Direct Taxation 6.

INCOME UNDER THE HEAD

CAPITAL GAIN
Profits or gains arising on transfer of a capital asset shall be chargeable under the head “Capital
Gains” [Sec. 45(1)]

TYPES OF CAPITAL ASSET

Type of asset Period for which it is

held before transfer

Equity or preference share; debenture, Government securities in a company 12 months

(listed in India)

A unit of an equity-oriented fund; zero-coupon bond; Units of UTI

(whether quoted or not)

Equity or preference share in an unlisted company 24 months

Immovable property being land or building or both

Any other asset 36 months

Tax point: Any gain on transfer of a depreciable asset shall be short-term capital gain (irrespective of
their period of holding) [Sec. 50].

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 Direct Taxation 6.2

COMPUTATION OF CAPITAL GAINS [Sec. 48]

Short Term Capital Gain (STCG)

At a glance, computation of capital gain of for the Assessment Year ......

Particulars Details Amount

Sale consideration (Full value of consideration 1) ****

Less: Expenses on transfer ****

Net sale consideration ****

Less: i) Cost of acquisition ****

ii) Cost of improvement **** ****

Short Term Capital Gain ****

Less: Deduction u/s 54B, 54D, 54G, etc. (****)

Taxable Short Term Capital Gain *****

Note: No deduction shall be allowed in computing the income chargeable under the head “Capital
gains” in respect of any sum paid on account of securities transaction tax

Fair market value deemed to be full value of consideration in certain cases [Sec. 50D]: Where the
consideration received or accruing as a result of the transfer of a capital asset by an assessee is not
ascertainable or cannot be determined, then the fair market value 2 of the said asset on the date of
transfer shall be deemed to be the full value of the consideration.

COMPUTATION OF LONG TERM CAPITAL GAIN (LTCG)

At a glance, computation of capital gain of for the Assessment Year ...........

Particulars Details Amount

Sale consideration (Full value of consideration) ****

Less: Expenses on transfer ****

1
In case, consideration is receivable in installment in different years, the entire value of the consideration shall be taxable
in the year of transfer.
2
Fair market value means the price that the capital asset would ordinarily fetch on sale in the open market on the relevant
date and where such price is not ascertainable, the price as may be determined in accordance with the rules made under
this Act.

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 Direct Taxation 6.3

Net sale consideration ****

Less: i) Indexed cost of acquisition ****

ii) Indexed cost of improvement **** ****

Long Term Capital Gain ****

Less: Exemption u/s 54, 54B, 54D, 54EC, 54F, etc. ****

Taxable Long Term Capital Gain ****

Note: No deduction shall be allowed in computing the income chargeable under the head “Capital
gains” in respect of any sum paid on account of securities transaction tax.

Cost Inflation Index

Cost Inflation Index for different financial years is as follows:

Financial Year Index Financial Year Index

2001-02 100 2012-13 200

2002-03 105 2013-14 220

2003-04 109 2014-15 240

2004-05 113 2015-16 254

2005-06 117 2016-17 264

2006-07 122 2017-18 272

2007-08 129 2018-19 280

2008-09 137 2019-20 289

2009-10 148 2020-21 301

2010-11 167 2021-22 317

2011-12 184 2022-23 331

2023-24 348 2024-25 363

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 Direct Taxation 6.4

Treatment of assets acquired before 1/4/2001

Cost of If an asset is acquired before 1/4/2001 then its cost of acquisition shall be higher
acquisition of the following:

a) Actual cost of acquisition (ignoring cost of improvement incurred before

1/4/2001); or
b) Fair market value of the asset as on 1/4/2001 [Sec. 55]

Exception: The option is not available in case of -

 Asset on which depreciation is allowed u/s 32(1)(ii);

 Self-generated assets (other than bonus share)

Cost of Any cost of improvement incurred by the assessee or the previous owner before
improvement 1/4/2001 shall not be considered.

Indexation Where an asset is acquired before 1/4/2001, then indexation benefit shall be
available from the year 2001-02.

Illustration 1: On 23rd December, 2024, Rajat sold 500 grams of gold, the sale consideration of which
was Rs. 13,50,000. He had acquired this gold on 20th August, 2000 for Rs. 4,00,000. Fair market value
of 500 grams of gold on 1st April, 2001 was Rs. 3,60,000. Find out the amount of capital gain
chargeable to tax for the assessment year 2025-26.

Solution: Computation of capital gains of Rajat

Particulars Working Amount
Sale consideration
Less: Expenses on transfer
Net Sale consideration
Less: Indexed cost of acquisition
Long term capital gain
1. If an asset is acquired before 1/4/2001 then its cost of acquisition will be higher of the following:
a) Actual cost of acquisition; or b) Fair market value of the asset as on 1/4/2001

Illustration 2: Mr. Anand has purchased a house property as on 17/08/2002 for Rs. 5,00,000. On
1/05/2004, he constructed a new floor on the same house at a cost of Rs. 2,50,000. On 1/10/2024, he
sold such house for Rs. 18,00,000 and incurred brokerage @ 2% for arranging customer. Compute
capital gain.

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 Direct Taxation 6.5

Solution: Computation of capital gain of Mr. Anand for the A.Y. 2024-25
Particulars Working Details Amount
Sale consideration
Less: Expenses on transfer
Net sale consideration
Less: i) Indexed cost of acquisition
ii) Indexed cost of improvement
Long Term Capital Gain

Deemed Cost of Acquisition in certain cases [Section 49(1)]

A. In certain cases (stated below) cost of acquisition of the previous owner of the property shall be
deemed to be the cost of acquisition for the assessee:
a. Assets received on total or partial partition of HUF [Sec. 49(1)(i)].
b. Assets received under a gift or will [Sec. 49(1)(ii)].
c. Assets received by succession, inheritance or devolution [Sec. 49(1)(iii)(a)].
d. Assets received on dissolution of a firm, BOI or AOP [Sec. 49(1)(iii)(b)].
e. Assets received on liquidation of a company [Sec. 49(1)(iii)(c)].
f. Assets received under a trust (whether revocable or irrevocable) [Sec. 49(1)(iii)(d)]
g. Assets received under business reorganization subject to certain conditions [Sec. 49(1)(iii)(e)]
e.g., assets received by a 100% Indian subsidiary company from its holding company or
received by an Indian holding company from its 100% subsidiary company or received by an
amalgamated Indian company from the amalgamating company, asset received on conversion of
a company into LLP, etc.
h. Asset (being a self-acquired property of a member) received by an HUF from its member [Sec.
49(1)(iv)].
- Where cost of acquisition of previous owner is unascertainable, the fair market value of the
asset on the date on which the previous owner had acquired the same shall be deemed to be the
cost of acquisition.
- Period of holding of the previous owner shall be considered for classifying the asset into short
term or long-term capital asset.
- Indexation benefit shall be available from the year when the current owner first held the
property

Illustration 3: Mrs. Parminder has jewellery, being gifted on 1/04/2005 by her brother Jitendar.
Jitendar acquired such asset for Rs. 60,000 as on 1/07/1995. On 1/07/2002, Jitendar has sewn a
diamond worth Rs. 25,000 in such jewellery. On 1/04/2009, Mrs. Parminder incurred polish
expenditure on such jewellery costing Rs. 5,000. As on 1/04/2024, Mrs. Parminder sold such jewellery
for Rs. 12,00,000. Brokerage @ 1% of sale value was paid by her. The fair market value of the
jewellery as on –
1/04/2001 is Rs. 2,00,000; 1/04/2005 is Rs. 5,00,000; and 1/04/2024 is Rs. 7,50,000.

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 Direct Taxation 6.6

Compute capital gain in hands of Mrs. Parminder for the A.Y. 2025-26.

Solution: Computation of capital gain in the hands of Mrs. Parminder

Particulars Working Details Amount
Sale consideration
Less: Expenses on transfer
Net sale consideration
Less: i) Indexed cost of acquisition
ii) Indexed cost of improvement
Long Term Capital Gain
Notes:
1. Fair market value as on 1/04/2005 and 1/04/2024 are irrelevant.
2. Cost of acquisition shall be taken as cost of acquisition in the hands of previous owner or
fair market value as on 1/04/2001, whichever is higher. However, indexation benefit shall
be available from the year in which the assessee acquired the property.
3. Benefit of indexation in case of cost of improvement shall be available when the actual
improvement
expenditure was incurred.
4. Polish expenditure on jewellery does not amount to improvement as such expenditure is
not a capital expenditure and does not increase value of the asset.

Cases where indexation benefit is not available even on transfer of long term capital asset

• Debenture or Bonds: In case of transfer of bonds and debentures other than capital indexed
bonds issued by the Government or Sovereign Gold Bond issued by the RBI under the
Sovereign Gold Bond Scheme, 2015 [Sec. 48].
• Slump Sale: Transfer of an undertaking or division in a slump sale [Sec. 50B]. (Discussed later
in this chapter)
• Virtual Digital Asset: Transfer of crypto currency [Sec. 115BBH] (Discussed later in this
chapter)
• Equity shares and equity oriented fund referred to in sec. 112A (Discussed later in this
chapter)
• Certain transactions by a non-resident: In case of a non-resident, capital gain arising on the
transfer of shares in or debentures of an Indian company acquired in foreign currency. It will be
computed as per First Proviso to sec. 48 (discussed later in this chapter). Further, in case of
transaction u/s 115AB, 115AC, etc. index benefit is not available.
• Transfer of Global Depository Receipt: Transfer of Global Depository Receipt purchased in
foreign currency by a resident individual being employee of an Indian Company [Sec. 115ACA]

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 Direct Taxation 6.7

TREATMENT OF ADVANCE MONEY RECEIVED AND FORFEITED [Sec. 51]

Any sum of money received as an advance for transfer of a capital asset shall be taxable as “Income
from Other Sources”, if,—

a. such sum is forfeited; and

b. the negotiations do not result in transfer of such capital asset [Sec. 56(2)(ix)]

TREATMENT OF COMPENSATION PAID BY THE TRANSFEROR

If transferor commits default and transferee receives any compensation (apart from refund of advance
money), then compensation received by the transferee shall be treated as sale consideration against
transfer of (relinquishment of) purchasing right and charged to capital gain.

Tax point: Treatment of compensation paid by the transferor shall be as under -

Nature of asset transferred Right to purchase

Nature of transfer Relinquishment

Cost of acquisition Nil

Sale consideration Amount of compensation

CAPITAL GAIN IN CASE OF INSURANCE CLAIM [Sec. 45(1A)

Any compensation received from an insurance company for the specified damages# is treated as
transfer. Such transfers are liable to capital gain in the year of receipt of compensation.

Specified damages

Damages caused due to -

• Flood, typhoon, hurricane, cyclone, earthquake or other natural calamities; or

• Riot or civil disturbance; or
• Accidental fire or explosion; or
• Action by an enemy and an action taken in combating an enemy (whether with or without a
declaration of war)

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 Direct Taxation 6.8

For computation of capital gain, various terms to be interpreted as under:

If compensation received is
Compensation so received
in cash
Sale consideration Fair Market value (as on date of
If compensation received is receipt) of assets received as
in kind compensation.

Cost of acquisition / Cost of

improvement / Expense on As usual
transfer

Indexation benefit available

(if any) Till year of destruction

Taxable In the year of receipt of compensation

Tax rate As applicable in the year of receipt of compensation

Illustration 4: Lucky has a house property acquired on 18/08/2009 for Rs. 6,00,000. He used the house
for his own residential purpose.
On 18/08/2012 he incurred capital expenditure on re-construction of house Rs. 3,00,000. On
15/05/2023, he brought office goods (inflammable) worth Rs. 1,00,000 at home to be delivered to a
party staying near to his home. At the night of that day accidental fire took place and damaged the
whole house property, furniture worth Rs. 5,00,000 and business stock.
Insurance claim received on 18/08/2023 –
1. for the house Rs. 1,00,000 in cash & a new house allotted to him (fair market value of which is
Rs. 44,00,000 on 18/08/2023);
2. for house-hold furniture Rs. 2,00,000; and
3. for stock Rs. 80,000.
State –

- Tax-treatment under the head Capital gains.

- How shall your answer differ if such compensation is received by the assessee on 15/04/2024.

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 Direct Taxation 6.9

Solution: Computation of capital gain in the hands of Lucky for the A.Y. 2024-25
As the damage occurred due to accidental fire, such case is governed by the provision of sec. 45(1A)
Particulars Workings Details Amount
Sale consideration of house
Less: Expenses on transfer
Net sale consideration
Less: i) Indexed cost of acquisition
ii) Indexed cost of improvement
Long Term Capital Gain
For Furniture: No capital gain liability arises as furniture is a personal asset of the assessee
and hence not a capital asset. Compensation received on loss of furniture shall be treated as
capital receipt and hence not liable to tax.
For Stock: Compensation received on loss of stock shall be liable to tax u/s 28. In the given
case, loss of ₹ 20,000 (₹ 1,00,000 – ₹ 80,000) shall be allowed under the head “Profits &
gains of business or profession”
In case such compensation is received on 15/04/2024 then the capital gain of ₹ 25,67,190 as computed
above shall be taxable in the Assessment year 2025-26.

CAPITAL GAIN ON CONVERSION OF CAPITAL ASSETS INTO STOCK IN TRADE [Sec.

45(2)

Conversion of capital assets into stock in trade shall be treated as transfer u/s 2(47). For computation of
capital gain, various terms to be interpreted are as under:

Sale consideration Fair Market value as on date of such conversion.

Cost of acquisition / Cost of

As usual
improvement / Expenditure on transfer

Indexation benefit available (if any) Till year of conversion

Taxable In the year in which such stock is actually sold

Tax rate As applicable in the year of actual sale of such stock

Treatment of difference of actual sale [Actual sale value - FMV as on date of conversion -
value and Fair market value as on date of Expenditure on transfer] shall be treated as business
conversion Income.

Illustration 5: Ali has 10,000 shares of X (P) Ltd. acquired on 15/05/1981 for ₹ 12 each. On
15/07/1983 he converted 6,000 of such shares into stock in trade. On that date, market value of such
share was ₹ 15 each. On 1/05/2007, he further converted 2,000 of such shares into stock in trade. On
such date, market value of the share was ₹ 30 each. On 17/02/2025, he sold all shares for ₹ 225 each.
Brokerage incurred 2%. State tax treatment. Fair market value of such shares as on 01-04-2001 was ₹
16/-

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 Direct Taxation 6.10

In the given case, shares held by Ali can be divided into three categories –
Category A: 6,000 shares being converted into stock in trade as on 15/07/1983: Sec. 45(2) is applicable
on the conversion effected on or after 1/04/1984. Hence, on conversion of 6,000 shares, sec. 45(2) shall
not be applicable. Hence, on transfer of such asset no capital gain arises.
Category B: 2,000 shares being converted into stock in trade as on 1/05/2007: As per sec. 45(2), such
conversion shall be deemed to be transfer u/s 2(47) and shall be liable to tax in the year of actual sale.
For this purpose, fair market value as on date of conversion (₹ 30 each) shall be treated as sale
consideration and fair market value on 01-04-2001 shall be considered as cost of acquisition. The
difference between actual sale value (₹ 225) and fair market value as on date of conversion (₹ 30 each)
shall be treated as business income.
Category C: 2,000 shares (remaining) held as investments: Transfer of such share shall be liable to
capital gain.
Computation of capital gain in the hands of Ali for the A.Y. 2025-26
Category B Category C
Particulars
Details Amount Details Amount
Sale consideration
Less: Expenses on transfer
Net Sale Consideration
Less: i) Indexed cost of
acquisition
ii) Indexed cost of
improvement
Long Term Capital Gain

Computation of Profits & gains of business or profession in the hands of Ali for the A.Y. 2025-26
Category A Category B
Particulars Details Amount Details Amount
Sale consideration
Less: Expenses on transfer
Net Sale Consideration
Less: Cost of goods sold
Profits & gains of business or
profession
1. Provision of sec. 45(2) shall be applicable from A.Y. 1985-86, since such shares are
converted before A.Y. 1985-86, hence the difference between cost price (₹ 12) and
market price (₹ 15) on the date of such conversion shall neither be liable to capital gain
nor business income. Further cost of goods sold shall be taken as fair market value as on
the date of such conversion i.e. ₹ 15.
2. Fair market value of share on conversion of such asset into stock in trade.

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 Direct Taxation 6.11

Capital Gain on Virtual Digital Assets [Sec. 115BBH r.w.s 2(47A)]

As per sec. 2(47A), virtual digital asset means any information or code or number or token (not being
Indian currency or foreign currency), generated through cryptographic means, providing a digital
representation of value exchanged. It functions as a store of value or a unit of account including its use
in any financial transaction or investment. It can be transferred, stored or traded electronically.

Rate of tax - Any income from the transfer of any virtual digital asset (VDA) shall be taxable @ 30%.

Computation of income on transfer of such assets

While computing such income:

a. Deduction in respect of any expenditure (other than cost of acquisition, if any) or allowance or
set off of any loss shall not be allowed to the assessee.
b. Set off of loss from transfer of the virtual digital asset shall not be allowed against other
income
c. Loss from transfer of the virtual digital asset shall not be allowed to be carried forward to
succeeding assessment years.
d. Index benefit is not allowed.

In nutshell,
Cost of acquisition  Allowed (without index)
Other expenditure (like improvement Not allowed

expenses, expenses on transfer, etc.)
Loss on transfer of VDA  No adjustment with other income
Loss from other activities  No adjustment with income on transfer of VDA
Carry forward of loss on transfer of VDA  Not allowed

Taxpoint: Where VDA has been held as investment, the income on transfer shall be taxable under the
head Capital Gains, however, if VDA has been held for trading purpose, the income may be taxable as
business income. However, in either of the case, computation shall be made as per aforesaid provision
and rate of tax will be 30%.

VALUATION OF CONSIDERATION IN CASE OF LAND OR BUILDING OR BOTH [Sec.

50C]

Conditions

(a) Capital asset being land or building or both is transferred.

(b) Value adopted or assessed or assessable by the stamp valuation authority exceeds 110% of actual
consideration.

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 Direct Taxation 6.12

Tax treatment

Full value of consideration shall be the value adopted or assessed or assessable# by any authority of a
State Government (i.e. Stamp Valuation authority) for the purpose of payment of stamp duty.

# Assessable means the price which the stamp valuation authority would have adopted or assessed, if it
were referred to such authority for the purposes of the payment of stamp duty.

Tax point: Where value adopted or assessed or assessable by the stamp valuation authority does not
exceed 110% of consideration or where such value is less than actual consideration, then actual
consideration shall be considered as full value of consideration.

Illustration 6: Mr. Raj has a self-occupied house property acquired 10 months ago for Rs. 5,00,000. He
sold such property for Rs. 6,00,000 to Rajshree.

Case (a): Stamp duty authority for the purpose of levying stamp duty adopted value of Rs. 6,25,000.

Case (b): Stamp duty authority for the purpose of levying stamp duty adopted value of Rs. 6,75,000.

Compute capital gain on such transfer.

Solution: Computation of capital gain

Particulars Case (a) Case (b)

Sale consideration
- Actual Consideration
- Value adopted for stamp duty
Value adopted for stamp duty (i.e. ₹ 6,25,000) does not exceed
110% of actual consideration (i.e., ₹ 6,60,000 being 110% of ₹
6,00,000)
Value adopted for stamp duty (i.e. ₹ 6,75,000) exceeds 110% of
actual consideration (i.e., ₹ 6,60,000 being 110% of ₹ 6,00,000)
Less: Cost of acquisition
Short Term Capital Gain

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 Direct Taxation 6.13

DEDUCTION FROM CAPITAL GAIN

From capital gain so computed, several deductions are allowed as per provisions of sections 54, 54B,
54D, 54EC, 54EE, 54F, 54G, 54GA and 54GB. Provisions of these sections are discussed as under:

DEDUCTION FROM CAPITAL GAIN ON SALE OF RESIDENTIAL HOUSE PROPERTY

[Sec. 54]

Applicable to Individual or HUF

1. Assessee has transferred a long-term residential house, income of which

is taxable under the head “Income from house property”.
2. Assessee must acquire one new residential house within prescribed time
limit.

Alternate Option

When Available: Where the amount of the capital gain does not exceed Rs. 2
crore.

Option: The assessee may, at his option, purchase or construct two residential
houses in India

Restriction: Where during any assessment year, the assessee has exercised this
option, he shall not be subsequently entitled to exercise the option for the same or
any other assessment year. That means, the option is available once in lifetime of
Conditions
the assessee.

3. The new residential house should be in India.

Tax point:

> Capital asset must be a long term capital asset.

> Property must be a residential house whether let-out or self occupied.

> Income of such property must be taxable u/s 22.

> Land transferred appurtenant to a house property (assessable u/s 22) together
with such house property, also qualifies for deduction u/s 54.

> The new residential house(s) may not be taxable u/s 22. e.g. a new house
acquired for the residence of employees shall be eligible for deduction.

Within a period of 1 year before, or 2 years after, the date of

Time limit for
transfer” Example: If a property is transferred on 17/8/2022,
acquisition of For Purchase
then the new house property may be purchased at any time
new assets
between 17/08/2021 to 17/8/2024.

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 Direct Taxation 6.14

Within a period of 3 years after the date of transfer.

For
Construction Construction may start at any time but must be completed
within stipulated time

Scheme of Applicable [Refer “Capital Gains Account Scheme” given

deposit below].

In case of compulsory acquisition of such capital asset by the Government, the

time limit shall start from receipt of compensation or part thereof.

Minimum of the following:

Deduction • Investment in the new asset(s); or
• Capital gain

If the newly acquired residential house is transferred within 3 years from the
date of acquisition of new assets, then the benefit availed earlier shall be revoked.
Revocation of Such revoked income shall be reduced from cost of acquisition of new asset.
benefit If the amount held in Capital Gains Deposit Account Scheme (1988) is
unutilized, then such amount shall be taxable as long-term capital gain in the
previous year in which the period of 3 years from the date of transfer expires.

Notes

1. Legal title of the house: Holding of legal title is not necessary. It is sufficient that assessee has
made the full (or substantial) payment within the time limit even though the transfer deed has not
been registered and the possession is given after stipulated time.

2. Transfer of part of house: Exemption u/s 54 is available on sale of part of the house if the same is
an independent unit.

3. Treatment of Land: The cost of land is integral part of the residential house.

4. Treatment in hands of legal heir: The benefit of sec. 54 is also available to the legal heir of
deceased assessee provided he fulfills conditions of sec. 54.

Capital Gains Accounts Scheme, 1988

Introduction If the new asset is not acquired till the due date of submission of return of
income#, then the taxpayer will have to deposit the money in “Capital Gains
Deposit Account” with a nationalized bank. The proof of deposit should be
submitted along with the return of income. On the basis of actual
investment and the amount deposited in the deposit account, exemption will

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 Direct Taxation 6.15

be given to the taxpayer.

#. 1Due date of filing of return being 31st October (where audit is required)
& 31st July (in any other case)

Utilisation of The taxpayer is to acquire a new asset by withdrawing from the deposit
amount account.

New asset must be acquired within specified time, provided in the relevant
section.

If deposit amount The unutilized amount will become chargeable to tax in the previous year in
remains unutilized which the specified time limit expires. Chargeable amount shall be -

For sec. 54, 54B, 54D, 54G, 54GA: Unutilised amount

For sec. 54F & 54GB: Unutilised amount * Capital gain

Net sale consideration

Nature of gain It will be taxable as short term or long-term capital gain depending upon the
status of the original capital gain.

Notes:

a. The unutilized amount can be withdrawn by the taxpayer after the expiry of the aforesaid time
limit.
b. The unutilized amount in Capital Gain Account Scheme (1988), in hands of legal heir of deceased
individual, cannot be taxed. [Circular No.743 dated 6/5/1996]

Illustration 7: Mr. Sidhartha has a residential house property taxable u/s 22. Such property is acquired
on 12/08/2005 for Rs. 2,00,000. The property is sold on 1/03/2024 for Rs. 25,00,000. He acquired
another residential house on 31/03/2024 for Rs. 17,00,000 for self-occupation. On 1/03/2025, he sold
such new residential house for Rs. 30,00,000. Compute his capital gain for the A.Y. 2024-25 and 2025-
26.

Solution : Computation of capital gain of Mr. Sidhartha for the A.Y. 2024-25

Particulars Details Amount

Sale consideration
Less: Expenditure on transfer
Net sale consideration
Less: Indexed cost of acquisition
Less: Indexed cost of improvement
Long term capital gain
Less: Exemption u/s 54
Taxable Long term Capital gain

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 Direct Taxation 6.16

Computation of capital gain of Mr. Sidhartha for the A.Y. 2025-26

Particulars Amount Amount
Sale consideration
Less: Expenditure on transfer
Net sale consideration
Less: Cost of acquisition
Less: Earlier exemption claimed u/s 54
Short term capital gain

DEDUCTION FROM CAPITAL GAIN ON ACQUISITION OF CERTAIN BONDS [Sec. 54EC]

Applicable to All assessee

1. Assessee must have transferred any long-term capital asset being land
or building or both.

2. Assessee acquires “long term specified assets”, ie. any bond

redeemable after 5 years, issued by:
Conditions
a) the National Highways Authority of India (NHAI);
b) the Rural Electrification Corporation Ltd.;
c) Power Finance Corporation Limited;
d) Indian Railway Finance Corporation Limited;
e) any other bond being notified by the Central Government

Within 6 months after the date of transfer

In case of compulsory acquisition, time limit starts from the date of

Time limit for receipt of compensation.
acquisition of new
assets In case of conversion of capital asset into stock in trade, the time limit of
6 months for making investments in specified assets should be taken from
the date of actual sale of stock in trade and not from the date when capital
asset is converted into stock. [Circular No.791 dated 2/6/2000]

Minimum of the following:

Amount of Deduction • Investment in the new asset;

• Capital gain; or
• Rs. 50 lakhs

Earlier benefit shall be revoked if such bond is transferred or converted

Revocation of benefit
into money within 5 years of its acquisition or a loan is taken on security
of the new asset within the said period.

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 Direct Taxation 6.17

Treatment of revoked Such revoked income shall be treated as long-term capital gain in the year
income of transfer of new asset.

Scheme of deposit Not applicable

Illustration 8: Ms. Kavita, an individual, sold an agricultural land for 40 lakh on 10.03.2024. The land
is located at 3.6 kms (aerial distance) from the local limits of municipality whose population was
600000 according to the last preceding census. It was acquired by her on 30.06.2014 for 18 lakh.

She also sold a vacant land located in urban area for 75 lakh in June, 2023 and the value of land for
stamp duty purposes was 80 lakh. This vacant land was obtained as gift from her father in May 2013
which was originally acquired by her father in October, 2001 for 12 lakh. The Fair Market Value
(FMV) of the vacant land in May 2013 was 40 lakh.

Kavita deposited 30 lakh in section 54EC bonds on 25.03.2024.

cost inflation index: F.Y. 2001-02 = 100; F.Y.2013-14 = 220; F.Y.2014-15 = 240, F.Y.2023-24 = 348.

Under the Income Tax Act, 1961 compute income from capital gains in the hands of Kavita for the
assessment year 2024-25. She does not opt to be taxed under section 115BAC of the Income Tax Act,
1961. (June 2024)

Solution:

Capital gain in the hands of Kavita for the Asst. Year 2024-25

Rs. Rs.
Sale of urban vacant land:
Sale consideration
Value of land for stamp duty purposes
Since the difference between the sale consideration and value for
stamp duty purposes is less than 10%,
Actual sale consideration to be adopted as deemed sale consideration.
Less: Indexed cost of acquisition

Sale of agricultural land:

Since the land is located within 6 kms from the local limits of
municipality and the population as per the preceding census is more
than 1 lakh but less than 10 lakhs, it is a capital asset liable for capital
gain (loss) upon transfer.
Sale consideration
Less: Indexed cost of acquisition

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 Direct Taxation 6.18

Less: Deduction under section 54 EC

As the investment was made on 25.03.2024 which is more than 6 months from the
date of transfer in respect of urban vacant land, no deduction would be considered
against such longterm capital gain.
However, the agricultural land sold in March, 2024 is eligible for the exemption
limited to the capital gain. Thus, the deposit of Rs.30 lakhs would however entitle
the taxpayer to claim only Rs.13.90 lakhs as deduction.
Long-term capital gain

DEDUCTION FROM CAPITAL GAIN ON TRANSFER OF CAPITAL ASSETS OTHER

THAN RESIDENTIAL HOUSE PROPERTY [SEC. 54F]

Applicable to Individual or HUF

Conditions 1. Assessee must have transferred a long-term capital asset other than
a residential house property.
2. Assessee must acquire one residential house within prescribed
time limit, income of which is taxable u/s 22.
3. Such new house should be situated in India.
4. Assessee does not own more than one residential house property,
income of which is taxable u/s 22 (other than new house), on the
date of transfer.
5. Assessee does not purchase, within 2 years, or construct, within 3
years of transfer of the original asset, any other residential house,
income of which is taxable u/s 22.

Time limit for For Purchase Within a period of 1 year before, or 2 years after, the
acquisition of new date of transfer.
assets
For Within a period of 3 years after the transfer
Construction
Construction may start at any time but must be
completed within stipulated time

Scheme of
Applicable [Refer “Capital Gains Account Scheme”].
deposit

Note: In case of compulsory acquisition the time limit starts from the
date of initial receipt of compensation.

Amount of Deduction Minimum of the following:

• Investment in the new asset x Capital gain

Net Sale consideration#
• Capital gain

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 Direct Taxation 6.19

#Net sale consideration = Sale consideration - Expenditure on

transfer

Revocation of benefit 1. If the newly acquired residential house is transferred within 3

and its treatment years after the date of its acquisition, benefit availed earlier shall be
revoked.

2. If another residential house is purchased (apart from newly

acquired residential house property) by the assessee within 2 years or
constructed within 3 years after the date of transfer of original asset,
benefit availed earlier shall be revoked.

Tax point: The time limit shall be determined from the date of transfer
of original asset even in the case when asset is compulsory acquired by
the Government.

3. If the amount, held in Capital Gains Deposit Account Scheme (1988),

is unutilized, benefit availed earlier shall be revoked.

Treatment of revoked • Revocation due to case 1 & 2 above - Such revoked income
income (exemption) shall be taxable as long-term capital gain in the year
of revocation of condition.
• Revocation due to case 3 above - Chargeable amount shall be –
Unutilised amount for which benefit u/s 54F is availed x Original
capital gain / Net sale consideration

- taxable as long term capital gain of the previous year in which 3 years
from the date of transfer of asset expires.

Illustration 9: Mr. X has sold following assets during the year 2003-24

Items Cost of acquisition Sale consideration Year of acquisition

Land Rs. 10 lacs Rs. 150 lacs 1998-99

Jewellery Rs. 30 lacs Rs. 120 lacs 2008-09

On 31/03/2024, he has purchased a residential house of Rs. 30,00,000 for self occupation as he had no
other house till date. Compute capital gain.

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 Direct Taxation 6.20

Solution : Computation of capital gains in the hands of Mr. X for the A.Y. 2024-25

Particulars Details Land Jewellery

Sale Consideration
Less: Expenses on transfer
Net Sale Consideration
Less: Indexed cost of Acquisition
Less: Indexed cost of Acquisition
Less: Indexed cost of
improvement
Long Term Capital Gain
Less: Exemption u/s 54F
Long Term Capital Gain

Working 1: In the given case assessee can claim benefit u/s 54F, for any of the LTCG (land or jewelry).

A Comparative study is made under to decide from which LTCG such deduction should be claimed –
Particulars Working Land Jewellery
Long Term Capital Gain A
Net sale consideration B
Benefit u/s 54F A/B * ₹ 30,00,000
Since deduction is higher in case of Land hence the deduction u/s 54F is ₹ 23,04,000

EXEMPTION UNDER MORE THAN ONE PROVISION

An assessee can claim exemption under more than one section (from sec. 54 to 54GB) if conditions of
the respective sections are fulfilled. E.g. An assessee deriving long term capital gain on sale of a
residential house can claim benefit u/s 54 by investing a part of the capital gain in acquisition of a new
residential house property and as well as claim benefit u/s 54EC by investing remaining part of the
capital gain in acquisition of specified securities.

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 Direct Taxation 6.21

TAX ON CAPITAL GAIN

TAX ON SHORT TERM CAPITAL GAIN (STCG)

Tax on STCG on transfer of certain assets on which Security transaction tax has been charged
[Sec. 111A]

STCG, in certain cases, shall be taxed @ 15% + surcharge (if applicable) + Health and Education Cess.

Applicable to: All assessee

Conditions to be satisfied

1. Nature of asset: A short-term capital asset, being an equity share in a company or a unit of an
equity oriented fund or a unit of a business trust.

2. Securities transaction tax: Such transaction is chargeable to securities transaction tax.

Tax rate – Such short-term capital gains shall be taxed @ 15% + surcharge + Health and Education
Cess.

Short-term capital gain in any other case: In any other case, short-term capital gain is to be taxed as
per usual rates, as applicable to any other income.

TAX ON LONG TERM CAPITAL GAIN (LTCG) IN CERTAIN CASES [SEC. 112A]

Applicable to: All assessee

Conditions:

(a) The capital gains arise from the transfer of a long-term capital asset being an equity share in a
company or a unit of an equity-oriented fund or a unit of a business trust;

(b) Securities Transaction Tax (STT) has been levied, except in case where transfer has been
undertaken on a recognised stock exchange located in any International Financial Services Centre,
where consideration is received in foreign currency

Treatment: Such long-term capital gain shall be taxable as under:

Case Rate of Taxation

Where such long-term capital gain does not exceed Rs.

100,000 Nil

10% on income exceeding Rs.

Where such long term capital gain exceeds Rs. 1,00,000 1,00,000

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 Direct Taxation 6.22

Tax on Long term capital gain on transfer of unlisted securities by non-resident [Sec.
112(1)(c)(iii)]

Applicable to: Non-resident (not being a company) or a foreign company

Conditions:

a) Long-term capital gains arises on transfer of a capital asset, being unlisted securities or shares of a
company, not being a company in which the public are substantially interested
b) Such gain is computed without giving effect to the First proviso of sec.48 (i.e., provision relating
to computation of capital gain in foreign currency and then reconversion into Indian currency)
c) Such gain is computed without giving effect to the Second proviso of sec.48 (i.e., index benefit)

Treatment

Long term capital gain shall be taxable @ 10% + Surcharge + Health & Education cess

In any other case [Sec. 112(1)]

Long term capital gain is taxed @ 20%3+ Surcharge (if applicable) + Health & Education cess

Deduction under chapter VIA [Sec. 112(2)]: No deduction under chapter VIA (i.e. u/s 80C to 80U) is
available against LTCG.

Option available on capital gains in respect of shares, securities and units [Proviso to Sec. 112]

Applicability

Long-term capital asset being security listed in any recognized stock exchange in India are transferred -

• As per sec. 2(h) of the Securities Contracts (Regulation) Act, 1956, securities include:

(i) Shares, scripts, stocks, bonds, debentures, debenture stock or other marketable securities of a like
nature in or of any incorporated company or other body corporate.

(ii) Government securities.

(iii) Such other instruments as may be declared by the Central Government to be securities.

(iv) Rights or interest in securities.

3
In case long-term capital gain being covered u/s 115AB, 115AC, 115AD or 115E, special rate of tax is
applicable.

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 Direct Taxation 6.23

Treatment

Capital gain may be calculated and assessed in any of the following two options:

Step Option 1 Option 2

1st Find sale consideration Find sale consideration

Deduct expenditure on transfer, cost of

acquisition and cost of improvement.
2nd Deduct expenditure on transfer, indexed
cost of acquisition and indexed cost of Tax point: No indexation benefit shall be
improvement as usual. available.

3rd The balancing amount [i.e., (1) - (2)] is long The balancing amount [i.e., (1) - (2)] is long
term capital gain term capital gain.

4th Such capital gain shall be taxed @ 20% + Such capital gain shall be taxed @ 10% +
surcharge (if any) + education cess. surcharge (if any) + education cess.

Note: Though the tax rate in option 2 is lower, but since no indexation benefit is available, it is difficult
to state which option is better for assessee. However, in the case of transfer of listed debentures and
listed bonds, Option 2 will be better as compared to Option 1, as because in such asset indexation
benefit is not available.

Illustration 10. Mr. Jadu has sold following assets on 31/03/2024:

Assets transferred Cost Acquired on Sold for Expenses on transfer

Land Rs. 4,00,000 19/08/2009 Rs. 15,00,000 Rs. 40,000

Government securities Rs. 10,000 17/07/2006 Rs. 1,00,000 Rs. 5,000

Debentures (listed) Rs. 20,000 17/04/2010 Rs. 1,00,000 Rs. 2,000

Compute his tax liability.

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 Direct Taxation 6.24

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 Direct Taxation 6.25

MCQs:-

1. Capital Gain arises from the transfer of –

(a) any Asset

(b) any Capital

(c) Tangible assets only.

(d) Intangible assets only.

2. Distribution of assets by a Company at the time of liquidation shall be regarded as a transfer and subject
to Capital Gain-

(a) in the hands of the Company

(b) in the hands of the Shareholders

(c) in the hands of both Company as well as Shareholders

(d) neither in the hands of a Company nor in the hands of Shareholders.

3. If share are acquired on conversion of debentures, the cost of acquisition of such share shall be-

(a) Market Value of Shares on the date of conversion

(b) Market Value of the debentures on the date of conversion.

(c) Cost of acquisition of the debentures.

(d) None of above.

4. The cost of acquisition of shares under Employees Stock Option Scheme shall be-

(a) Fair Market Value of Shares on the date of offer

(b) Fair Market Value of the shares on the date of exercise of option

(c) Fair Market Value of share on the date of vesting of option.

(d) Price at which it was offered to the employee.

5. Conversion of Capital Asset into Stock in Trade will result into Capital Gain of the previous year-

(a) in which such conversion took place

(b) in which such converted asset is old or otherwise transferred

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 Direct Taxation 6.26

(c) any of the above

(d) none of the above

6. Where a Partner transfers any Capital Asset into the business of Firm, the sale consideration of such
asset to the Partner shall be-

(a) Market Value of such asset on the date of such transfer

(b) Price at which it was recorded in the books of the firm

(c) Cost of such asset to the Partner

(d) Leas of the above

7. Where the entire block of the depreciable assets is transferred after 36 months, there will be-

(a) Short-Term Capital Gain

(b) Long-Term Capital Gain

(c) Short- Term Capital Gain or Loss

(d) Long- Term Capital Gain or Loss

8. For claiming exemption u/s 54, the assessee should purchase Residential Property with in –

(a) 2 years after the date of transfer

(b) 3 years after the date of transfer

(c) 1 year before or 2 years after the date of transfer

(d) 1 year before & 3 years after the date of transfer.

9. Exemption u/s 54EC shall be available to –

(a) Any Assessee

(b) Individual Only

(c) Individual or HUF

(d) Company Assessee only

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 Direct Taxation 6.27

10. Exemption under Section 54F shall not be allowed if the assessee, on the date of transfer, owns-

(a) any Residential House

(b) a Residential House which is let out

(c) a Hose which is self occupied

(d) more than one Residential House.

11. For claiming exemption u/s 54G, the assessee shall acquired the new asset within-

(a) 2 years from the date of transfer

(b) 3 years from the date of transfer

(c) 1 year before or 2 years after the date of transfer

(d) 1 year before or 3 years after the date of transfer

12. CG arising from compulsory acquisition of urban agricultural land is-

(a) Taxable

(b) Exempt

(c) Exempt if acquired by RBI or Central Government

(d) None of the above

Answer:

1 2 3 4 5 6 7 8 9 10 11 12

b b c b a b c c a d d b

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 Direct Taxation 6.28

KPTR

Capital Asset Any kind of property held by an assessee, whether or not in connection with his
[Section 2(14)] business or profession.

It excludes:

 Stock in trade, consumable stores or raw materials.

 Personal effect (excluding jewelry, archaeological collections, drawings,
paintings, sculptures; or any work of art)
 Agricultural land in rural area
 Gold Bonds or Gold deposit bonds - a) 6.5% Gold Bond, 1977; b) 7% Gold
Bonds, 1980; National Defence Gold Bond, 1980;
 Special Bearer Bond, 1991 issued by the Central Government

Long-term Capital Type of asset Period for which it is

Asset held before transfer

Equity or preference share; debenture, Government securities 12 months

in a company (listed in India)

A unit of an equity-oriented fund; zero-bond; Units of UTI

(whether quoted or not)

Equity or preference share in an unlisted company 24 months

Immovable property being land or building or both

Any other asset 36 months

A capital asset, held for less than above thresholds (before transfer) are held to be a
short-term capital asset

Any gain on transfer of an asset on which depreciation is allowed as per WDV method
u/s 32(1)(ii) shall be taxable as short-term capital gain (irrespective of their period of
holding) [Sec. 50].

Transfer [Sec. 2(47)] a. Sale, Exchange & Relinquishment of the asset;

b. Extinguishment of any right in an asset;
c. Compulsory acquisition of an asset under any law;
d. Conversion of asset into stock-in-trade by the owner;
e. Any transaction which has the effect of transferring or enabling the enjoyment
of any immovable property.
f. Maturity or redemption of a zero coupon bond

Transactions not  Distribution of capital assets in the event of liquidation / partition of a

regarded as transfer company / HUF to its shareholders / members.
(Sec. 46 & 47)  Transfer of a capital asset under a gift or will or an irrevocable trust.
 Transfer of a capital asset by a 100% holding company to its Indian subsidiary
company or vice versa.
 Transfer of a capital asset by the amalgamating company to the amalgamated

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 Direct Taxation 6.29

(Indian) company.
 Any transfer of shares of an Indian company, by the amalgamating foreign
company to the amalgamated foreign company, if -
 At least 25% of the shareholders of the amalgamating foreign company
continue to remain shareholders of the amalgamated foreign company;
and
 Such transfer does not attract tax on capital gains in the country, in which
the amalgamating company is incorporated
 Any transfer, of capital asset by the demerged company to the resulting
(Indian) company.
 Any transfer, of shares held in an Indian company, by the demerged foreign
company to the resulting foreign company, if -
 Not less than three-fourths in value of the shares of the demerged foreign
company continue to remain shareholders of the resulting foreign
company; and
 Such transfer does not attract tax on capital gain in the country, in which
the demerged foreign company is incorporated:
 any transfer in a business reorganisation, of a capital asset by the predecessor
co-operative bank to the successor co-operative bank
 Any transfer of a capital asset, being foreign currency convertible bonds or
Global Depository Receipts referred to in sec. 115AC(1), made outside India
by a non-resident to another non-resident.
 Any 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
 Any transfer of Sovereign Gold Bond issued by the RBI under the Sovereign
Gold Bond Scheme, 2015, by way of redemption, by an assessee being an
individual.
 Any transfer of a capital asset being a work of art, archaeological, scientific or
art collection, book, manuscript, or any such other public museum or
institution as may be notified by the Central Government in the Official
Gazette to be of national importance or to be of renown throughout any State
or States.
 Any transfer by way of conversion of bonds or debentures, debenture-stock or
deposit certificates in any form of a company into shares or debentures of that
company.
 Any transfer of a capital asset by a firm / sole proprietorship to a company as
a result of succession of the firm / sole proprietorship by a company subject to
following conditions:
 All assets and liabilities of the firm / sole proprietorship become the
assets and liabilities of the company.
 All the partners / sole proprietor of the firm / sole proprietorship become
the shareholders of the company in the same proportion.
 The partners / sole proprietor of the firm / sole proprietorship received
only shares in the company; and
 The aggregate of 50% shareholding in the company continues to be held
(for 5 years) by the partners / sole proprietor of the firm / sole

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 Direct Taxation 6.30

proprietorship who held not less than 50% share.

 Any transfer of a capital asset to a company in the course of demutualisation
or corporatisation of a recognized stock exchange
 Any transfer of a membership right of a recognized stock exchange for
acquisition of shares in that recognized stock exchange
 Any transfer by a unit holder of a capital asset, being a unit or units, held by
him in the consolidating scheme of a mutual fund, made in consideration of
the allotment to him of a capital asset, being a unit or units, in the
consolidated scheme of the mutual fund.

Sale consideration Sale value of the asset (in form of money or money’s worth). In case, consideration is
(full value of receivable in installment in different years, the entire value of the consideration shall
consideration) be taxable in the year of transfer.

Fair market value Where the consideration received by an assessee is not ascertainable or cannot be
deemed to be full determined, then, the fair market value of the said asset on the date of transfer shall be
value of deemed to be the full value of the consideration.
consideration in
certain cases [Sec.
50D]

Expenses on transfer Expenditure incurred wholly and exclusively in connection with such transfer such as,
brokerage or commission incurred for securing buyer, cost of stamp and registration
fee by the vendor, traveling expenses, etc. It is reduced from sale consideration to get
net sale consideration.

Cost of Acquisition Expenditure incurred for acquiring the asset or completing the title of the asset
[Sec. 55(2)]
If an asset is acquired before 1/4/2001 then its cost of acquisition shall be higher of the
following:

a) Actual cost of acquisition (ignoring cost of improvement incurred before

1/4/2001); or

b) Fair market value of the asset as on 1/4/2001 [Sec. 55]

Cost of Improvement Expenditure incurred to increase the productive quality of the asset.
[Sec. 55(1)(b)]
Any cost of improvement incurred before 1/4/2001 shall not be considered.

Indexed cost of “Cost of acquisition” adjusted according to the price level of the year of sale.
acquisition
Indexed cost of acquisition = Cost of acquisition x Index of the year of transfer / Index
of the year of acquisition

Indexed cost of “Cost of improvement” adjusted according to the price level of year of sale.
improvement
Indexed cost of improvement = Cost of improvement x Index of the year of transfer /
Index of the year of improvement

Cost Inflation Index Index as the Central Government may, having regard to 75% of average rise in the

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 Direct Taxation 6.31

Consumer Price Index (urban).

Where an asset is acquired before 1/4/2001, then indexation benefit shall be available
from the year 2001-02.

First Proviso To In case of an assessee who is a non-resident, the capital gains arising from the transfer
Section 48 of shares or debentures in an Indian company, shall be computed by converting

(Capital Gains in FV of Consideration (TTBR + TTSR) / 2

Case of Non-
Residents) expenditure incurred in [As on the date of Transfer]
connection with such transfer

cost of acquisition of the (TTBR + TTSR) / 2

asset
[As on the date of Acquisition]

Capital Gain TTBR as on the date of Transfer

The capital gains so computed in the foreign currency shall be reconverted into Indian
currency

Second proviso to 1. This proviso is not applicable where the first proviso applies.
section 48 2. Where the capital gain arises from the transfer of a long-term capital asset, then
[Indexation] for the purposes of computing capital gains, indexation is not to be applied.

Third proviso to First and second provisos shall not apply to the capital gains arising from the transfer
Section 48 [First and of a long-term capital asset being an equity share in a company or a unit of an equity-
Second Provisos to oriented fund or a unit of a business trust referred to in section 112A.
Section 48 Not to
Apply]

Fourth proviso to Second proviso shall not apply to the long term capital gain arising from the transfer
Section 48 [Second of a long-term capital asset, being a bond or debenture other than—
Proviso to Section 48
Not to Apply] (a) capital indexed bonds issued by the Government; or

(b) Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign
Gold Bond Scheme, 2015:

Deemed Cost of In the following cases cost of acquisition of the previous owner of the property shall
Acquisition in be deemed to be the cost of acquisition for the assessee:
certain cases [Section
49(1)] a. Assets received on total or partial partition of HUF [Sec. 49(1)(i)].

b. Assets received under a gift or will [Sec. 49(1)(ii)].

c. Assets received by succession, inheritance or devolution [Sec. 49(1)(iii)(a)].

d. Assets received on dissolution of a firm, BOI or AOP [Sec. 49(1)(iii)(b)].

e. Assets received on liquidation of a company [Sec. 49(1)(iii)(c)].

f. Assets received under a trust (whether revocable or irrevocable) [Sec.

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 Direct Taxation 6.32

49(1)(iii)(d)]

g. Assets received under business reorganization subject to certain conditions

[Sec. 49(1)(iii)(e)] e.g., assets received by a 100% Indian subsidiary company
from its holding company or received by an Indian holding company from its
100% subsidiary company or received by an amalgamated Indian company
from the amalgamating company, asset received on conversion of a company
into LLP, etc.

h. Asset (being a self-acquired property of a member) received by an HUF from

its member [Sec. 49(1)(iv)].

- Where cost of acquisition of previous owner is unascertainable, the fair

market value of the asset on the date on which the previous owner had
acquired the same shall be deemed to be the cost of acquisition.

- Period of holding of the previous owner shall be considered for

classifying the asset into short term or long-term capital asset.

- Indexation benefit shall be available from the year when the current
owner first held the property

Deemed / Notional Case Deemed Sales Consideration

sales consideration in
certain cases Insurance claim received Compensation received [45(1A)]

Conversion of capital assets Fair market value of the asset as on date of such
into stock in trade conversion. [45(2)]

Transfer of capital assets by The amount recorded in books of account of the

a partner/ member to firm/AOP/BOI, as value of such assets. [45(3)]
firm/AOP/BOI as capital
contribution

Transfer of capital assets by Fair market value of the asset as on date of transfer
a firm/ AOP/BOI to [45(4)]
partner/member by way of
distribution on its dissolution

Assets received by Money so received or the market value of other assets

shareholders on liquidation on the date of distribution, as reduced by the amount
assessed as dividend u/s 2(22)(c) [46(2)]

Shares debentures or Market value of the asset as on date of such transfer

warrants transferred by the [Fifth proviso to Sec 48]
employee by way of gift or
under an irrevocable trust.

Transfer in case of land or Value determined for payment of stamp duty (if
building or both consideration declared by the assessee is less) [50C]

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 Direct Taxation 6.33

Advance money Taxable as “Income from Other Sources” [Sec. 56(2)(ix)]

received and
forfeited [sec. 51]

Compensation paid treated as sale consideration against transfer of (relinquishment of) purchasing right
by the transferor to and charged to capital gain
transferee

Insurance claim [Sec. Liable to capital gain in the year of receipt of compensation. Indexation benefit is
45(1A)] available till year of destruction

Capital Gain on Sale consideration Fair Market value as on date of such conversion.
conversion of capital
assets into stock in Indexation benefit available
trade [Sec. 45(2) (if any) Till year of conversion

Taxable In the year in which such stock is actually sold

Tax rate As applicable in the year of actual sale of such stock

Treatment of difference of
[Actual sale value - FMV as on date of conversion -
actual sale value and Fair
Expenditure on transfer] shall be treated as business
market value as on date of
Income.
conversion

Transfer of capital The amount recorded in books of account of the

Sale consideration
assets by a partner / firm/AOP/BOI, as value of such assets.
member to firm /
AOP / BOI as capital Cost of acquisition / Cost of
contribution [sec. improvement / Expenditure As usual
45(3)] on transfer

Taxable In the year of such transfer

Indexation benefit As usual

Capital gain / income Sale consideration Fair market value as on date of transfer
on transfer of capital
asset or stock in Cost of acquisition / Cost of As usual
trade by a improvement / Expenditure
firm/AOP/BOI/ to on transfer and Indexation
partner/member by
Taxable
way of distribution
on its dissolution or
reconstitution [Sec.
9B] In the year of such transfer

Capital gains on Value of Money + Fair market value as on date of

transfer of money or Sale consideration transfer
capital assets by a
firm/AOP/BOI/ to Cost of acquisition / Cost of Partner’s Capital Account as on the date of
improvement / Expenditure

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 Direct Taxation 6.34

partner/member by on transfer and Indexation reconstitution

way of distribution
on its reconstitution Taxable
[Sec. 45(4)] In the year of such transfer

Capital gain on Sale consideration Total compensation or consideration received or

transfer by way of receivable
compulsory
acquisition [Sec. Cost of acquisition / Cost of
As usual
45(5)] improvement

Expenditure on transfer Legal expenditure incurred to recover claim shall be

allowed as deduction.

Taxable In the year when such compensation / consideration

(or part thereof) is first received.

Indexation benefit available Till the year of compulsory acquisition.

Tax treatment of Sale consideration Total enhanced compensation or consideration

enhanced received [See Note].
compensation [Sec.
45(5)(b)] Tax point: Such compensation shall be taxable in the
year of receipt only. If a part installment received
then only part amount shall be taxable and not the
entire amount.

Expenditure on transfer As usual

Litigation expenses for getting the enhanced

compensation are deductible as expenses on transfer
sec. 45(5)(b).

Cost of acquisition / Cost of

improvement Nil

Taxable In the year when such enhanced compensation or

consideration is received.

Nature of gain on enhanced

compensation (whether As in case of initial compensation or consideration.
STCG or LTCG)

Interest on enhanced
compensation (if any) Taxable as “Income from other sources”

Capital gain on joint Sale consideration Stamp duty value on the date of issue of completion
development certificate of his share being land or building or both
agreement [sec. in the project + The consideration received in cash, if
45(5a)] any.

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 Direct Taxation 6.35

Cost of acquisition Proportionate cost of the asset transferred

Available upto the year in which completion

Benefit of indexation certificate is issued

Taxable In the year in which completion certificate for the

whole or part of the project is issued by the competent
authority

Capital gain on Assets are sold in the market sale of assets by the company in market shall be
distribution of assets and sale proceeds distributed treated as transfer and chargeable under the head
by companies in its among shareholders “Capital gains”
liquidation [sec. 46]
Assets are distributed among Nothing shall be charged to tax under the head
shareholders “Capital gains”.

When a shareholder receives money or other assets at the time of liquidation of the
company then such receipts [excluding the amount of dividend u/s 2(22)(c)] shall be
liable to capital gain

Capital gain on buy Amount received by a securityholder from the

back of own Sale consideration company.
securities [sec. 46A]
Cost of acquisition / Cost of
improvement As usual

In the year when such securities are purchased by the

Taxable company.

In case of buy back of shares, any income (or capital gain) in hands of shareholder is
exempt u/s 10(34A). However, company (listed or unlisted) itself is liable to pay
additional tax @ 20% (+SC + Cess) u/s 115QA.

Withdrawal of Where at any time before the expiry of a period of 8 years from the date of the transfer
exemption in case of of the capital asset-
transfer by a holding
company to its 100% a. Such capital asset is converted by the transferee-company into stock in trade; or
subsidiary company b. 100% relationship between holding and subsidiary company ceases to exist.
and vice versa u/s - the exemption shall be withdrawn.
47(iv)/(v) [Sec.
47A(1)]

Withdrawal of On non-fulfillment of such conditions, exemption earlier allowed shall be withdrawn

exemption u/s by virtue of sec. 47A(3)
47(xiii) / 47 (xiiib) /
47(xiv) [sec. 47A(3)]

Capital gain on The cost of shares in amalgamating company shall be

transfer of shares of Cost of shares in deemed to be the cost of shares in amalgamated
amalgamating amalgamated company company.

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 Direct Taxation 6.36

company in lieu of To find whether shares in amalgamated company are

shares of Determination of nature of long-term or short-term capital asset, the period of
amalgamated assets holding shall be calculated from the date when shares
company in case of in the amalgamating company were acquired.
amalgamation [sec.
49(2)] Indexation benefit shall be available from the year in
Indexation benefit which shares of amalgamated company were acquired
by the assessee.

Capital Gain on sale Redemption price, Maturity value or sale proceeds as

of zero coupon bond Sale consideration the case may be.

Cost of acquisition of new

asset As usual

Determination of nature of Long term capital asset if held for more than 12
asset months.

Employee stock Taxed as Salaries when such Difference between the FMV of shares as on the date
option plan (ESOP) assets are received by the of exercise of option and cost at which it is offered to
[sec. 49(2AA)] Employees employee, is treated as taxable perquisite.

Difference between the Sales Consideration and Cost

Taxed as “Capital Gains” of acquisition of such shares (FMV on the date of
when such assets are sold by exercise of option as considered for calculating above
employee perquisite) will be Capital Gains.

Capital gain in case Sale consideration As usual

of bonus share [Sec.
55(2)(aa)(iiia)] Expenditure on transfer As usual

Period of holding Starts from the date of allotment of such share

Nil - If bonus shares are allotted on or after 1/4/2001

FMV on 1/4/2001 - If bonus shares are allotted before

Cost of acquisition 1/4/2001

Capital gain in case Cost of Acquisition Right issue price / Nil

of transfer of right
share and right (Right Share / Right Entitlement resp.)
entitlement [sec.
Period of holding starts from The date of allotment of such shares / The date of
55(2)(aa)]
declaration of such right by the company

(Right Share / Right Entitlement resp.)

Sale consideration Amount charged from transferee / Amount charged

from transferee

(Right Share / Right Entitlement resp.)

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 Direct Taxation 6.37

Capital gain on Sale consideration As usual

transfer of equity
share allotted at the Cost of acquisition of such
time of shares Cost of acquisition of his original membership
corporatisation of a
Cost of Trading or clearing
recognized stock
rights Nil
exchange [sec.
55(2)(ab)] Starts from the date of acquiring the original
Period of holding membership

Available from the year of allotment of such

Benefit of indexation shares/rights

Conversion of Sale consideration As usual

inventory into capital
assets Cost of acquisition Fair Market Value taken as income u/s 28(via)

Period of holding Starts from the date of such conversion or treatment

Available from the year of such conversion or

Benefit of indexation treatment

Capital gain on Particulars Resulting Company Demerged Company

transfer of shares in
demerged company Cost of shares (Cost of acquisition of Cost of acquisition of the
or resulting company Original shares) x (Net original shares
[Sec. 49(2C)/(2D)] book value of assets Less: Cost of shares of
transferred to resulting resulting company
company) / Net worth
of the company
immediately before
such demerger

Period of holding From date of acquisition of original shares in

demerged company (before demerger).

Indexation benefit from the year in which from the year in which
shares in resulting original shares in demerged
company were acquired company were acquired by
by the assessee the assessee.

Capital gains in case Sale consideration As usual

of slump sale [Sec.
50B] Cost of Acquisition or
Improvement Net worth of the undertaking

Indexation Benefit Not available

Nature of gain whether short If undertaking is owned and held by the assessee for
term or long term not more than 36 months, then capital gain shall be
deemed to be short-term capital gain otherwise long-

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 Direct Taxation 6.38

term capital gain. It makes no difference that few of

the assets of the undertaking are newly acquired (i.e.
for less than 36 months).

Valuation of In case the value adopted by the stamp valuation authority exceeds 110% of actual
consideration in case consideration, full value of consideration shall be the value adopted by Stamp
of land or building or Valuation authority.
both [Sec. 50C]

Reference to Value determined by the Valuation Stamp duty value shall be taken as full
Valuation Officer Officer > Stamp duty value value of consideration.

Value determined by the Valuation Value determined by the Valuation

Officer < Stamp duty value Officer shall be taken as full value of
consideration.

Valuation of Where unquoted share, is transferred for a consideration which is less than the fair
consideration in case market value of such share, the fair market value shall be deemed to be the full value
of unquoted shares of consideration.
[Sec. 50CA]

Capital gain in the Sale consideration Actual

case of self-
generated assets Cost of acquisition Nil
[Sec. 55(2)(a)]
Cost of improvement Nil - in case of Goodwill, right to carry on a business
or profession, right to manufacture or process any
article

Actual Cost - in case of Tenancy right, route permits,

loom hours, trade-mark & brand name associated with
the business

Expenditure on transfer Actual

Deduction on sale of Applicable to Individual or HUF

residential house
property [Sec. 54] Transferred Asset Long-term residential house

Purchased Asset 1 residential HP in India. If LTCG is upto 2 Crores,

assessee can acquire 2 residential HPs.

Time period for Purchase Within a period of 1 year before, or 2 years after, the
date of transfer

Time period for Construction Within a period of 3 years after the date of transfer.

Capital Gain Deposit Scheme Applicable

Lock In Period Newly acquired residential house is transferred within

3 years, then the exemption claimed earlier is reduced
from cost of acquisition of new asset.

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 Direct Taxation 6.39

If the amount held in Capital Gains Deposit Scheme is

unutilized, then such amount shall be taxable as long-
term capital gain in the previous year in which the
period of 3 years from the date of transfer expires.

Deduction from Applicable to Individual or HUF

capital gain on
transter of agro land Transferred Asset Long-term / Short term agricultural land used by the
[Sec. 54B] individual or his parents / HUF for agricultural
purposes for at least 2 years, prior to its transfer

Purchased Asset New agricultural land in urban area or rural area

Time period for Purchase Within 2 years after the date of transfer

Capital Gain Deposit Scheme Applicable

Lock In Period Newly acquired residential house is transferred within

3 years, then the exemption claimed earlier is reduced
from cost of acquisition of new asset.

If the amount held in Capital Gains Deposit Scheme is

unutilized, then such amount shall be taxable as long-
term capital gain in the previous year in which the
period of 2 years from the date of transfer expires.

Deduction from Applicable to All assessee

capital gain on
compulsory Transferred Asset LTCA / STCA being land or building used for
acquisition of land industrial purpose by the assessee for at least 2 years
and building forming prior to its transfer.
part of industrial
Purchased Asset Purchase / Construct any other land or building, for
undertaking [SEC.
the purpose of shifting or reestablishing the said
54D]
undertaking

Time period for Purchase / Within 3 years after the date of receipt of
Construction compensation or any part thereof.

Capital Gain Deposit Scheme Applicable

Lock-In-Period If the newly acquired land or building is transferred

within 3 years, then the exemption availed earlier
shall be reduced from cost of acquisition of new asset.

If the amount held in Capital Gains Deposit Scheme is

unutilized, then such amount shall be taxable as long-
term capital gain in the previous year in which the
period of 3 years from the date of receipt of
compensation expires.

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 Direct Taxation 6.40

Deduction from Applicable to All assessee

capital gain on
acquisition of certain Transferred Asset LTCA being land or building or both
bonds [Sec. 54EC]
Purchased Asset Bond redeemable after 5 years, issued by the
prescribed authorities, upto a maximum of Rs. 50
Lakhs

Time period for Purchase Within 6 months after the date of transfer

Capital Gain Deposit Scheme Not Applicable

Lock-In-Period Earlier benefit shall be revoked if such bond is

transferred or converted into money within 5 years of
its acquisition or a loan is taken on security of the new
asset within the said period.

Deduction from Applicable to All assessee

capital gain on
investment in units Transferred Asset LTCA
of a specified fund
Purchased Asset Units, issued before 01-04-2019, of such fund as may
[Sec. 54EE]
be notified by the Central Government upto a
maximum of Rs. 50 Lakhs

Time period for Purchase Within 6 months after the date of transfer

Capital Gain Deposit Scheme Not Applicable

Lock-In-Period Earlier benefit shall be revoked if such unit is

transferred or converted into money within 3 years of
its acquisition or a loan is taken on security of the new
asset within the said period.

Deduction from Applicable to Individual or HUF

capital gain on
transfer of capital Transferred Asset LTCA other than a residential house property.
assets other than
Purchased Asset 1 residential HP in India. Assessee must not own
residential house
more than one residential house property, income of
property [SEC. 54F]
which is taxable u/s 22 (other than new house), on the
date of transfer.

Time period for Purchase Within a period of 1 year before, or 2 years after, the
date of transfer

Time period for Construction Within a period of 3 years after the date of transfer.

Capital Gain Deposit Scheme Applicable

Exemption available Investment in the new asset x Capital gain / Net Sale
consideration

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 Direct Taxation 6.41

Lock In Period If the newly acquired residential house is transferred

within 3 years after the date of its acquisition, benefit
availed earlier shall be revoked.

If another residential house is purchased (apart from

newly acquired residential house property) within 2
years or constructed within 3 years after the date of
transfer of original asset, benefit availed earlier shall
be revoked.

If the amount held in Capital Gains Deposit Scheme is

unutilized, then such amount shall be taxable as long-
term capital gain in the previous year in which the
period of 3 years from the date of transfer expires.

Deduction from Applicable to All assessee

capital gain on
transfer of capital Transferred Asset  A machinery or plant or building or land; or
assets in case of
 Any rights in building or land,
shifting of industrial
undertaking from used for by an industrial undertaking situated in an
urban areas [Sec. urban area and is in the process of shifting of such
54G] industrial undertaking to any rural area.

Purchased Asset  new machinery or plant;

 building or land or constructed building;

 incurred expenses on shifting the original asset

and transferring the establishment of such
undertaking to such area

Time period for Purchase / within a period of 1 year before, or 3 years after, the
Construction date of transfer

Capital Gain Deposit Scheme Applicable

Lock-In-Period If the newly acquired land or building is transferred

within 3 years, then the exemption availed earlier
shall be reduced from cost of acquisition of new asset.

If the amount held in Capital Gains Deposit Scheme is

unutilized, then such amount shall be taxable as long-
term capital gain in the previous year in which the
period of 3 years from the date transfer expires.

Deduction from Applicable to All assessee

capital gain on
transfer of capital Transferred Asset  A machinery or plant or building or land; or

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 Direct Taxation 6.42

assets in case of  Any rights in building or land,

shifting of industrial
undertaking from used by an industrial undertaking situated in an urban
urban areas to special area and is in the process of shifting of such industrial
economic zone [Sec. undertaking to an SEZ (urban or rural area).
54GA]
Purchased Asset  new machinery or plant;

 building or land or constructed building;

incurred expenses on shifting the original asset and

transferring the establishment of such undertaking to
SEZ

Time period for Purchase / within a period of 1 year before, or 3 years after, the
Construction date of transfer

Capital Gain Deposit Scheme Applicable

Lock-In-Period If the newly acquired land or building is transferred

within 3 years, then the exemption availed earlier
shall be reduced from cost of acquisition of new asset.

If the amount held in Capital Gains Deposit Scheme is

unutilized, then such amount shall be taxable as long-
term capital gain in the previous year in which the
period of 3 years from the date transfer expires.

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 Direct Taxation 6.43

Practice Questions

1. Mr. X purchased one house 01-07-2018 10,00,000 and constructed its first floor 01-07-2018 by
incurring 6,00,000 and sold the house on 01-05-2020 70,00,000 and invested 2,00,000 in NSC.
Compute Income and Tax Liability.

Answer: House is sold within 2 years from the date of purchase hence asset is a short term capital
asset and capital gain shall be computed in the manner given below:

Full Value of Consideration 70,00,000.00

Less: - Cost of Acquisition (10,00,000.00)
- Cost of Improvement (6,00,000.00)
- Selling Expenses Nil
Short Term Capital Gain 54,00,000.00
Gross Total Income 54,00,000.00
Less: Deduction u/s 80C (1,50,000.00)
Total Income 52,50,000.00

2. Mr. X purchased one house on 01.07.2002 for 3,50,000. He constructed its first floor on 01.10.2011
by incurring 4,00,000 and constructed its second floor on 01.10.2012 by incurring 6,00,000 and third
floor on 01.10.2014 by incurring 7,00,000. Finally, sold the building on 01.01.2022 for 120,00,000
and selling expenses were 2% of the sale price. He has deposited 1,00,000 in NSC. Compute capital
gain of the assessee for the assessment year 2022-23.

Answer: Computation of Capital Gains

Full value of consideration 120,00,000.00
Less: Indexed cost of acquisition
= 3,50,000 / Index of 02-03 x Index of 21-22
= 3,50,000 / 105 x 317= 10,56,667 (10,56,667.00)

Less: Indexed cost of improvement Cost of constructing first floor

= 4,00,000 / Index of 11-12 x Index of 21-22
= 4,00,000 / 184 x 317 = 6,89,130.43 (6,89,130.43)

Less: Indexed cost of improvement Cost of constructing second floor

= 6,00,000 / Index of 12-13 x Index of 21-22
= 6,00,000 / 200 x 317 = 9,51,000 (9,51,000.00)

Less: Indexed cost of improvement Cost of constructing third floor

= 7,00,000 / Index of 14-15 x Index of 21-22
= 7,00,000 / 240 x 317 = 9,24,583.33 (9,24,583.33)

Less: Selling Expenses

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 Direct Taxation 6.44

= 2% of 120,00,000 = 2,40,000 (2,40,000.00)

Long Term Capital Gain 81,38,619.24
Income under the head Capital Gain (LTCG) 81,38,619.24
Gross Total Income 81,38,619.24
Less: Deduction u/s 80C to 80U Nil
Total Income (Rounded off u/s 288A) 81,38,619.24

3. Mr. X purchased one house property on 01.07.1992 for 3,00,000 and incurred 1,00,000 on its
improvement in 1995-96 and its market value as on 01.04.2001 was 32,00,000 and he incurred
5,00,000 on its improvement in 2012-13 and sold the house on 01.11.2021 for 200,00,000. He
purchased one commercial building on 01.04.2018 for 50,00,000 and it was let out @ 2,00,000 p.m.
to XYZ Ltd. and XYZ Ltd. has deducted tax at source. Mr. X has paid Municipal Tax of 20,000 p.m.
Compute Income for Assessment Year 2022-23.

Answer:
Full value of consideration 200,00,000.00
Less: Indexed Cost of acquisition
= 32,00,000/Index of 01-02 x Index of 21-22
= 32,00,000/100 x 317 = 1,01,44,000 (1,01,44,000.00)
Less: Indexed cost of Improvement
= 5,00,000/Index of 12-13 x Index of 21-22
= 5,00,000/200 x 317 = 7,92,500.00 (7,92,500.00)
Long Term Capital Gain 90,63,500.00

Computation of income under head House Property

Gross Annual Value (2,00,000 x 12) 24,00,000.00

Less: Municipal Tax (20,000 x 12) 2,40,000.00)
Net Annual Value 21,60,000.00
Less: 30% of NAV u/s 24(a) (6,48,000.00)
Less: Interest on capital borrowed u/s 24(b) Nil
Income under the head House Property 15,12,000.00
Computation of Gross Total Income
Income under the head House Property 15,12,000.00
Income from Long Term Capital Gain 90,63,500.00
Gross Total Income 1,05,75,500.00
Less: Deduction u/s 80C to 80U Nil
Total Income 1,05,75,500.00
Normal Income 15,12,000.00
LTCG 90,63,500.00

4. Mr. X purchased Gold on 01.10.1991 for 2,00,000 and its fair market value on 01.04.2001 is
3,00,000 and he converted it into stock-in-trade on 01.10.2008 and market value of the gold on the
date of conversion was 11,00,000 and subsequently half of the stock-in-trade was sold on 01.10.2021

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 Direct Taxation 6.45

for 6,50,000 and balance half was sold on 01.10.2022 for 7,50,000. Compute his total income for
various years.

Answer: Previous year 2008-09

Computation of Capital Gains under section 45(2)
Full value of consideration
11,00,000
Less: Indexed cost of acquisition
= 3,00,000 / Index of 01-02 x Index of 08-09
= 3,00,000 / 100 x 137= 4,11,000 (4,11,000)
Long Term Capital Gain 6,89,000
Previous year 2021-22
Long Term Capital Gain (1/2 of 6,89,000) 3,44,500
Business Income (6,50,000-5,50,000) 1,00,000
Total Income 4,44,500
Previous year 2022-23
Long Term Capital Gain (1/2 of 6,89,000) 3,44,500
Business Income (7,50,000-5,50,000) 2,00,000
Total Income 5,44,500

5. One partnership firm has purchased gold on 01.10.2005 for 5,00,000 and dissolution has taken place
on 01.10.2021 and this gold was transferred to one of the partner in settlement of his claim of
25,00,000, though the market value was 35,00,000. Compute capital gains for assessment year 2022-
23.

Answer: Computation of Capital Gains

Full value of consideration 35,00,000.00
Less: Indexed cost of acquisition
= 5,00,000 / Index of 05-06 x Index of 21-22
= 5,00,000 / 117 x 317 = 13,54,700. (13,54,700.00)
Long Term Capital Gain 21,45,300.00
Rounded off u/s 288A 21,45,300.00

6. Mrs. X purchased one house on 01.07.1997 for 2,00,000 and incurred 1,00,000 on its improvement
in 1998-99 and its market value as on 01.04.2001 is 2,50,000. She incurred 2,00,000 on its
improvement in 2011-12 and the house was acquired by the Government on 01.07.2014 and
compensation fixed is 60,00,000 and half of the amount was paid by the Government on 01.01.2022
and balance half on 01.01.2023. She has also received interest of 2,00,000 in previous year 2021-22
from the Government for delay in payment of compensation. Income under the head
Business/Profession 20,03,990. Compute Capital Gain of Mrs. X for the Assessment Year 2022-23.

Answer:
Computation of income under the head Capital Gains

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 Direct Taxation 6.46

Capital gain shall be computed in the year in which the asset was acquired by the Government i.e. in
the previous year 2014-15 and shall be taxed in the year in which the first payment has been received
by the assessee i.e. in the previous year 2022-23

Full value of consideration 60,00,000.00

Less: Indexed cost of acquisition
= 2,50,000/Index of 01-02 x Index of 14-15
= 2,50,000/100 x 240 (6,00,000.00)
Less: Indexed cost of improvement
= 2,00,000/ Index of 11-12 x Index of 14-15
= 2,00,000/184 x 240 (2,60,869.57)
Long Term Capital Gain 51,39,130.43

Computation of income under the head Other Sources

Interest income 2,00,000.00
Less: Deduction u/s 57 @ 50% (1,00,000.00)
Income under the head Other Sources 1,00,000.00

Computation of income under the head Business/Profession

Income under the head Business Profession 20,03,990.00
Computation of Gross Total Income
Income under the head Business Profession 20,03,990.00
Income from long term capital gains 51,39,130.43
Income under the head Other Sources 1,00,000.00
Gross Total Income 72,43,120.43
Less: Deduction u/s 80C to 80U Nil
Total Income 72,43,120.43
LTCG 51,39,130.43
Rounded off u/s 288A 51,39,130.00

7. Mr. X purchased one house on 01.10.1998 for 2,00,000 and incurred 1,00,000 on its improvement on
01.10.1999. Its fair market value on 01.04.2001 is 4,50,000. Mr. X expired on 01.05.2005 and the
house was inherited by his son Mr. Y and value for the purpose of charging stamp duty was
10,00,000. Mr. Y has sold the house on 01.11.2021 for 72,00,000. Compute capital gain of Mr. Y for
the assessment year 2022-23.

Answer: Computation of Capital Gains

Full value of consideration 72,00,000.00
Less: Indexed cost of acquisition
= 4,50,000 / 100 x 317 = 1372500.00 (1426500.00)
Long Term Capital Gain 57,73,500.00

Income under the head Capital Gain 57,73,500.00

Gross Total Income 57,73,500.00

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 Direct Taxation 6.47

Less: Deduction u/s 80C to 80U Nil

Total Income 57,73,500.00

8. Mr. X & sons, HUF, purchased a land for Rs. 40,000 in 2001-02. In 2005-06, a partition takes
place when Mr. A, a coparcener, is allotted this plot valued at Rs. 2,00,000. In 2006-07, he had
incurred expenses of 1,85,000 towards fencing of the plot. Mr. A sells this plot of land for
15,00,000 in 2021-22 after incurring expenses of 20,000. You are required to compute the capital
gain for the A.Y. 2022-23.

Answer:
Computation of taxable capital gains for the A.Y. 2022-23
Particulars Amount

Sale consideration 15,00,000.00

Less: Indexed cost of acquisition

= 40,000 / Index of 05-06 x Index of 21-22
= 40,000 /117 x 317 (14,763.00)

Less: Indexed cost of improvement

= 1,85,000 / Index of 06-07 x Index of 21-22
= 1,85,000 /122 × 317 (4,80,696.72)

Less: Expenses incurred for transfer (20,000.00)

Long term capital gains 9,84,541.28

9. In which of the following situations capital gains tax liability does not arise?
(i) Mr. A purchased gold in 2004 for 25,000. In the P.Y. 2021-22, he gifted it to his son at the time
of marriage. Fair market value (FMV) of the gold on the day the gift was made was 1,00,000.
(ii) A house property is purchased by a Hindu undivided family in 1985 for 20,000. It is given to one
of the family members in the P.Y. 2021-22 at the time of partition of the family. FMV on the day
of partition was 12,00,000.
(iii) Mr. B purchased 50 convertible debentures for 40,000 in 2005 which are converted into 500
shares worth 85,000 in November 2021 by the company.

Answer:
The liability of capital gains tax in the situations given above is discussed as follows:
(i) As per the provisions of section 47, transfer of a capital asset under a gift is not regarded as
transfer for the purpose of capital gains. Therefore, capital gains tax liability does not arise in
the given situation.
(ii) As per the provisions of section 47, transfer of a capital asset on partition of Hindu undivided
family is not regarded as transfer for the purpose of capital gains. Therefore, capital gains tax
liability does not arise in the given situation.

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 Direct Taxation 6.48

(iii) As per the provisions of section 47, transfer by way of conversion of bonds into shares is not
regarded as transfer for the purpose of capital gains. Therefore, capital gains tax liability does
not arise in the given situation.

10. Mr. X purchased one house on 01.10.2002 for 2,00,000 and incurred 5,00,000 on its
improvement in F.Y. 2009-2010 and Mr. X gifted the house on 01.10.2012 to his friend Mr. Y when
its value for the purpose of charging stamp duty was 10,00,000. Mr. Y sold the house on 01.01.2022
for 42,00,000. Compute his capital gain.

Answer:
Computation of Capital Gains
Full value of consideration 42,00,000.00
Less: Indexed cost of acquisition
= 10,00,000 / 200 x 317 = 15,25,000.00 (15,85,000.00)
Long Term Capital Gain 26,15,000.00
Income under the head Capital Gain 26,15,000.00
Gross Total Income 26,15,000.00
Less: Deduction u/s 80C to 80U Nil
Total Income 26,15,000.00

(b) Presume Mr. Y is son of Mr. X.

Computation of Capital Gains
Full value of consideration 42,00,000.00
Less: Indexed cost of acquisition
= 2,00,000 / 105 x 317 = 6,03,809.52 (6,03,809.52)

Less: Indexed cost of improvement

= 5,00,000 / 148 x 317 = 10,70,945.94 (10,70,945.94)

Long Term Capital Gain 25,25,244.54

Income under the head Capital Gain 25,25,244.54
Gross Total Income 25,25,244.54
Less: Deduction u/s 80C to 80U Nil
Total Income (Rounded off u/s 288A) 25,25,245.00

11. Mr. A is a proprietor of ABC Enterprises having 2 units started on 01.04.2012. He transferred
on 01.04.2021 his unit 1 by way of slump sale for a total consideration of 45 Lacs. The expenses are
incurred for this transfer were 65,000/-. His Balance Sheet as on 31.03.2022 is as under:
Liabilities Total Assets Unit 1 Unit 2 Total

Own Capital 21,00,000 Building 15,00,000 4,00,000 19,00,000

Revaluation Reserve 6,00,000

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 Direct Taxation 6.49

(for building of unit Machinery 5,00,000 2,00,000 7,00,000

1) 4,00,000
Bank Loan (70% for Debtors 3,00,000 70,000 3,70,000
unit 1) 3,10,000
Trade creditors (25% Other assets 3,50,000 90,000 4,40,000
for unit 1)

Total 34,10,000 Total 26,50,000 7,60,000 34,10,000

Other information:
(i) Revaluation reserve is created by revising upward the value of the building of unit 1.
(ii) No individual value of any asset is considered in the transfer deed. Compute the capital gain for
the assessment year 2022-23.

Answer:
Computation of capital gains on slump sale of Unit 1

Sale value 45,00,000

Less: Expenses on sale (65,000)
Less: Net worth (See Note (i) below) (16,92,500)
Long term capital gain 27,42,500

Note (i): Computation of net worth of Unit 1 of ABC Enterprises

Building (excluding 6 lakhs on account of revaluation) 9,00,000
Machinery 5,00,000
Debtors 3,00,000
Other assets 3,50,000
Total assets 20,50,000
Less: Bank Loan (2,80,000)
Creditors (77,500)
Net worth 16,92,500

12. Mr. X who transferred his land and building on 10.02.2022, furnishes the following
information:
(i) Net consideration received 35,00,000.
(ii) Value adopted by stamp valuation authority, which was contested by Mr. X 50,00,000.
(iii) Value ascertained by Valuation Officer on reference by the Assessing Officer 52,00,000.
(iv) This land was distributed to Mr. X on the partial partition of his HUF on 01.04.2001. Fair
market value of the land as on 01.04.2001 was 1,60,000.
(v) A residential building was constructed on the above land by Mr. X at a cost of 3,50,000
(construction completed on 01.12.2012) during the financial year 2012-13.
(vi) Brought forward short-term capital loss (incurred on sale of shares during the financial year
2015-16) 80,000.

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 Direct Taxation 6.50

What should be the maximum amount to be invested by Mr. X in NHAI / RECL bonds so as to be
exempt from clutches of capital gain tax?

Answer: Computation of Capital Gains of Mr. X for the Assessment Year 2022-23
Full value of consideration 50,00,000.00
Less: Indexed cost of acquisition
Indexed cost of land (1,60,000 / 100 x 317) (5,07,200.00)
Indexed cost of building (3,50,000 / 200 x 317) (5,54,750.00)
Long term capital gain 39,38,050.00
Less: Brought forward short term capital loss set off (80,000.00)
Long term capital gain 38,58,050.00
Amount to be invested in NHAI / RECL bonds (38,58,050 – 2,50,000) 36,08,050.00
Since income upto 2,50,000 is exempt from income tax hence amount can be invested upto
36,08,050 instead of 38,58,050.

13. Mr. X purchased one residential house on 01-07-2001 for 2,00,000 and it was sold by him on 01-
07-2021 for 100 lakhs and he purchased one house in 01-07-2022 for 20,00,000. He sold this house
on 01-07-2023 for 22,00,000. Compute his capital gains for various years.

Answer:
Full value of consideration 1,00,00,000.00
Less: Indexed cost of acquisition
= 2,00,000 / 100 x 317 = 6,34,000 (6,34,000.00)
Long Term Capital Gains 93,66,000.00
Less: Exemption u/s 54 (20,00,000.00)
Long Term Capital Gains 73,66,000.00
Income under the head Capital Gain (LTCG) 73,66,000.00
Gross Total Income 73,66,000.00
Less: Deduction u/s 80C to 80U Nil
Total Income 73,66,000.00

Computation of Capital Gain for the assessment year 2022-23

Capital gain on sale of House
Full value of consideration 22,00,000.00
Less: Cost of acquisition (20,00,000 – 20,00,000) (Nil)
Short Term Capital Gain 22,00,000.00

14. Mr. X purchased one residential house on 01.04.2002 for 5,00,000. This house was acquired
compulsorily by the Government on 01.10.2013 and compensation of 50,00,000 was fixed by the
government but the amount was paid by the Government on 01.03.2022. The assessee has
purchased one residential house on 01.01.2022 for 2,00,000 and the house was sold by him on
01.01.2023 for 4,00,000. Compute his capital gains for the various years.

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 Direct Taxation 6.51

Answer:
Computation of capital gains under section 45(5) Capital gain shall be computed in the year in which
the asset was acquired i.e. in the previous year 2013- 14 and shall be taxed in the year in which the
first payment has been received i.e. in the previous year 2021-22

Full value of consideration 50,00,000.00

Less: Indexed cost of acquisition
= 5,00,000 / 105 x 220 = 10,47,619.05 (10,47,619.05)
Long Term Capital Gains 39,52,380.95
Less: Exemption u/s 54 (2,00,000.00)
Long Term Capital Gains 37,52,380.95
Income under the head Capital Gain (LTCG) 37,52,380.95
Gross Total Income 37,52,380.95
Less: Deduction u/s 80C to 80U Nil
Total Income (rounded off u/s 288A) 37,52,380.00
Computation of Capital Gain for the assessment year 2022-23
Capital gain on sale of House
Full value of consideration 4,00,000.00
Less: Cost of acquisition (2,00,000 – 2,00,000) Nil
Short Term Capital Gain 4,00,000.00
Hence Short Term Capital Gain for assessment year 2022-23 4,00,000.00

(b) Presume the house was purchased on 01.09.2022 instead of 01.01.2022

Computation of capital gains under section 45(5)
Capital gain shall be computed in the year in which the asset was acquired i.e. in the previous year 2013
14 and shall be taxed in the year in which the first payment has been received i.e. in the previous year
2021-22

Full value of consideration 50,00,000.00

Less: Indexed cost of acquisition
= 5,00,000 / 105 x 220 = 10,47,619.05 (10,47,619.05)
Long Term Capital Gains 39,52,380.95
Income under the head Capital Gain (LTCG) 39,52,380.95
Gross Total Income 39,52,380.95
Less: Deduction u/s 80C to 80U Nil
Total Income (rounded off u/s 288A) 39,52,380.00

Computation of Capital Gain for the assessment year 2022-23

Capital gain on sale of House
Full value of consideration 4,00,000.00
Less: Cost of acquisition (2,00,000.00)
Short Term Capital Gain 2,00,000.00
Hence Short Term Capital Gain for assessment year 2022-23 2,00,000.00

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 Direct Taxation 6.52

15. Mr. X has one industrial undertaking in Wazirpur industrial area and the building which is being
used for industrial purposes was purchased on 01.10.2007. Since then it was being used for industrial
purpose and was purchased for 23,00,000 and its w.d.v. as on 01.04.2014 is 10,38,000. This building
was acquired by the Government on 01.01.2015 and compensation fixed was 25,00,000. Entire
payment was released by the Government on 01.07.2021. The assessee has purchased one building
for the purpose of industrial undertaking in Bawana Industrial Area on 01.01.2022 for 6,00,000.
Compute capital gain for assessment year 2022-23.

Answer:
Computation of Capital Gains under section 45(5)
Capital gains shall be computed in the year of compulsory acquisition i.e. in the previous year 2014-15
Full value of consideration 25,00,000.00
Less: W.D.V of the building (10,38,000.00)
Short Term Capital Gain 14,62,000.00

Computation of capital gains for the assessment year 2022-23

Capital gain shall be taxed in the year in which payment has been given by the Government i.e. in the
previous year 2021-22

Short Term Capital Gain 14,62,000.00

Less: Exemption u/s 54D (6,00,000.00)
Short Term Capital Gain 8,62,000.00
Income under the head Capital Gain (STCG) 8,62,000.00
Gross Total Income 8,62,000.00
Less: Deduction u/s 80C to 80U Nil
Total Income 8,62,000.00

16. Mr. X purchased agricultural land in the urban area on 01.04.2001 for 2,00,000. It was being
used for agricultural purposes since then and was sold by the assessee on 01.07.2021 for 123,00,000.
He made following investments: (i) Bonds of National Bank for Agriculture and Rural Development
on 01.06.2021 for 1,50,000 which are redeemable after 5 years. (ii) He purchased agricultural land
on 01.09.2021 for 2,00,000. (iii)He has invested 75,000 on 01.10.2021 in the bonds of National
Highway Authority of India redeemable after five years. He sold the bonds of National Highway
Authority of India on 15.04.2022 for 3,00,000. Compute his capital gains for various years for
assessment year 2022-23.

Answer:
Computation of Capital gains
Full value of consideration 123,00,000.00
Less: Indexed cost of acquisition
= 2,00,000 / 100 x 317 = 6,34,000 (6,34,000.00)
Long Term Capital Gain 116,66,000.00
Less: Exemption u/s 54B (2,00,000.00)

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 Direct Taxation 6.53

Less: Exemption u/s 54EC (75,000.00)

Long Term Capital Gain 113,91,000.00
Income under the head Capital Gain (LTCG) 113,91,000.00
Gross Total Income 113,91,000.00
Less: Deduction u/s 80C to 80U Nil
Total Income 113,91,000.00

Previous year 2021-22

Full value of consideration 3,00,000.00
Less: Cost of acquisition (75,000.00)
Short Term Capital Gain 2,25,000.00
Long Term Capital Gain (withdrawal of exemption) 75,000.00

17. ABC Ltd. purchased one commercial building on 01.07.1995 for 2,00,000 and paid brokerage
20,000 and its market value as on 01.04.2001 2,10,000. The company sold the building on
01.07.2021 for 500,00,000 and invested 60,00,000 in bond of NHAI redeemable after five years.
Compute tax liability of the company for Assessment Year 2022-23.
(b) Presume building was sold for 11,72,00,000.

Answer:
Full value of consideration 500,00,000.00
Less: Indexed cost of acquisition
= 2,20,000 / 100 x 317 = 6,71,000 (6,97,400.00)
Long Term Capital Gain 493,02,600.00
Less: Exemption u/s 54EC (50,00,000.00)
(Exemption under section 54EC cannot exceed 50,00,000)
Long Term Capital Gain 3,89,02,600.00
Income under the head Capital Gain (LTCG) 3,89,02,600.00
Gross Total Income 3,89,02,600.00
Less: Deduction u/s 80C to 80U Nil
Total Income 3,89,02,600.00

(b)
Computation of Capital gains
Full value of consideration 11,72,00,000.00
Less: Indexed cost of acquisition
= 2,20,000 / 100 x 317 = 6,97,400 (6,97,400.00)
Long Term Capital Gain 11,65,02,600.00
Less: Exemption u/s 54EC (50,00,000.00)
(Exemption under section 54EC cannot exceed 50,00,000)
Long Term Capital Gain 11,15,02,600.00
Income under the head Capital Gain (LTCG) 11,15,02,600.00

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 Direct Taxation 6.54

Gross Total Income 11,15,02,600.00

Less: Deduction u/s 80C to 80U Nil
Total Income 11,15,02,600.00

18. Mr. X purchased gold on 01.04.1991 for 3,00,000 and its market value on 01.04.2001 is
2,00,000. This gold was sold by him on 01.01.2022 for 35,00,000 and selling expenses are 37,000.
He has purchased one house on 01.05.2022 for 4,00,000 because he did not have any house in his
name and he deposited 3,00,000 in capital gain account scheme on 30.09.2022. Mr. X is also
engaged in a business and he has turnover of his business 105,00,000 and cost of goods sold
100,00,000 and other expenses 5,10,000. He has withdrawn 2,00,000 from capital gain account
scheme on 01.01.2023 and constructed 1st floor of the house which was purchased by him on
01.05.2022. Remaining amount in the capital gain account scheme was unutilized. Compute
assessee’s tax liability for assessment year 2022-23 and capital gains for various years.

Answer:
Previous year 2021-22
Computation of capital gain
Full value of consideration 35,00,000.00
Less: Indexed cost of acquisition
= 3,00,000 / 100 x 317 = 9,51,000 (9,51,000.00)
Less: Selling expenses (37,000.00)
Long Term Capital Gain 25,12,000.00
Less: Exemption u/s 54F
= 25,12,000 / 34,63,000 x 7,00,000 = 5,07,767.83 (5,07,767.83)
Long Term Capital Gain 20,04,232.17
Income under the head Capital Gain (LTCG) 20,04,232.17
Loss under the head Business/Profession (10,000.00)
Gross Total Income 19,94,232.17
Less: Deduction u/s 80C to 80U Nil
Total Income (rounded off u/s 288A) 19,94,230.00

Previous year 2022-23

Amount deposited in capital gain a/c scheme 3,00,000.00
Less: Amount withdrawn (2,00,000.00)
Balance amount 1,00,000.00
Long Term Capital Gain
= 25,12,000 x 1,00,000 = 73,577.82 72,538.26
34,63,000
(Proportionate exemption with regard to the unutilized amount lying in the capital gain account
scheme is chargeable to tax after expiry of period of three years.)

19. Mr. X sold gold for 5,50,000 on 01.10.2021 which had been acquired by him in October 2004
for 55,000. He wants to utilize the said amount of sale consideration for purchase or construction of
a new residential house. He already owns one residential house at the time of sale of the gold on

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 Direct Taxation 6.55

01.10.2021. He has deposited 4,00,000 under the capital gains deposit scheme with a specified bank
on 30.04.2022. Ascertain the capital gains taxable in Mr. X’s hands for assessment year 2022-23 and
advise him as to what further action he has to take to avail the exemption.

Answer:
Computation of Capital Gains
Full value of consideration 5,50,000.00
Less: Indexed cost of acquisition
= 55,000 / 113 x 317 = 1,54,292.03 (1,54,292.03)
Long Term Capital Gain 3,95,707.97
Less: Exemption u/s 54F
= 3,95,707.97/5,50,000 x 4,00,000 = 2,87,787.61 (2,87,787.61)
Long Term Capital Gain 1,07,920.36
X has to fulfill the following conditions so as to avail exemption of section 54F

 He should acquire a residential house property by withdrawing from the deposit account. The new
house can be purchased at any time upto 30.09.2022 or it can be constructed upto 30.09.2024. If the
amount utilised is lower than 4,00,000 then the following amount will become chargeable to tax as
long term capital gain for the assessment year 2025-26 = [4,00,000 – Amount utilised]/ 5,50,000 x
4,09,336.28
 He should not transfer the new house within 3 years
 He should not purchase another residential house upto 30.09.2022 and he should not complete
construction of another residential house property upto 30.09.2024.

20. Write short note on capital gain on transfer of depreciable assets. (Dec 22)
Solution: As per ‘block asset’ concept, group of assets falling within a class of assets for which same
rate of depreciation is prescribed under the Act are grouped (section 2(11)). These assets are eligible for
depreciation as per section 32.
Block asset concept is applicable both for tangible and intangible assets. Only condition for inclusion in
the block asset is that it should be a depreciable asset for which rate of depreciation is prescribed in the
Income-tax Rules, 1962.
Where the entire block of depreciable assets are transferred and the block ceases to exist: If the net sale
consideration is more than the opening WDV of the block of assets plus actual cost of assets falling
within that block of assets acquired during the previous year, the resultant is taxable as short-term
capital gain.
When depreciable assets are sold and the block continues to exist: If the net sale consideration is more
than the opening WDV of block of assets plus actual cost of assets falling within that block of assets
acquired during the previous year, then also the surplus is taxed as short-term capital gain. However,
the remaining assets of the block would continue to exist at ‘nil’ value.
Where depreciable assets are sold and the block continues to exist: If the net sale consideration is less
than the opening WDV of block of assets plus actual cost of assets falling within that block of assets
acquired during the previous year, when the block continues to exist (with assets), the remaining WDV
(after deduction of net sale consideration) would be eligible for depreciation.

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 Direct Taxation 6.56

Where entire block of depreciable assets is transferred i.e. the block ceases to exist: If the value of net
sale consideration is less than the opening WDV of block of assets plus actual cost of assets falling
within the block of assets acquired during the previous year, the deficiency will be short-term capital
loss.
The sale consideration less expenditure incurred for realising the sale consideration being net sale
consideration would be adopted for comparing the opening WDV + actual cost of asset falling within
the block of assets during the previous year.

21. Compute capital gain in the individual cases: (Dec 21)

(i) A listed equity share is acquired on 1st of March, 2017 for Rs. 150, its fair market value is Rs.270 on
31st March, 2018 and it is sold on 31st of August, 2020 in a recognised stock exchange for Rs. 70.

(ii) A listed equity share is acquired on 1st of May, 2018 for Rs. 230, its fair market value is Rs.450 on
31st of March, 2019 and it is sold on 1st of April, 2021 in a recognised stock exchange for Rs.400.

Answer: Computation of capital gains

(i) In this case, the actual cost of acquisition is less than the fair market value as on 31st March, 2018.
The sale value is less than the fair market value as on 31st of March, 2018 and also the actual cost of
acquisition. Therefore, the actual cost of Rs.150 will be taken as the cost of acquisition in this case.
Hence, the loss under the head long-term capital gain will be Rs.80 (Rs.70 – Rs.150) per share in this
case
(ii) In this case, the actual cost of acquisition is less than the fair market value as on 31st of March,
2019. However, the sale value is also less than the fair market value as on 31st of March, 2019.
Accordingly, the sale value of Rs. 400 will be taken as the cost of acquisition and the long-term
capital gain will be NIL (Rs.400 – Rs.400).

22. State the taxability of the following transactions for the assessment year 2017-18: [dec 2017]
(i) Mr. Ashok acquired a vacant site from Mr. Brijesh (non relative) for Rs. 6 lakhs when the stamp
duty valuation of the vacant site on the date of registration of document was Rs. 10 lakhs.

(ii) Rosy & Co. a partnership firm engaged in trading of vacant lands. It sold vacant land for Rs. 40
lakhs when the stamp duty valuation of the lands was Rs. 55 lakhs.

(iii) Ms. Janaki received family pension of Rs. 84,000.

(iv) Ms. Jency got gift of 500 listed equity shares of a company from her husband when the market
value of the share was Rs. 150 per share. After a month, the company issued bonus shares in 1:1
ratio. The original shares were acquired by her husband 4 months before the date of gift for Rs.
50,000. All the 1000 shares were sold for Rs. 1,50,000 through off-market transaction. How much is
taxable and in whose hands it is taxable as income?

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 Direct Taxation 6.57

(v) Mr. Jayaram retired from a nationalized bank on 30.11.2016, sold his motor car for Rs. 5 lakhs. The
Car was used by him for the last 5years and was received as gift from his brother who acquired the
car for Rs. 10 lakhs on 10.01.2010.

(vi) Mr. Vasu acquired an agricultural land situated in a village (rural area) for Rs. 10 lakhs from Mr.
Sundar (non relative) when the stamp duty valuation on the date of registration of document was Rs.
12 lakhs.

Answer:
(a) (i) Rs. 4 lakhs is taxable under the head "income from other sources" in the hands of Ashok under
section 56(2). For the purpose of computing capital gain in the hands of Mr. Brijesh, the deemed sale
consideration would be Rs. 10 lakhs as per section 50C.

(ii) Even where the immovable property being land or building or both is dealt with as stock-in-trade of
a business, as per section 43CA the difference between stamp duty value and the actual
consideration would be taxable as income from business.
Hence, Rs. 15 lakhs would be taxable as business income under section 43CA in the hands of Rosy
& Co.

(iii) As per section 57(iia) on family pension a standard deduction shall be allowed to Mr. Janaki @ 33
1/3% of such pension or Rs. 15,000, whichever is less. Therefore, the balance amount of Rs. 69,000
is taxable under the head "income from other sources in the hands of Ms. Janaki.

(iv) Short-term capital gain arising from sale of original shares gifted i.e., Rs. 25,000 (Rs.75,000 - Rs.
50,000) shall be taxed in the hands of husband of Ms. Jency under section 64.

Capital gain attributable to bonus shares will not be liable for clubbing under section 64 since it is an
accretion to the original shares. Therefore, Rs. 75,000 being the sale consideration from sale of
bonus shares whose cost of acquisition is Nil is taxable in the hands of Ms. Jency as short-term
capital gain.

(v) As per section 2(14), "capital asset" does not include personal effects (i.e. moveable property held
for personal use). Since Mr. Jayaram was an employee, the motor car constituted his personal effect.
Therefore, sale of motor car shall not result in capital gain.

(vi) The term "property" as defined in section 56(2)(vii) does not include rural agricultural land which
is not a "capital asset". Regardless of whether the transaction is between relatives or not, the
difference between the stamp duty value and the sale consideration is not liable to tax.

23. The summarised financial position of Purva India (P) Ltd. of Cs on 31/12/2017 is as under (Dec
2018)
Liabilities Amount Assets Amount
Equity share capital of Rs.10 each 8,00,000 Land 6,00,000
Preference share capital 1,00,000 Building (WDV as per Income tax 3,00,000

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 Direct Taxation 6.58

Act)
Reserves 2,00,000 Machinery (WDV as per Income 4,00,000
tax Act)
Loan Creditors 6,00,000 Current Assets 10,40,715
Creditors 6,00,000
Provision of Dividend Distribution 40,715
Tax
23,40,715 23,40,715
Additional Information: The Company went into liquidation on the balance sheet date; all current
assets and building realized at book value. The realized money was applied towards payment of
outside liabilities including Dividend Distribution Tax, and there after the preference shareholders.

Mr. Utkarsh is a holder of 10% equity shares and 20% preference shares of the company. Equity
shares were originally acquired by him 16.08.2002 at face value. However, he had subscribed to
preference shares on 01.04.2017, which were issued at par. He received a part of land (MV
Rs.5,00,000) and cash (for preference share) Rs. 20,000.

Compute the capital gain in hands of the company and Mr. Utkarsh.

Answer: Computation of capital gain for the A. Y. 2016- 17 in the hands or Purva India (P) Ltd
Particulars
As per Sec.46(l), at the time of liquidation of company, any transfer by way of distribution of assets
to its shareholders is not treated as transfer for the purpose of
capital gain.
However, if any asset is sold in the market the same shall be liable to capital gain
In the given case, only one capital asset is sold i.e. building and the same being sold at book value;
hence no capital gain arises in the hands of the company.

Computation of capital gain for the A. Y 2018 – 19 in the hands of Utkarsh

Particular Working Details Amount
In case of equity share
Sale consideration See Note below 4,80,000
Less: Expenses on transfer Nil

Net sale consideration 4,80,000

Less: (i)Indexed cost of (10% of Rs.8,00,000) 2,07,238
acquisition 272/105
(ii) Indexed cost of Nil 2,07,238
improvement
Long-term Capital Gain 2,72,762
In case of Preference share
Sale consideration 20,000
Less: Expenses on transfer Nil

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 Direct Taxation 6.59

Net sale consideration 20,000

Less: (i) Cost of acquisition 20% of Rs.1,00,000 20,000
(ii) Cost of improvement Nil 20,000
Short Term Capital Gain Nil

Market value of land received Rs. 5,00,000

Less: Dividend u/s 2(22) (c) being 10% of accumulated profit Rs. 20,000
Sale consideration Rs. 4,80,000

24. State with brief reason, the taxability or otherwise of the following in the hands of the recipients
[except for (i), for which issue may be seen from the hands of the company], as per the provisions of
the Income-tax Act, 1961 (Dec 2019)

(i) Unicorn Capital Private Limited, a closely held company, issued 14,000 shares at Rs. 135 per share.
(The face value of the share is Rs. 10 per share and the fair market value of the share is Rs. 120 per
share).

(ii) Mr. Srinivsan received an advance of Rs. 96,000 on 19.09.2018 against the sale of his house.
However, due to non-payment of balance amount in time, the contract was cancelled and the amount
of Rs. 96,000 was forfeited.

(iii) Mr. Dhandapani, transferred a house property to his son Mr. Vignesh Karthik without
consideration. The value of the house is Rs. 12 lakhs as per the stamp valuation authority.

Answer:
(i) Taxable. Since Unicorn Private Limited, a closely held company, issued 14,000 shares at a premium
(i.e., issue price exceeds the face value of shares), the excess of the issue price of the shares over the
fair market value would be taxable under section 56(2)(viib) in its hands under the head "Income
from other sources". Therefore, Rs. 2,10,000 [14,000 x Rs.15 (Rs. 135 - Rs. 120)] shall be taxable as
income in the hands of Unicorn Capital Private Limited under the head "Income from other sources.

(ii) Taxable. Any sum of money received as an advance or otherwise in the course of negotiations for
transfer of a capital asset would be chargeable to tax under the head "Income from other sources", if
such amount is forfeited and the negotiations do not result in transfer of such capital asset [Section
56(2)(ix)].
Therefore, the amount of Rs. 96,000 received as advance would be chargeable to tax in the hands of
Mr. Srinivasan under the head "lncome from other sources", since it is forfeited on account of
cancellation of contract for transfer of house, being a capital asset, due to non-payment of
installment in time.

(iii) Not taxable. As per section 56(2)(x), immovable property received without consideration by any
person from his relative is not taxable. In the present case, since Mr. Dhadapani is the father of Mr.

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 Direct Taxation 6.60

Vignesh Karthik, Rs. 12 lakhs, being the stamp duty value of house property received, without
consideration, would not be chargeable to tax in the hands of Mr. Vignesh Karthik.

25. Vipul held a plot of land in Haryana as capital asset till 31st March, 2017. The land was
acquired by him in the previous year 2013-14 for Rs. 20,00,000. It was converted into stock-in trade
on 1st April, 2017 of real estate business carried on by him. The fair market value of the land on the
said date was Rs. 35,00,000. 10 Vipul sold the land to Vinod for Rs. 45,00,000 on 31st January,
2019. The stamp duty assessed on the said date in respect of the land amounted to Rs. 50,00,000.
Vipul purchased a flat for Rs. 15,00,000 on 31st March, 2019 for his residential purpose. He has no
other residential property. (june 19)
(i) Compute the income arising from the above transactions under appropriate heads of income in the
hands of Vipul.
(ii) What is the effect on assessment of Vinod, if Vinod had bought the land for constructing a
residential property? [June 2019 ]

Additional Information:
Financial Year Cost Inflation Index
2013-14 200
2017-18 254
2018-19 264

Answer:
In the hands of Vipul:
Computation of capital gain for Assessment Year 2019-20
Particular Amount
Consideration, being fair market value of land on the date of conversion into 35,00,000
stock-in-trade
Less: indexed cost of acquisition (Rs. 20,00,000 × 254/200) 25,40,000
Long-term capital gain 9,60,000
Less: exemption u/s 54F for investment in residential flat (Rs. 9,60,000 × Rs. 4,11,429
15,00,000 / Rs. 35,00,000)
Taxable long-term capital gain 5,48,571

Computation of business income for Assessment Year 2019-20

Particular Amount
Consideration, being stamp duty value on the date of sale [Under section 43C, 50,00,000
actual consideration or stamp duty value, whichever is more is to be taken as
consideration]
Less: Cost of acquisition, being fair market value on the date of conversion 35,00,000
Business income 15,00,000
(ii) Effect on assessment of Vinod for Assessment Year 2019-20:As per section 56(2)(x), where
immovable property in the nature of capital asset is received for a consideration less than the stamp
duty value, the difference between the stamp duty value and actual consideration shall be taxed as
income from other sources, if such difference exceeds Rs. 50,000. In the instant case, Vinod purchased

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 Direct Taxation 6.61

the land for constructing residential property meaning thereby that the land is his capital asset. So, the
difference between the stamp duty value and actual purchase price i.e. Rs. 5,00,000 is taxable in his
hands under the head “income from other sources‟‟.

26. Mr. A is an individual carrying on business. His stock and machinery were damaged and
destroyed in a fire accident. The value of stock lost (total damaged) was 6,50,000. Certain portion of
the machinery could be salvaged. The opening WDV of the block as on 1-4-2021 was 10,80,000.
During the process of safeguarding machinery and in the firefighting operations, Mr. A lost his gold
chain and a diamond ring, which he had purchased in April, 2004 for 1,20,000. The market value of
these two items as on the date of fire accident was 1,80,000. Mr. A received the following amounts
from the insurance company:
(i) Towards loss of stock 4,80,000
(ii) Towards damage of machinery 6,00,000
(iii) Towards gold chain and diamond ring 1,80,000

You are requested to briefly comment on the tax treatment of the above three items under the
provisions of the Income-tax Act, 1961.

Answer:
(i) Compensation towards loss of stock: Any compensation received from the insurance company
towards loss/damage to stock in trade is to be construed as a trading receipt. Hence, 4,80,000
received as insurance claim for loss of stock has to be assessed under the head “Profit and gains of
business or profession”. Note - The assessee can claim the value of stock destroyed by fire as
revenue loss, eligible for deduction while computing income under the head “Profits and gains of
business or profession”.

(ii) Compensation towards damage to machinery: The question does not mention whether the salvaged
machinery is taken over by the Insurance Company or whether there was any replacement of
machinery during the year. Assuming that the salvaged machinery is taken over by the Insurance
Company, and there was no fresh addition of machinery during the year, the block of machinery
will cease to exist. Therefore, 4,80,000 being the excess of written down value (i.e. 10,80,000) over
the insurance compensation (i.e. 6,00,000) will be assessable as a short-term capital loss. Note – If
new machinery is purchased in the next year, it will constitute the new block of machinery, on
which depreciation can be claimed for that year.

(iii) Compensation towards loss of gold chain and diamond ring: gold chain and diamond ring are
capital assets as envisaged by section 2(14). They are not “personal effects”, which alone are to be
excluded. As per section 45(1A), if any profit or gain arises in a previous year owing to receipt of
insurance claim, the same shall be chargeable to tax as capital gains. The capital gains have to be
computed by reducing the indexed cost of acquisition of jewellery from the insurance
compensation of 1,80,000

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 Direct Taxation 6.62

Q 31 Mr. Sengupta (aged 65 years) is a retired person drawing a monthly pension of Rs. 6,000. His
taxable long-term capital gain from sale of painting during the previous year 2016-17 is Rs. 2,75,000.
He has no other income during the year.[ June 2017]

Compute his tax liability for Assessment Year 2017-18

(i) if he is resident and

(ii) if he is nonresident.

Answer: Tax liability if Mr. Sengupta is resident

Rs. Rs.
Total income (Rs. 6,000 × 12 + 2,75,000) 3,47,000
Tax on income other than long-term capital gain Nil
Tax on long-term capital gain:
Excess of basic exemption limit on other income 2,28,000
(Rs.3,00,000 - Rs. 72,000)
20% of (Rs. 2,75,000 - Rs. 2,28,000) 9,400
Education cess & SHEC @ 3% 282
Tax liability 9,682
Tax liability if Mr. Sengupta is non-resident
Rs.
Tax on income other than long-term capital gain Nil
Tax on long-term capital gain: 20% of Rs. 2,75,000 (Note) 55,000
Education cess & SHEC @ 3% 1,650
Tax liability 56,650
Note:

Where the individual assessee is non-resident, he is not entitled to deduct the excess of basic exemption
limit over other income from long-term capital gain for computing tax liability (section 112).

She deposited Rs. 40 lakhs in REC Capital Gain Bonds in September, 2016 and Rs. 20 lakhs in NHAI
Capital Gain bonds in February 2017. She acquired a residential property in Colombo

Q 32. Mr. Manoj is a resident individual who retired from employment in March,2022. He sold a
residential building for ₹60 lakh to Zeet Ltd., Delhi on 3rd February, 2023.
Mr. Manoj paid 2% commission on sale price to Mr. Pritham for fetching the buyer.

The building was inherited by him as per the 'will' of his mother on 5th April, 2000, Morris She had
acquired the said building on 18th October, 1990 for₹ 1 lakh. The Fair Market Value (FMV) of the
building as on 1st April, 2001 was ₹5 lakh. The Stamp duty value of the building on the date of sale
was ₹70 lakh.

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 Direct Taxation 6.63

Earlier, Mr. Manoj had entered into an agreement with Mr. Ram in August, 2022 for sale of the same
building and forfeited advance money of ₹2 lakh. He purchased a residential apartment in Madurai for
₹30 lakh on 28th March, 2023 and subscribed to REC capital Gain bonds for ₹20 lakh in November,
2023.
Cost inflation index: FY 2001-02 = 100; FY 2022-23 = 331.
Compute the income under the head 'Capital Gain' for Mr. Manoj for the assessment year 2023-24. Mr.
Manoj does not opt to be taxed under section 115 BAC of the Income Tax Act, 1961 (December 2023)

Solution: Computation of Capital Gain

Particulars Amount
(Rs.)

Sales Consideration (higher of SDV or sales price) 7,000,000

Less: Commission @ 2% of 60 Lakhs 120,000

Net Sales Consideration 6,880,000

Less: Indexed Cost of Acquisition (500000/100*331) 1,655,000

Long term Capital Gain 5,225,000

Less: Exemption u/s (Purchase of residential flat in Madurai) 3,000,000

Net long-term Capital Gain 2,225,000

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