Income under the head

CHAPTER 7 “Capital gains” and its

computation

A
ny gain arising on the transfer [except such transfers as are given in sections 46
and 47] of a capital asset [sec. 2(14)] is chargeable to tax under section 45, if it is not
eligible for exemption under sections 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA,
54GB and 54H. Incidence of tax on capital gains, however, depends upon whether capital
gain is a short-term capital gain or a long-term capital gain [sec. 2(42A)]. All the provisions
of the Act regulating tax incidence on capital gains are discussed in this chapter. For the
assessment year 2025-26, this book calculates capital gains based on the assumption that
the capital asset is transferred on or after July 23, 2024, unless otherwise specified.

nn WHAT IS THE BASIS OF CHARGE [SEC. 45]

92. 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 54GB1. 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 93.
Condition 2 The capital asset is transferred by the assessee. For meaning of transfer, see para 94.
Condition 3 Such transfer takes place during the previous year. See para 94.2.
Condition 4 Any profit or gains arises as a result of transfer. For computation of capital gain, see para 95.
Condition 5 Such profit or gains is not exempt from tax under sections See para 103.
54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA and 54GB1.
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 101.

nn WHAT IS INCLUDED IN AND EXCLUDED FROM CAPITAL ASSET

93. “Capital asset” is defined by section 2(14).
p 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. 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).
p Negative list - The following assets are excluded from the definition of “capital assets” –

1. Stock-in-trade (other than securities referred to in point 3 above).

2. Personal effects (movable assets).
1. Exemption under these sections can be claimed even by an assessee who pays tax under the alternative tax regime.
311
Para 93 Income under the head ‘Capital gains’ and its computation 312

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.
p 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”.
p 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.
Provisions illustrated
Consider the following cases –
1. X purchased a computer for his personal use at his residence for Rs. 34,000 during 2022-23. He recently sells it for Rs. 44,000.
Personal computer is treated as “personal effects”. Consequently, it is not a capital asset. Surplus of Rs. 10,000 cannot be taxed
under the head “Capital gains”. Since it is capital profit, it cannot be taxed under any other head of income (this income of
Rs. 10,000 will not be chargeable to tax at all). This rule is applicable on transfer of any other movable personal effects (not
being jewellery, archaeological collections, drawings, paintings, sculptures, or any work of art). For instance, on transfer of
personal car, personal garments, personal furniture, personal household goods, nothing is chargeable to tax.
2. Personal jewellery/house property/immovable asset/archaeological collections, drawings, paintings, sculptures or any
work of art are capital assets. Suppose, an individual purchases jewellery/house property/immovable asset/archaeological
collections, drawings, paintings, sculptures or any work of art for his personal use or for the use of his family members.
Although these are purchased for personal purposes, these are not taken as “personal effects” (by default such items are not
taken as personal effects). Consequently, these are capital asset. Any surplus, which arises on transfer of such capital asset,
is taxable under section 45 under the head “Capital gains”.

pAgricultural land situated in rural area is not a capital asset - Agricultural land in India in a rural area2 is not capital
asset.
Provisions illustrated
Consider the following cases –
1. X, a farmer, transfers a piece of agricultural land situated in a village (population : 6,000) in Madhya Pradesh. Since this
agricultural land is situated in a rural area, any surplus on its transfer cannot be taxed under the head “Capital gains”. Nor
can it be taxed under any other head of income. It will be a tax-free income.
2. The above rule is equally applicable if X is not a farmer, but the land which is transferred is used for agricultural purposes
either by X or by any other person authorized by X.
3. If agricultural land is situated in a village which comes within a municipality, then population of the municipality shall
be considered (and not of village). In such a case if population of the municipality exceeds 10,000, then agricultural land is
a capital asset, even if population of the village is less than 10,000.

93.1 Short-term/long-term capital asset - 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 long-
2. 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 If the population of the municipality/cantonment board is more
board than 10,000 but not more than 1 lakh
6 kilometers from the local limits of municipality/cantonment If the population of the municipality/cantonment board is more
board than 1 lakh but not more than 10 lakh
8 kilometers from the local limits of municipality/cantonment If the population of the municipality/cantonment board is more
board 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.
313 Short-term/long-term capital assets Para 93.1

term capital asset. However, the holding period is reduced to 12 months for the following assets (to become long-
term capital assets) –
- Securities2a (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
93.1-1 POSITION PRIOR TO JULY 23, 2024 - Generally, holding period should be more than 36 months to become a long-
term capital asset. However, in a few cases, the period of holding is 24 months/12 months2b.
93.1-2 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.
93.1-3 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.
p In the case of transfer of a depreciable asset (other than an asset used by a power generating unit eligible for

depreciation on straight line basis), capital gain (if any) is taken as short-term capital gain, irrespective of period
of holding.
Problems
93.1-P1 State, giving reason, whether the asset is short-term or long-term in the cases given below —
1. X purchases a house property on March 10, 2023 and transfers it on June 6, 2024.
2. Y purchases listed shares in an Indian company on May 10, 2023 and transfers it on August 6, 2024.
3. Z acquires units of an equity oriental mutual fund on August 7, 2023 and he transfers these units on August 10, 2024.
4. A purchases diamonds on September 12, 2022 and gifts the same to his friend B on December 31, 2022. B transfers the asset on October
20, 2024.
5. C purchases unlisted shares in a company on November 21, 2022; the company transfers shares in the name of C : January 5, 2023).
These shares are transferred by C on December 20, 2024.
Solution :
Taxpayer Asset Minimum period Period of holding Short-term or
to become long- long-term
term capital asset
X House property 24 months + March 10, 2023 to June 6, 2024 (i.e., Short-term
14 months and 27 days)
Y Listed Shares 12 months + 14 months and 27 days Long-term
Z Units of a equity 12 months + 12 months and 3 days Long-term
oriented mutual fund
B Diamonds 24 months + September 12, 2022 to October 20, Long-term
2024
C Unlisted shares 24 months + November 21, 2022 to December 20, Long-term
2024
Notes—
1. If an asset is acquired by gift, will, etc. [i.e., circumstances mentioned under section 49(1)—see para 101.1], then the period
of holding of the previous owner is also taken into consideration.
2. In the case of shares, the purchase date by the broker is taken as the date of acquisition.
93.1-E1 State, giving reasons, whether the asset is short/long-term capital asset in the cases given below —
1. X purchases preference shares in a foreign company on January 20, 2022 which are transferred by him on January 18, 2025. Shares
are not listed on any recognised stock exchange in India.
2. Y purchases debentures of a company on March 10, 2023 which are transferred on January 5, 2025. Debentures are not listed on
any recognised stock exchange in India.

2a. Securities for this purpose include shares, bonds, debentures, debenture stock (or other marketable securities of a like manner), derivatives,
units, Government securities or rights/interests in securities.
2b. 12 months - In the case of securities2a listed in a recognised stock exchange in India, units of UTI (whether listed or not), units of equity oriented
mutual fund (whether listed or not), and zero coupon bonds (whether listed or not).
24 months - Unlisted shares in a company and immovable property.
Para 94 Income under the head ‘Capital gains’ and its computation 314

3. In 2 supra, suppose debentures are listed on the Cochin Stock Exchange with effect from January 1, 2025.
4. Z purchases Government securities on March 6, 2023 which are transferred by Mrs. Z on March 31, 2025 after his death (Z dies
on February 20, 2025).

nn WHAT IS TRANSFER OF CAPITAL ASSET

94. 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.
p For detailed discussion, see problem 106-P1.

94.1 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 cases4, there is no capital gain)—
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 ESOP5-6 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 amalgam-
ated 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, if a few conditions are satisfied.
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
3. 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).
4. Provisions of sections 46 and 47 are given in brief (keeping in view the requirement of undergraduate/IPC students).
5-6. In the case of gift of ESOP shares, fair market value on the date of gift is taken as full value of consideration.
315 Transfer when complete and effective Para 94.2

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.
If the aforesaid conditions are satisfied, then the transaction is not treated as “transfer”.
Problems
94.1-P1 State, giving reasons, whether the capital gain is taxable in the following cases —
1. A house property is purchased by a Hindu undivided family in 1950 for Rs. 40,000. It is given to one of the family members in
2024-25 at the time of partition of the family.
2. Y purchases gold in 1974 for Rs. 10,000. In 2024-25, it is gifted to his son at the time of his marriage.
3. Z purchases 10 convertible debentures in 1987 which are converted into 100 shares in 2024 by the company.
4. A Ltd. is 100 per cent holding company of B Ltd. A Ltd. transfers a capital asset (acquired in 1987 for Rs. 50,000) to B Ltd. on June
16, 2024 for Rs. 2,70,000. B Ltd. is an Indian company, while A Ltd. is a foreign company. The capital asset is transferred as capital asset.
5. Suppose in 4, the capital asset is transferred as stock-in-trade.
Solution :
1. Distribution of a capital asset by a Hindu undivided family to its members at the time of partition is not treated as
“transfer”. As the element of “transfer” is missing, capital gain is not chargeable to tax [see, however, para 101.1].
2. Transfer by way of gift is not treated as “transfer”. Therefore, no capital gain tax liability arises in the case of gift [see,
however, para 101.1].
3. No capital gain tax liability will arise in the case of conversion of bonds into shares as such conversion is not treated as
transfer [see, however, para 101.13].
4. Any transfer between a holding company and 100% subsidiary company is not treated as transfer if the transferee-
company is an Indian company. In this case, therefore, the element of “transfer” is missing, and hence capital gains tax
liability does not arise.
5. The rule stated in 4 supra is not applicable if a capital is transferred as a stock-in-trade. Therefore, in this case, capital gain
is chargeable to tax.
94.1-E1 State, giving reasons, whether the following are treated as “transfer” —
1. X Ltd. is a foreign company. It holds shares in A Ltd., an Indian company. Y Ltd., a foreign company, takes over the business of
X Ltd. in a scheme of amalgamation of X Ltd. and Y Ltd. Shareholders holding 75 per cent shares in X Ltd. become shareholders in
Y Ltd. Consequently, shares in A Ltd. owned by X Ltd. are transferred to Y Ltd. On this transaction, there is no foreign tax liability.
2. At the time of liquidation, capital assets are distributed by a company to its members.
3. X gifts his house property to his daughter-in-law.
4. Y, Finance Head in A Ltd., gets 2,000 equity shares in A Ltd. under ESOP from A Ltd. at a pre-determined price of Rs. 2 per share
(fair market value: Rs. 900 per share). On March 2, 2025, X gifts these shares to his daughter-in-law (fair market value : Rs. 1,200
per share).

94.2 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”.
1. Immovable property when documents are registered - Title to immovable assets will not pass till the conveyance
deed is executed or registered.
2. 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 an agreement to sell (registered);
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.
Para 95 Income under the head ‘Capital gains’ and its computation 316

3. Movable property - Title to a movable property passes at the time when property is delivered pursuant to a
contract to sell. Entries in the books of account are not relevant for determining date of transfer.

Problems
94.2-P1 State, giving reasons, the assessment year for which capital gain is chargeable to tax in the cases given below —
1. X sells a house property to Y as per sale deed dated March 30, 2025. The documents are, however, registered on April 6, 2025.
2. Z sells a house property to A as per agreement to sale dated May 6, 2024. A pays the consideration on the same day. The possession
is given on June 1, 2024. The sale deed is yet to be registered.
3. B sells shares to C on March 1, 2025. Transfer deed is signed on the same day. Share certificates are delivered at the time of signing
the transfer deed. Shares are, however, transferred in the name of C in the records of the company on May 10, 2025.
Solution :
1. In the case of immovable property, ownership is transferred when sale deed is registered. In such a case, “transfer” takes
effect from the date of execution of the sale deed (and not from the date of registration)— CIT v. Ghaziabad Engg. Co. (P.) Ltd.
[2001] 116 Taxman 268 (Delhi). Therefore, in this case transfer takes place during the previous year 2024-25 and,
consequently, capital gain is taxable for the assessment year 2025-26.
2. Even if sale deed is not registered, an immovable property is transferred when the three conditions of section 53A of the
Transfer of Property Act [see para 94.2] are satisfied. The three conditions are satisfied on June 1, 2024. Therefore, capital gain
is taxable for the assessment year 2025-26.
3. When a movable property is delivered pursuant to a contract to sell, the ownership is transferred. In this case, ownership
is transferred on March 1, 2025 and, consequently, capital gain is taxable for the assessment year 2025-26.
94.2-E1 State, giving reasons, the assessment year for which capital gain is chargeable to tax in the cases given below—
1. X sells a house property to Y as per sale deed dated March 1, 2025. The documents are registered on April 1, 2025. As per the
contract, sale consideration is paid on April 1, 2025.
2. Z sells a commercial property to A as per agreement to sell dated March 11, 2025. The possession is given on April 1, 2025 after
receiving the entire consideration on March 31, 2025. The documents are not registered.

nn CAPITAL GAINS - HOW COMPUTED [SEC. 48]

95. 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 96] 1. Find out full value of consideration [see para 96]
2. Deduct the following : 2. Deduct the following :
a. expenditure incurred wholly and exclusively in a. expenditure incurred wholly and exclusively in connec-
connection with such transfer [see para 97]; tion with such transfer [see para 97];
b. cost of acquisition [see para 98]; and b. cost of acquisition7; and
c. cost of improvement [see para 99]. c. cost of improvement7.
3. From the resulting sum deduct the exemption8 pro- 3. From the resulting sum deduct the exemption8 provided by
vided by sections 54B, 54D, 54G and 54GA [see para sections 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA and 54GB
103] [see para 103]
4. The balance amount is short-term capital gain. 4. The balance amount is long-term capital gain.
Notes –
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 101.7 and problem 101.7-P3].
95.1 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.

7. The indexed cost of acquisition and the indexed cost of improvement are deductible if a long-term capital asset is transferred before July 23,
2024. Conversely, if the long-term capital asset is transferred on or after July 23, 2024, the indexation benefit is not available, except for the
one exception mentioned in section 112 [for the exception, see para 104.1-3]. The method for computing the indexed cost of acquisition and
the indexed cost of improvement is discussed in Annex 1 of this chapter.
8. Exemption under these sections can be claimed even by an assessee who pays tax under the alternative tax regime.
317 How to find out expenditure on transfer Para 97

95.1-1 CAPITAL GAIN IN THE CASE OF INSURANCE POLICY [SEC. 10(10D)] - See paras 32.3, 101.24 and 116B.
95.1-2 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.
95.1-3 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. 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.
95.1-4 CAPITAL GAIN ON COMPULSORY ACQUISITION OF URBAN AGRICULTURE LAND [SEC. 10(37)] - Section 10(37) is applicable
if the following conditions are satisfied—
1. 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.
p If the above conditions are satisfied, capital gain (short-term or long-term) is exempt from tax.

95.1-5 CAPITAL GAIN ARISING UNDER LAND POOLING SCHEME OF ANDHRA PRADESH GOVERNMENT [SEC. 10(37A)] - See para
101.23.
95.1-6 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.
95.1-7 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.

nn WHAT IS FULL VALUE OF CONSIDERATION [SEC. 48]

96. 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.
p 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.
p 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.
p 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].

nn HOW TO FIND OUT EXPENDITURE ON TRANSFER

97. 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.
Para 98 Income under the head ‘Capital gains’ and its computation 318

nn WHAT IS COST OF ACQUISITION

98. 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, 2019, 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, 2021, the property (with mortgage) is
transferred to Mrs. X. Mrs. X transfers the property on May 2, 2023 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.
p Cost of acquisition shall not include the deductions claimed on the amount of interest under section 24(b) or

under the provisions of Chapter VI-A.

nn WHAT IS COST OF IMPROVEMENT

99. 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.
p 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.

p Double deduction not possible - Cost of improvement shall not include the deductions claimed on the amount

of interest under section 24(b) or under the provisions of Chapter VI-A.

nn HOW TO CONVERT COST OF ACQUISITION/IMPROVEMENT INTO INDEXED COST OF

ACQUISITION/IMPROVEMENT
100. Indexed cost of acquisition and indexed cost of improvement are deductible if a long-term capital asset is
transferred before July 23, 2024. Conversely, if the long-term capital asset is transferred on or after July 23, 2024,
the indexation benefit is not available, except for the one exception mentioned in section 112 [for the exception,
see para 104.1-3]. The method for computing the indexed cost of acquisition and the indexed cost of improvement
is discussed in Annex 1 of this chapter.

nn CAPITAL GAIN IN SPECIAL CASES - HOW TO FIND OUT

101. In the following cases, the method of computation is different from what is discussed in the above
paras –
101.1 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

*The number given in brackets represents a similar solved Problem No. of another book entitled “Students’ Guide to Income-tax - Problems &
Solutions”, November 2024 edition. This book includes many more solved problems focusing on contemporary issues.
319 Cost of acquisition being fair market value Para 101.2

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;
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.
p Other points - The following points should be duly considered —

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.
Provisions illustrated
X purchases a capital asset in November 2018 for Rs. 40,000. He transfers this asset to his friend Y by gift during December
2023. Y dies during March 2024 and the asset is transferred by his Will to Mrs. Y. Mrs. Y transfers this property during August
2024 for a consideration of Rs. 90,000. To calculate capital gain in the hands of Mrs. Y, cost of acquisition of the capital asset
to X (i.e., Rs. 40,000) will be considered and capital gain will be Rs. 50,000.

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 is available (if transfer takes place before July 23, 2024) from the year in
which the asset was first held by the previous owner9.
101.2 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 :
a. where the capital asset became the property of the assessee before April 1, 2001; or
b. 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.
Provisions illustrated
Suppose X purchases preference shares on April 30, 1990 @ Rs. 40 per share. Fair market value on April 1, 2001 is Rs. 90 per
share. If he sells the shares in 2024-25 at the rate of Rs. 200 per share, he has an option. He can either take the actual cost of
Rs. 40 per share as cost or, fair market value on April 1, 2001, i.e., Rs. 90 per share. As the fair market value on April 1, 2001
is higher, the resulting capital gain will be lower if it is taken as the cost of acquisition.

p The following points should be duly considered —

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. 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.

9. Conversely, if the long-term capital asset is transferred on or after July 23, 2024, the indexation benefit is not available, except for the one
exception mentioned in section 112 [for the exception, see para 104.1-3]. The method for computing the indexed cost of acquisition and the
indexed cost of improvement is discussed in Annex 1 of this chapter.
Para 101.3 Income under the head ‘Capital gains’ and its computation 320

6. Further option is not available in respect of transfer of a capital asset being goodwill of a business; 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).
Problems
101.2-P1 Find out capital gain chargeable to tax in the following cases –
House Silver Diamond
Date of acquisition May 20, 1989 March 10, 1999 May 1, 2003
Date of transfer October 29, 2024 August 10, 2024 August 12, 2024
Rs. Rs. Rs.
Sale consideration 14,00,000 8,00,000 8,10,000
Stamp duty value 16,50,000 – –
Cost of acquisition 95,000 58,000 70,000
Fair market value on April 1, 2001 90,000 60,000 84,000
Cost of construction of first floor (in 1999-00) 18,000 – –
Cost of construction of second floor (in 2014-15) 40,000 – –
Solution :
House Silver Diamond
Whether option of using fair market value on April 1, 2001 is available Yes Yes No
Whether fair market value on April 1, 2001 is more than actual cost of
acquisition and should it be adopted No Yes –
Full value of consideration (stamp duty value is taken in the case of house, as it
exceeds 110% of sale consideration) 16,50,000 8,00,000 8,10,000
Less:
Cost of acquisition 95,000 60,000 70,000
Cost of improvement 40,000 – –
Long-term capital income 15,15,000 7,40,000 7,40,000
Notes—
1. Cost of acquisition of house - Fair market value on April 1, 2001 is less than actual cost of acquisition. It should not be taken
as cost of acquisition. Consequently, cost of acquisition of Rs. 95,000 is taken.
2. Cost of improvement of house - Any cost of improvement which is incurred prior to April 1, 2001 is never taken into
consideration. Cost of improvement incurred during 1999-00 will be ignored.
3. Cost of acquisition of silver- Fair market value on April 1, 2001 is more than actual cost of acquisition. It should be taken as
cost of acquisition. Consequently, cost of acquisition of Rs. 60,000 is taken.
4. Cost of acquisition of diamond - Fair market value on April 1, 2001 cannot be adopted, as diamond was acquired on or after
April 1, 2001.
101.2-E1 X purchases a plot of land on March 1, 1997 for Rs. 45,000. He transfers the plot to his nephew Y on July 20, 2022 for
Rs. 55,00,000. Y transfers the plot on September 6, 2024 for Rs. 61,00,000. Expenditure incurred on transfer by Y is Rs. 10,000.
However, it is reimbursed by the purchaser. The fair market value of the plot on April 1, 2001 was Rs. 2,30,000. Find out the amount
of capital gain chargeable to tax in the hands of Y.

101.3 Capital gain in the case of transfer of depreciable assets [Sec. 50] - The following rules10 are applicable –
p 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. 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).

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