothe

resulting company is an Indian company. [Sec. 47(viib)]

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 Section 48 Method of computation
Short Term Capital Gain (STCG) Long Term Capital Gain (LTCG)
Full value of consideration xxx Full value of consideration xxx
Less- Less-
- Cost of acquisition (COA) xxx - Indexed COA xxx
- Cost of improvement (COI) xxx - Indexed COI xxx
- Expenses on transfer xxx - Expenses on transfer xxx
Gross STCG xxx Gross LTCG xxx
Less- Exemption u/s 54B/D/G/GA xxx Less- Exemption u/s 54,
54B/D/EC/ED/F/G/GA xxx
Taxable STCG xxx Taxable LTCG xxx
❖ Full value of consideration: transferor received or accruing as a result of the transfer.
Note- where the consideration is not in money, the value placed by the parties to the
transaction will have to be taken as the consideration.
❖ Expenses on transfers: like advertisement expenses, brokerage, legal expenditure etc.
❖ Cost of acquisition:
Purchase price of the assets
Add: Expenses incurred for completing the title.
❖ Cost of improvement: Any capital expenditure incurred by assessee after the
acquisition of assets.

Q. 1: Mr. Raj purchased a house property purchased on 1st October 2020 for Rs.
5,00,000. On 15th September 2023 Mr. Raj sold such house property for Rs.
12,50,000 and paid 1% brokerage. Compute the capital gain for the assessment
year 2024-25.
In case of LTCG
Cost inflation index: Under section 48, for computation of long-term capital gains, the
cost of acquisition and cost of improvement will be increased by applying the cost inflation
index (CII). Once the cost inflation index is applied to the cost of acquisition and cost of
improvement, it becomes indexed cost of acquisition and indexed cost of improvement.

Indexed cost of acquisition =

COA or FMV as on 1.4.2001 as the case may be Index Factor for the
Index factor for the base year 2001-02 or for the first (X) year of transfer
year in which the assets was held by assessee
Index cost of improvement =
COI incurred only after 1.4.2001 Index Factor for the
Index factor for the year in which (X) year of transfer
Improvement was made to the asset

Cost inflation index (CII) as notified by the Central Government as under:

Financial Year CII Financial Year CII
2001-2002 100 2012-2013 200
2002-2003 105 2013-2014 220
2003-2004 109 2014-2015 240
2004-2005 113 2015-2016 254
2005-2006 117 2016-2017 264
2006-2007 122 2017-2018 272
2007-2008 129 2018-2019 280
2008-2009 137 2019-2020 289
2009-2010 148 2020-2021 301
2010-2011 167 2021-2022 317
2011-2012 184 2022-2023 331
2023-24 348
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 Q.2: X purchased a piece of land on 4.1.2009 for Rs. 5,00,000. This land was sold by him
on 2.9.2023 for Rs. 40,00,000. Expenses on transfer were 2% of the sale price. Compute the
capital gain for the assessment year 2024-25.

Cost of acquisition in different situation

1. Cost of acquisition of assets acquired before 1.4.2001
COA = Actual cost of the assets acquired; or
FMV as on 1-4-2001 (optional)
Note:
1. The option is not available in the case of depreciable assets.
2. When option is available, the cost of the asset or FMV as on 1-04-2001, whichever is
higher, is taken as the cost of acquisition.
3. The option is not available in respect of transfer of a capital asset being goodwill of a
business; trademark, brand name, right to manufacturer, tenancy right, route permits.

Q. 3: X purchased a piece of land on 4.1.1999 for Rs. 3,00,000. This land was sold by him
on 2.9.2023 for Rs. 35,00,000. The market value of the land as on 1.4.2001 was Rs.
4,30,000. Expenses on transfer were 2% of the sale price. Compute the capital gain for the
assessment year 2024-25.
Q. 4: What would be the answer if the land was purchased by X on 1-4-2002 for Rs.
4,50,000.

2. Cost of the previous owner [Sec. 49(1)]: If the assessee has acquired assets by
Certain specified modes such as gift, will, partition, inheritance or succession, amalgamation
etc., then the cost to the previous owner shall be adopted as the cost of acquisition.
Note:
1. Where the previous owner also acquired the property by specified modes, then the cost of
acquisition of the assets shall be the cost to the last of previous owner.
2. In this situation period of holding will be calculated from the date of assets held by first
owner.
3. Indexation:
FMV as on 1.4.2001 or COA to the CII for the year in which
previous owner, X asset is transferred
CII for the year in which year asset
Transferred by specified modes
Q. 5: X acquired the property in the previous year 2006-2007 for Rs. 8,00,000 and paid Rs.
20,000 as registration charges. X died on 1.10.2014 and the property was transferred to his
son Y through inheritance. The market value of the property as on 1.10.2014 is Rs.
8,00,000. Y sold this property on 31.10.2023 for Rs. 69,00,000. Compute the capital gain for
the assessment year 2024-25.

Q. 6: X acquired a land in 1999-2000 for Rs. 2,00,000 and gifted it to his major son on
1.6.2000, when market value of the land was Rs. 2,50,000. The FMV as on 1.4.2001 was
Rs. 3, 00,000.
Y sold the land on 15.9.2023 for Rs. 55,00,000. Compute the capital gain for assessment
year 2024-25, assuming that the expenses on transfer were Rs. 1,00,000.

3. Cost of acquisition of depreciable assets [Sec. 50]:

COA = WDV of the Block of Asset in the beginning of the year
+ Assets acquired during the year
+ Expenses on transfer.
Note: In case of depreciable assets, gain/loss on sale of such assets is always treated as
short term capital gain/loss.
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 4. Cost of acquisition of bonus shares:
Cost of acquisition of bonus shares
➢ If bonus shares acquired before1-4-2001 FMV as on 1-4-2001
➢ If bonus shares acquired after 1-4-2001 Nil

Cost of acquisition in the case of advance money received [Sec. 51]

➢ Any advanced money received is forfeited by the assessee before 01/04/2014,
shall be deducted from -
(a) the cost for which the assets was acquired; or
(b) the FMV as on 1.4.2001; or
(c) the WDV
as the case may be in computing the cost of acquisition.

Note:
1. Amount forfeited before 1.4.2001 is also be deducted as per section 51.
2. Amount forfeited by the previous owner is not be deducted u/s 51.

➢ Any advanced money received is forfeited by the assessee after

01/04/2014: Advance forfeited to be taxed under 56(2)(ix) as Income
from other sources

Cost of Improvement:
➢ Any capital expenditure incurred towards the improvement before 1.4.2001
Ignore such expenditure.
➢ Any capital expenditure incurred towards the improvement after 1.4.2001
➢ Cost of improvement incurred by the assessee and the previous owner

Note: Cost of improvement in relation to goodwill of a business or a right manufacturer,

produce or process any article/thing, is taken to be nil.

Q. 7: X purchases a house property for Rs. 7,00,000 on June 30, 1997. The following
expenses are incurred by him for making addition/ alteration to the house property:
a. Cost of construction of first floor in 1999 – 2,000 Rs. 1,00,000
b. Cost of construction of the second floor in 2004- 2005 Rs. 3,40,000
c. Alteration/reconstruction of the property in 2010 – 2011 Rs. 5,50,000
FMV of the property on April 1, 2001 is Rs. 7,50,000. The house property is sold by X on
June 15, 2023 for Rs. 82,50,000 (expenses on transfer; Rs. 100,000)

Q. 8: X acquired a residential house on 1.9.1998 for Rs. 1, 00,000. He spent Rs. 25,000 on
1.7.1999 for the improvement of this house property. A further amount of Rs. 50,000 was
spent by him on 15.11.2004 on the improvement of the house. X gifted the said property to
his son Y on 12.10.2006. Y also spent Rs. 1,50,000 on 15.07.2007 on improvement of the
house.
Y sold the above house on 30.11.2023 for a sum of Rs. 55,00,000. Expenses on transfer
were 2% of the sale consideration. Compute the capital gain for the assessment year 2024-
25, assuming the FMV as on 1.4.2001 to be Rs. 3,00,000.

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 Computation of Capital Gains in Specific Cases

Capital gain in case of amount received from an insurer on account of damage or

destruction of any capital assets [Section 45(1A)]

Year of Chargeability: Previous year in which money or other asset is received from the
insurance company.
Consideration: The value of money or the fair market value of other assets on the date of
such receipt.
Note: The damage to or destruction of a capital asset referred to in sub section (1A) of sec.
45 may be as a result of –
(a) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or
(b) riot or civil disturbance; or
(c) accidental fire or explosion; or
(d) action by an enemy or action taken in combating an enemy (whether with or without a
declaration of war).

Conversion of Capital Assets into Stock-in-trade [Section 45(2)]

Year of Chargeability: Previous year in which SIT is sold

Consideration: FMV as on the date of conversion

Computation of Capital Gains:

Rs. Rs.
Fair market value on the date of conversion xxx
Less:
(i) Cost or indexed COA of assets xxx
(ii) Cost or indexed COI of assets xxx
(iii) Expenses on transfer xxx xxx
Capital gains (It is taxed in the year; the stock is sold)
Profit (or loss) arising on the sale of stock is chargeable under the head “Profits and
gains of business or profession”. It shall be valued as below:
Taxable business profit = Sale price of SIT (-) Fair market value on the date of
conversion
Q. 9: Mr. B is the owner of a car. On 1-4-2020, he starts a business of purchase and sale of
motor cars. He treats the above car as part of the stock-in-trade of his new business. He sells
the same on 31-3-2022 and gets a profit of 1 lakh. Discuss the tax implication in his hands
under the head “Capital gains”.
Q. 10: Mr. Raj purchased an asset on 1st July 2005 for Rs. 2,00,000. This is assets converted
into stock-in-trade on 15th September, 2020. The fair market value on the date of conversion
was Rs. 7,50,000. Mr. Raj sold stock-in-trade on 25th January, 2023 for Rs. 10,00,000.
Computation capital gain for the assessment year 2023-24.

Q. 11: Mr. A converts his plot of land purchased in July, 2004 for 80,000 into stock-in- trade on
31st March, 2021. The fair market value as on 31.3.2021 was 3,00,000. The stock-in-trade was
sold for 3,25,000 in the month of January, 2023.
Find out the taxable income, if any, and if so under which ‘head of income’ and for which
Assessment Year?

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 Transfer of Capital Assets to a FIRM/AOP/BOI [Section 45(3)]

Year of Chargeability: Previous year in which transfer takes place

Consideration: Value recorded in firm’s/AOP/BOI’s Books of accounts

1. Computation of Capital gains = Consideration on transfer - Cost or indexed

COA including improvements + expenses on transfer
Q. 12: X and Y a partnership firm. Soon after formation of the firm X brings on July 10, 2022,
the following assets on his capital contribution:
Gold Silver
FMV on the date of transfer by X to firm 5,40,000 72,000
Amount recorded in books of account 6,00,000 50,000
Actual cost 30,000 12,000
Year of acquisition 2005-06 2019-20
Rs. 6,50,000 is credited in the capital accounts of X in the firm. Is X chargeable to tax in this
case?
Transfer on distribution of assets on dissolution of FIRM/AOP/BOI [Section 45(4)]

Year of Chargeability: Previous year in which transfer takes place

Consideration: FMV as on date of transfer

Computation of capital gains = Consideration on dissolution (-) Cost or

indexed COA including improvements

Capital gains on Compulsory acquisition of Asset [Section 45(5)]

Year of Chargeability: Previous year in which consideration received.

Consideration: FMV as on date of transfer

➢ First time when original compensation received: It shall be calculated as follows:

Capital gains = Original compensation received for the first time (-) [Expenditure incurred
for such transfer + Cost or indexed cost of acquisition + Cost or indexed cost of
improvements]

➢ In case of enhanced or additional compensation:

Capital gains = Enhanced or additional compensation received – expenses on transfer

Q. 13: X acquired a house for Rs. 2,00,000 in 1999-2000. On his death in October 2005 the
house was acquired by his son Y. The market value of the house as on 1.4.2001 was Rs.
8,00,000. This house was acquired by the Government on 15.3.2019 for Rs. 40,00,000 and
a compensation of Rs. 22,00,000 is paid to him on 25.3.2023 and the balance Rs. 18,00,000
on 15.4.2025. Y filed a suit against the Government challenging the quantum of compensation
and the court ordered for giving additional compensation of Rs. 1,00,000. He incurred
expenditure Rs. 2,000 in connection with the suit. The additional compensation is received
on 14.3.2026. Compute the capital gains chargeable to tax.

Capital gains on Transfer of Goodwill & On Transfer of Tenancy, Rights, Route Permits,
Loom Hours & Right to Manufacturer

1. In the case of self-generated goodwill: COA - Nil.

In such a case, the entire sale price of the goodwill will be the capital gain.

2. In the case of acquired goodwill: COA - purchase price of the goodwill.

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 Computation of capital gains:
= Sale consideration of goodwill (-) COA of goodwill

Note: Capital gains on the transfer of right to manufacture, produce or process any article or
thing, tenancy right, route permits or loom hours shall also be chargeable in the similar
manner.

Exemptions under section 10

Exemption of capital gains on compulsory acquisition of agricultural land situated
within specified urban limits [Section 10(37)]
With a view to mitigate the hardship faced by the farmers whose agricultural land situated in
specified urban limits has been compulsorily acquired, clause (37) of section 10 exempts the
capital gains arising to an individual or a HUF from transfer of agricultural land by way of
compulsory acquisition.
Such exemption is available where the compensation or the enhanced compensation or
consideration, as the case may be, is received on or after 1.4.2004.
The exemption is available only when such land has been used for agricultural purposes
during the preceding two years immediately preceding

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 Exemption of capital gain
Attribute Sec. 54 Sec. 54B Sec. 54D Sec. Sec. 54F Sec. 54G
54EC
Assessee Ind. / HUF Ind. All All Ind/HUF All
Original Long-term Agricultur Land building, Long Long term Machinery,
asset residential al land any rights term capital plant, building
house used for therein being capital asset not or land, used
two yrs. part of asset being in industrial
Preceding industrial residenti al undertaking in
transfer. undertaking house. urban area.
used so for two
yrs.
Preceding
transfer.
New Residentia Purchase Purchase Invest Purchase Incur specified
asset l house agricultura /construct net residential cost upto 1yr.
purchase l land upto land/building/ conside houseupto Before/ 3
upto 1 yr. 2 yrs. any right ra-tion 1 yr. yrs.after
Before or From therein upto 3 in Before/ 2 transfer
2 yr after, transfer yrs. From specifie yrs.
construct transfer d After,
upto 3 yrs. securiti construct
After es upto upro 3 yrs.
transfer 6 mths. After
Fro transfer.
m
trans
fer
Deposit Applicable Applicable Applicable N/A Applicable Applicable
scheme
When is New asset New asset New asset Securiti New asset New asset trfd.
exemptio trfd. trfd. trfd. Within es trfd./ trfd. Within Within3 yrs of
n Within 3 Within 3 3yrs of convert 3 yrs of purchase/
withdraw yrs. of yrs. Of purchase ed into purchas e/ construction/
n purchase/ purchase/ / cons. or money construction acquisition/
cons. or constructi deposit not within 3 or deposit transfer or
deposit on or utilised yrs. not utilised deposit not
not deposit From or other utilised.
utilised not acquisit residenti al
utilised. ion. house
purchas es
up to 2 yrs.
Constructed
upto
3 yrs. From
transfer.

Capital Gain Deposit Scheme: If the new asset is not acquired under section 54, 54B, 54D,
54F and 54F or full amount could not be invested up to the due date of furnishing the return of
income, the assessee can deposit the desired amount under the capital gain scheme on or
before the due date of return and thus can acquire the asset with in the stipulated time out of
money withdrawn from such scheme at the letter date.
NOTE:
1. Where the LTCG exceed Rs 2 crore than assessee can purchase/construct only one
house property.
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 Where the LTCG not exceed Rs 2 crore than assessee can purchase/construct two house
property.
2. Capital Gain Account Scheme: The capital in excess of Rs. 10 crore would not be taken
into account for the purpose of the deposit in CGAS.
3. The maximum exemption can be claimed u/s 54 is Rs. !0 crore.

Q. 14: Mr. B owns a residential house, which was purchased by him in 1976 for Rs. 60,000.
The fair market value of the house as on 1-4-2001 was Rs. 15,70,000. He sells this house
on 16-7-2023 for a consideration of Rs. 92,00,000. The brokerage and other expenses on
the transfer were Rs. 82,000. The due date of furnishing the return of income is 31-7-2024.
Compute the capital gain for the assessment year 2024-25 if:
(a) He invests Rs. 18,00,000 for the purchase of a new house on 14-5-2023
(b) He deposited Rs. 24,30,000 in the Capital Gains Accounts Scheme on 15-7-2024 and a
further sum of Rs.15,50,000 on 01-8-2024.

Q. 15: Mr. Cee purchased a residential house on July 20, 2020 for Rs.10,00,000
and made some additions to the house incurring Rs.2,00,000 in August 2021. He
sold the house property in April 2023 for Rs.20,00,000. Out of the sale proceeds, he
spent Rs.5,00,000 to purchase another house property in September 2023.
What is the amount of capital gains taxable in the hands of Mr. Cee for the A.Y. 2024-
25?

Q. 16: Mr Raj had purchased certain agricultural land in a specified area 2004-2005 for
Rs. 10,00,000. The land was being used for agricultural purposes by him. This land is
sold by him on 2-9-2023 for Rs. 65,00,000. He spent Rs. 30,50,000 for acquiring urban
agricultural land on 21-10-2023 and deposited Rs. 10,00,000 under the Capital Gains
Accounts Scheme on 15-4-2024.
Compute the taxable capital gains for the assessment year 2024-25.

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