GIBS INCOME TAX LAW & PRACTICE CAPITAL GAINS

UNIT- III
CHAPTER 6 CAPITAL GAINS (U/S 45 TO 55A)
Capital gain arises only when a capital asset is transferred, if the asset transferred is not
a capital asset, it will not be covered under the head 'capital gain'.

Basis of Charge Section 45(1)

• Any profit or gains arising from the transfer

• of a capital asset,
• shall be chargeable to income tax under the head ‘capital gains’ and
• shall be deemed to be the income of P/Y in which transfer took place [except in sec.
45(1A), 45(2) and 45(5)]
• unless such capital gain is exempt u/s 54, 54B, 54D etc.

Capital Asset [Section 2(14)]

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

1) Any stock-in-trade, consumable stores or raw materials held for the purposes of his
business or profession as these will be taxed under the head business income;
2) Personal effects, movable property (including wearing apparel and furniture but
excluding jewellery, antiques, paintings, etc), held for personal use by the assessee
or any member of his family. Jewellery will not be treated as personal effect, Jewellery
shall, therefore, be capital asset for capital gain purposes.
3) Rural agricultural land in India,
4) 6.5% Gold Bonds 1977, 7% Gold Bonds 1980, National Defense Bonds 1980, Gold
Deposit Bonds 1999.
5) Special Bearer Bonds, 1991

Transfer (section 2(47)

a. Sale, exchange or relinquishment* of the asset; (to give up)
b. Extinguishment* of rights therein; (to bring to an end)
c. Compulsory acquisition thereof under any law;
d. The asset converted into stock-in-trade
e. The redemption of a zero coupon bonds.

Transactions not regarded as transfer: (Section 47)

1) Where the assets of a company are distributed to its shareholders on liquidation of a

company.
2) Distribution of capital assets on the total or partial partition of Hindu Undivided Family
3) Transfer of a capital asset under a gift or will or an irrevocable trust.

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GIBS INCOME TAX LAW & PRACTICE CAPITAL GAINS

4) Transfer of capital asset by the amalgamating company to amalgamated company under

Amalgamation.
5) Transfer of capital asset by the Holding company to wholly owned Indian subsidiary
company.
6) Transfer of capital asset by wholly owned subsidiary company to the Indian holding
company.
7) Any transfer by the demerged company to the resulting company, if the resulting
company is an Indian company under Demerger.
8) Transfer of artistic, scientific work, painting, drawings, photo etc. to govt., university,
museum, national art gallery etc.
9) Transfer of capital asset on conversion of a firm in company if:

a) all assets/liabilities of firm become the assets/liabilities of company and

b) all partners of firm become shareholders in the ratio of their capital account and
c) partners receive only shares as consideration and
d) partners have at least 50% voting power for at least 5 years.

1. Transfer of capital asset on conversion of a sole proprietary concern in company if

(a), (c) & (d) in 9 above are satisfied.

2. Transfer of capital asset by a private company or unlisted public company to a

limited liability partnership or any transfer of shares held in the company by a
shareholder as a result of conversion of the company if
A. (a), (b), (c) & (d) in 9 above are satisfied
B. total sales or receipts of the company in any of the three preceding previous years
does not exceed 60 lacs. [Finance Act 2010]

CAPITAL GAINS

PARTICULARS Long Term Capital Gains Short Term Capital Gains

1. Period of holding before
transfer
a. Listed Shares (equity & More than 12 months Up to 12 months
pref.),
Listed Debenture & Govt.
Securities.
UTI & Mutual Fund.
Zero Coupon Bonds

b. (i) Land and building or More than 24 months Up to 24 months

both.
(ii) Shares of unlisted
companies.

c. Any other Capital Asset More than 36 months Up to 36 months

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GIBS INCOME TAX LAW & PRACTICE CAPITAL GAINS

2. Tax Rates 20% flat Rate (u/s 112) Slab system

3. Indexation Allowed Not Allowed
4. Deduction u/s 80C to 80U Not Allowed Allowed

Notes: 1. There will always be a short term capital gain on Depreciable Assets.
2. No indexation on Debentures and bonds except capital indexed bonds.
3. Initial slab of Rs.2,50,000/3,00,000/5,00,000 will be allowed on long term capital gains
except non-resident.

Tax Rates- Long Term Capital Gains and Short-Term Capital Gains

(A) Rates Applicable: In Case of Asset Transfer before 23rd July 2024

Capital Gains Type Condition Applicable Tax Rate

Sale of:
Listed equity shares and unites of 10% over and above
Long Term Capital equity oriented mutual funds (if STT Rs.1,25,000
Gains has been paid) (Sec. 112A) (Up to Rs. 1,25,000
Exempted)
Others 20%
Listed equity shares and unites of
equity oriented mutual funds (if STT 15%
Short Term Capital has been paid)- (Sec. 111A)
Gains On all other assets Normal slab rates

(B) Rates Applicable: In Case of Asset Transfer on or after 23rd July 2024

Capital Gains Type Condition Applicable Tax Rate

Sale of:
Listed equity shares and unites of 12.5% over and above
equity oriented mutual funds (if Rs.1,25,000
STT has been paid)- (Sec. 112A) (Up to Rs. 1,25,000
Exempted)
Two options are available to
Long Term Capital individual and HUF
Gains taxpayers:
Land or Building or Both • 12.5% without
indexation
• 20% with indexation

Other persons:
• 12.5% without
indexation
Others 12.5%

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GIBS INCOME TAX LAW & PRACTICE CAPITAL GAINS

Listed equity shares and unites of

equity oriented mutual funds (if 15%
Short Term Capital STT has been paid)- (Sec. 111A)
Gains On all other assets Normal slab rates

Illustrations 1:
In the following case, determine whether the asset held was short term or long term capital
asset:
(a) R holds 1000 shares in G Ltd., which goes into liquidation on 31.10.2018. R
purchased these shares on 31.1.2018. The company made the payment to R on
31.3.2018.
(b) R got a diamond ring by way of gift from his uncle on 1.1.2018. This ring was
purchased by his uncle on 30.12.2015. R sold ring on 31.12.2018.
(c) R acquires 1000 shares in G Ltd., a listed company on 28.2.2018 He surrenders
these shares to the company on 31.8.2018. Pursuance of scheme of amalgamation.
He is allotted 500 shares in S Ltd., the amalgamated listed company in lieu of such
shares surrendered. R sells these shares on 31.3.2019.
(d) R acquires 1000 shares in 0 Ltd., a listed company on 29.3.2018. He is allotted 500
shares of a resulting company S Ltd., a listed company in the scheme of demerger
on 1.4.2018. He transfers these shares on 29.3.2019.

Solution:
(a) Short term capital asset (since shares were held for 9 months 31.1.2018 to
31.10.2018).

(b) Long term capital asset (holding period more than 3 years 30.12.2015 to
31.12.2018).

(c) Long term capital asset (holding period more than one year 28.2.2018 to 31.3.2019).

(d) Long term capital asset (holding period more than one year 29.3.2018 to 29.3.2019)
as 12 months will end on 28.3.2019.

Cost of Acquisition COA

COA of an asset is a value for which it was acquired by the assessee. Expenditure of
capital nature for completing or acquiring the title to the property is included in the COA.

COA of assets acquired before 01/04/2001 will be

Actual Cost of Acquisition or Fair Market Value as on 01/04/2001 (Whichever is Higher)

Cost of Improvement (COI): Expenditure of capital nature incurred in making any

addition / alteration to capital asset by the assessee.
Expenditure incurred before 01/04/2001 on COI of asset is not allowed as deduction.

COST INFLATION INDEX

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2001-02 100 2007-08 129 2013-14 220 2019-20 289

2002-03 105 2008-09 137 2014-15 240 2020-21 301
2003-04 109 2009-10 148 2015-16 254 2021-22 317
2004-05 113 2010-11 167 2016-17 264 2022-23 331
2005-06 117 2011-12 184 2017-18 272 2023-24 348
2006-07 122 2012-13 200 2018-19 280 2024-25 363

Calculation of Short Term Capital Gain

Full Value of Consideration (FVC) = XXXX

Less: Cost of Acquisition (COA) = XXXX
Less: Cost of Improvement (COI) = XXXX
Less: Transfer Expenses = XXXX
………………
STCG = XXXX
………………

Calculation of Long Term Capital Gain

Full Value of Consideration (FVC) = XXXX

Less: Indexed Cost of Acquisition (ICOA) = XXXX
Less: Indexed Cost of Improvement (ICOI) = XXXX
Less: Transfer Expenses = XXXX
………………
LTCG = XXXX
…..……………

• Indexed Cost of Acquisition (ICOA) = CII of the year of transfer

COA X
CII of the year of acquisition

• Indexed Cost of Improvement (ICOI) = CII of the year of transfer

COI X
CII of the year of improvement

CASE OF ADVANCE MONEY FORFEITED

According to section 56(2)(ix), any sum of money, received as an advance or otherwise in

the course of negotiations for transfer of a capital asset shall now be taxable under the
head of income from other sources (IFOS) if:
(a) such sum is forfeited and
(b) the negotiations do not result in transfer of such capital asset.

Illustration 2:

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GIBS INCOME TAX LAW & PRACTICE CAPITAL GAINS

R purchased a house in Delhi on 16.12.2018 for 12,00,000. In March, 2019 he entered into
an agreement to sell the property to X for a consideration of 20,00,000 and received
earnest money of 2,00,000. As per the terms of the agreement, the balance payment was
to be made within 30 days of the agreement. If the intending purchaser does not make the
payment within 30 days, the earnest money would be forfeited. As X could not make the
payment within the stipulated time the amount of 2,00,000 was forfeited by R. Subsequently
on 15-5-2024, R sold the house to M for 25,00,000. He paid 2% brokerage on sale of the
house. Compute the capital gains chargeable to tax for the assessment year 2025-26.

Solution:
Assessment year 2025-26
Rs. Rs.

Sale consideration 25,00,000

Less: 1. Expenses on transfer being brokerage @2% 50,000

2. Indexed Cost of acquisition 12,00,000 × 363/280 15,55,714 16,05,714

Long-term capital gain 8,94,286

Note: Rs.2,00,000 forfeited by R shall be taxable under the head income from other
sources as per section 56(2)(ix) inserted by the Finance (No. 2) Act, 2014.

Provisions in the case of Gift, will etc. {Sec. 47}

a. For period of holding, time to previous as well as present owner is to be taken into
consideration.
b. Indexation on COA will be allowed from the year of purchase of previous owner.
c. Indexation on COI will be allowed from the year of actual improvement and not from the
year of Gift, will etc
d. Amount forfeited by the previous owner is not to be considered. It is to be totally ignored.

Problem 1: X purchases a house property for Rs.7,60,000 on June 30, 1998. The following
expenses are incurred by him for making addition/ alteration to the house property:
a. Cost of construction of first floor in 1999-00 Rs.1,10,000
b. Cost of construction of the second floor in 2010-11 Rs.1,40,000
c. Alteration/reconstruction of the property in 2019-20 Rs.1,90,000
Fair market value of the property on April 1, 2001 is Rs.11,00,000. The house property is sold
by X on June 15, 2024 for Rs.38,50,000 (expenses incurred on transfer: Rs.10,000). Calculate
capital gain for A/Y 2025-26.

Problem 2: X sells the following capital assets during the previous year 2024-25:
Shares (non-listed) House property
Sale consideration 4,30,000 9,35,700
Year of acquisition 2015-16 2007-08
Cost of acquisition 2,90,000 1,18,000
Cost of improvement incurred in 2019-20 70,000

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Problem 3: X purchases a house property for Rs.2,60,000 on May 10, 1993. He gets the first
floor of the house constructed in 1998-99 by spending Rs.1,40,000. He dies on September 12,
2015. The property is transferred to Mrs. X by his will. Mrs. X spends Rs.1,30,000 and
Rs.2,67,000 during 2016-17 and 2022-23 respectively for renewals/reconstruction of the
property. Mrs. X sells the house property for Rs.27,50,000 on March 15, 2025 {brokerage paid
by Mrs. X is Rs.11,500). The fair market value of the house on April 1, 2001 is Rs.5,60,000.
Calculate capital gain taxable for A/Y 2025-26.

Problem 4: X purchases a property on April 1, 1997 for Rs.95,000. Enters into an agreement
for sale of the property to A on November 1, 2010 and receives Rs.10,000 as advance. A could
not, however, keep his promise and advance of Rs.10,000 given by him is forfeited by X. Later
on, he gifts the property to his friend Y on May 15, 2012. The following expenses are incurred
by X and Y for renewal of the property:
Addition of two rooms by X during 1999-00 Rs.25,000
Addition of first floor by X during 2010-11 Rs.40,000
Addition of second floor by Y during 2017-18 Rs.1,15,000
Fair market value of the property on April 1, 2001 is Rs.1,25,000
Y enters into an agreement to sell the property for Rs.8,50,000 to B on April 1, 2021 after
receiving an advance of Rs.50,000. B could not pay the balance within the stipulated time of
two months and Y forfeits the advance of Rs.50,000 as per agreement with B. Y ultimately
finds a buyer in C to whom property is transferred for Rs.22,75,000 on December 1, 2024.
Compute the capital gain chargeable to tax in the hands of Y for the assessment year 2025-26.

Problem 5: X purchased the following assets on March 10, 2012:

Listed debentures of A Ltd. Rs.40,000
Listed debentures of B Ltd. Rs.70,000
On June 10, 2012, he gifts debentures of B Ltd. to his son Y. X dies on April 3, 2014 and as
per his will debentures of A Ltd. are transferred to his son Y. On March 1, 2025, Y sells
debentures of A Ltd. for Rs.98,000 (expenditure on transfer: Rs.2,000) and debentures of B
Ltd. for Rs.78,000 (expenditure on transfer: Rs.3,000). Find out the amount of capital gains
chargeable to tax for the assessment year 2025-26. [Answer: LTCG: Rs.61,000]

CAPITAL GAIN ON TRANSFER OF FIRM’S ASSETS TO PARTNE RS

AND VICE VERSA.

Considered as transfer and chargeable to tax as capital gains.

a. From partner to firm -Sale consideration will be Amount recorded in the books of the
firm
b. from firm to partner -Sale consideration will be Fair market value on the date of
transfer

INSURANCE CLAIM ON DESTRUCTION (SEC. 45(1A))

• If any person receives any money or other assets under an insurance from insurer

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• on account of destruction of any capital asset,

• then any profit from receipt of such money shall be chargeable under this head and
• shall be deemed the income of such person of the previous year in which such money or
asset was received and
• money received or FMV of the asset received, shall be deemed to be full consideration.
• But indexation shall be allowed upto the previous year in which destruction took place.

Illustration 3: R owns a house property which was purchased by him on 1.5.1999 for
3,00,000. The said property was destroyed by fire on 3.4.2024 and R received a sum of
45,00,000 for the insurance company during the year. The market value of the above
property as on 1.4.2001 was 4,00,000. Compute the capital gain for the assessment year
2025-26.

Solution Rs.

Consideration Price 45,00,000

Less: Indexed cost of acquisition — 4,00,000 x 363 14,52,000

100
Long-term capital gain 30,48,000

(b) What shall be the capital gain if the asset was destroyed by fire on 3.3.2023 and the
compensation was received during the previous year 2024-25? (Assessment year 2025-26)

Solution
Although the asset was destroyed on 3.3.2023 i.e. in the previous year 2022-23 but there
will be no capital gain as the compensation was received during the previous year 2024-25.
(Assessment year 2025-26)
Rs.

Consideration Price 45,00,000

Less: Indexed cost of acquisition — 4,00,000 x 331 13,24,000

100
Long-term capital gain 31,76,000

 The capital gain will arise in the previous year 2024-25 but indexation will be
done till the year of destruction i.e. previous year 2022-23.

CAPITAL GAIN IN THE CASE OF CONVERSION OF CAPITAL ASSET

INTO STOCK IN TRADE (SEC. 45(2))

a) Up to A.Y. 1984-85, conversion of capital asset into stock in trade is not chargeable to
tax.
b) But from A.Y. 1985-86, conversion of capital asset into stock in trade is chargeable to
tax. Capital gain will be calculated in the year of conversion and tax will be paid in the
year of actual sale.
c) Sale consideration will be fair market value on the date of conversion.
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d) Profit from the date of conversion to date of actual sale will be taxable as business
income.

Illustration 4: X invested 1,00,000 on the purchase of gold ornaments on 4.1.2011. He

holds the gold ornaments as investments. On 12.1.2023 he started a business of dealing in
jewellery and converts his holding into his stock-in-trade. The market value of the gold
ornaments as on the date of conversion was 4,00,000 and therefore, X credited his capital
account by 4,00,000 and debited his stock account by 4,00,000. The gold ornaments are
now reflected in the business of X as stock-in-trade. These gold ornaments were sold in the
previous year 2024-25 for a sum of 5,00,000.
(a) Compute the capital gain and business income.
(b) What would be the answer if the gold ornaments are held by the assessee till
31.3.2025?

Solution:
(a) The conversion of capital asset into stock-in-trade is treated as a transfer within the
meaning of section 2(47). In this case, conversion took place on 12.1.2023 i.e. in the
previous year 2022-23. Therefore, it will be treated as transfer of the previous year 2022-
23. But the capital gain will only arise in the previous year in which such asset is sold i.e.
previous year 2024-25.
Capital Gain of Assessment Year 2025-26
Rs.
Full value of consideration (Market value as on the date of 4,00,000
conversion)
Less: Indexed cost of acquisition — 1,00,000 x 331 1,98,204
167
Long-term capital gain 2,01,796

Business income (Previous year 2024-25):

Rs.
Sale price 5,00,000
Less: Market value as on the date of conversion 4,00,000
Business income 1,00,000

(b) if the gold ornaments are still held: There will neither be business income nor capital
gain because the asset has, no doubt, been converted into stock-in-trade, but it has not yet
been sold or otherwise transferred.

Problem 7: X invested Rs.10,000 to acquire 1000 shares of ABC Ltd. on 4-1-2015. He

holds the shares as investments. On 12-1-2021 he started a business of dealing in shares
and converts his holding into his stock-in-trade. The market value of the shares as on the
date of conversion was Rs.25 per share and therefore, X credited his capital account by
Rs.25,000 and debited his stock account by Rs.25,000. The shares are now reflected in the
business of X as stock-in-trade. The shares were sold in the previous year 2024-25 for a
sum of Rs.40,000.
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(a) Compute the capital gain and business income.

(b) What would be the answer if the shares are not yet sold by the assessee till 31-3-2025.

CAPITAL GAINS IN THE CASE OF COMPULSORY ACQUISITION OF

AN ASSET (SEC. 45(5))
Capital gain will be calculated in the year of Compulsory acquisition and tax will be paid in
the year when first installment of compensation is received.

Enhanced Compensation: a person can apply for enhancement of compensation to a

court, authority etc.
a. Taxable in a year when enhanced compensation is received.
b. COA and COI will be nil.
c. Litigation expenses for getting compensation enhanced is allowed as expenditure on
transfer.

The provisions contained in section 45 (5) of the Income Tax Act has been amended
to provide that the amount of compensation received in pursuance of an interim
order of the court, Tribunal or other authority shall be deemed to be income
chargeable under the head ‘Capital gains’ in the previous year in which the final
order of such court, Tribunal or other authority is made.

Illustration 5: X acquired a house for 20,000 in 1997-98. On his death in October 2012 the
house was acquired by his son Y. The market value of the house as on 1.4.2001 was
80,000. This house was acquired by the Government on 15.3.2016 for Rs.6,60,000 and a
compensation of 5,20,000 is paid to him on 25.3.2018 and the balance 1,40,000 on
15.4.2018. Y filed a suit against the Government challenging the quantum of compensation
and the court ordered for giving of additional compensation of 1,00,000. He incurred an
expenditure of 2,000 in connection with the suit. The additional compensation is received
on 14.3.2025. Compute the capital gains chargeable to tax.

Solution: Capital gain on initial compensation shall be chargeable in the assessment year
2018-19 i.e. for the previous year 2017-18, during which part of the compensation was
actually received by him, although the balance of 1,40,000 was received in the previous
year 2018-19.
Rs.
Compensation received 6,60,000
Less: Indexed cost of acquisition — 80,000 x 272 2,17,600
100
Long-term capital gain 4,42,400

1. 80,000 is the market value of the asset as on 1.4.2001.

2. 272 is the index of the financial year 2017-18 i.e. the year in which the property
was compulsory acquired.

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Capital gain for assessment year 2025-26 as enhanced compensation was received on
14.3.2025.
Rs. Rs.
Enhanced compensation received 1,00,000
Less: 1. Cost of acquisition Nil
2. Cost of improvement Nil
3. Expenses of transfer 2,000 2,000
Long-term capital gains 98,000

Problem 8: The Central Government acquires a house property owned by X on October

17, 2020. This property was purchased on April 10, 1996 for Rs.76,000 (cost of
improvement incurred during 2012-13: Rs.40,000 and fair market value of the property on
April 1, 2001 was Rs.1,32,000). The Government awards Rs.5,67,000 as compensation out
of which Rs.1,00,000 is received on May 4, 2022 and Rs.4,67,000 is received on April 1,
2023. Expenditure incurred by X for getting compensation fixed: Rs.2,000. Being aggrieved
against the award, X files an appeal. The court, as per order dated August 1, 2024,
enhanced the compensation from Rs.5,67,000 to Rs.8,50,000 (legal expenditure incurred in
court's proceedings : Rs.10,000). X receives the additional compensation of Rs.2,83,000 on
April 15, 2025. Compute the income under the head .Capital gains". Does it make any
difference if the additional compensation is received by X's son after the death of X?

TRANSFER OF CAPITAL ASSET BY A PARTNER TO FIRM (SEC.

45(3))
• The capital gain from the transfer of a capital asset by a partner to a firm by way of capital
contribution
• shall be chargeable to tax in the previous year in which transfer took place.
• The amount recorded in the books of the firm as value of capital asset, shall be deemed
to be sale consideration.

DISSOLUTION OF FIRM (SEC. 45(4)

• Capital gains from transfer by way of distribution of capital assets on dissolution of a firm
or otherwise
• shall be chargeable to tax as the income of the firm for the previous year in which such
distribution took place.
• The FMV of the capital asset on the date of distribution shall be taken as the sale
consideration.
Admission Dissolution
Section 45(3) 45(4)
Taxable in hands of Partner Firm
Sale consideration Amount in the books of firm Firm
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Capital gains on Transfer of Bonus Shares

a. if Bonus shares are received on and after 1/04/2001, then COA will be Nil
b. if Bonus shares are received before 1/04/2001, then COA will be Fair Market
Value as on 1/4/2001

Problem 9: X purchases 1100 equity shares in A Ltd. on June 11, 1999 @ Rs.30 per share
(brokerage: 1 percent). On May 23, 2012, he gets 550 bonus shares. Fair market value of
shares in A Ltd. on April 1, 2001 is Rs.46. He sells 1100 original shares on March 10, 2025
@ Rs.116 per share (brokerage: 1 per cent). Further on March 29, 2025, he sells 550
bonus shares @ Rs.175 per share (brokerage: 2 per cent). Calculate the value of capital
gain assuming that STT is not paid.

Capital gains on Transfer of Right Shares

COA will be price paid to the company for right issue.

RENOUNCEMENT OF RIGHT SHARES

a. Amount received by the person (who is renouncing the right), will be taxable as short
term capital gain.
b. For person who is taking the renouncement, COA will be total of amount paid to the
person who renounced the right shares and amount paid to the company.

Problem10: X holds 1,000 equity shares in A Ltd. since 1998 (cost of acquisition:
Rs.10.000, fair market value on April 1, 2001: Rs.16,000). A Ltd. Offers 2,000 rights shares
of Rs.10 each to X on May 1,2024 at a premium of Rs.50. X subscribes for 800 rights
shares and renounces 1,200 shares in favour of C by transferring the right entitlement for a
consideration of Rs.4,800. X sells 1,800 shares in A Ltd. on March 30, 2025 @ Rs.70 per
share.

CAPITAL GAIN IN THE CASE OF SELF GENERATED ASSETS

Self-generated assets FVC COA COI Expense Capital gain
s on
transfer
1. Goodwill of a Actual Nil Nil Actual Sale consideration minus
business Expenses on transfer
(Not of a
profession) Actual Nil Actual Actual Sale consideration minus
cost (or indexed cost) of
2. Tenancy rights, improvement minus
route permits and Actual Nil Nil Actual expenses on transfer
loom hours Sale consideration minus
expenses on transfer
3. Right to Actual Nil Actual Actual Sales consideration minus
manufacture, cost (or indexed cost) of
produce or process improvement minus

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GIBS INCOME TAX LAW & PRACTICE CAPITAL GAINS

any article expenses on transfer

4. Trade mark or brand

name associated
with a business

Note: 1. Self generated goodwill of a profession and a new formula patented to grow
seedless oranges is not chargeable to tax.
2. If above assets are purchased and latter on sold, then the actual purchase price will be
COA and COI will be same as above.

CAPITAL GAINS ON SALE OF ZERO COUPON BONDS

Amount received at the maturity of Zero coupons bonds will be taken as transfer for the
purpose of capital gains. Rule of 12 months is going to apply for the purpose of calculation
of period for long term or short term.

COMPUTATION OF CAPITAL GAINS IN SLUMP SALE (SEC. 50B)

1) Slump sale means sale of undertaking for a lump sum consideration without
determining the values of the individual assets and liabilities.
2) Any profit from slump sale shall be chargeable as LTCG in the year of transfer, if
undertaking is owned by the assessee for more than 36 months immediately preceding
the date of transfer.
3) Otherwise it shall be STCG.
4) For computing gain COA and COI shall be net worth.

*Net worth shall be total value of assets of the undertaking as reduced by the
liabilities appearing in the
books of account.
Total value of asset shall be computed as follows:
Type of Assets Total Value
(a) In case of Depreciable Assets WDV
(b) In case of Capital Assets, the whole of the expenditure of Nil
which is allowed as deduction u/s 35AD
(c) In case of Other Assets Book Value
A report of chartered accountant is required to be furnished certifying that net worth has
been computed correctly.

Notes :
1) Period of holding is not checked for individual asset.
2) Any expenses incurred on transfer shall be deducted.
3) Revaluation of asset shall be ignored.

CAPITAL GAINS IN REAL ESTATE TRANSACTIONS (SEC 50C)

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GIBS INCOME TAX LAW & PRACTICE CAPITAL GAINS

In the case of transfer of land or building, where the consideration declared to received or
accruing as a result of transfer is less than the value adopted or assessed by any authority
of a state government (stamp valuation authority) for the purpose of payment of stamp duty
in respect of such transfer, then such valuation will be taken as sale consideration for the
purpose of capital gain tax.

Valuation can be referred to the valuation officer: In the following conditions assessing
officer can refer valuation to valuation officer.
a. Where assessee claims that the fair value of the property is less than the valuation of
stamp authority.
b. If stamp valuation has not been disputed in any appeal or revision or reference before
authority or court.
Note: Valuation done by the valuation officer is less than the stamp valuation, and then
valuation done by the valuation officer will be taken as sale consideration.
And is Valuation done by the valuation officer is more than the stamp valuation, and then
valuation done by the valuation officer will not be taken into consideration.

REFERENCE TO VALUATION OFFICER (SEC. 55A)

For ascertaining the FMV of a capital asset, the assessing officer may refer the valuation of
capital asset to valuation officer in the following cases:

If the report of the registered valuer is attached :

• If the value of the asset claimed by the assessee, is as per the estimate made by
registered valuer and
• Assessing officer is of opinion that the value so claimed is less than at variance with its
market value.
The Assessing Officer is now entitled to question any variance from the FMV unlike earlier
where only a lesser value than FMV could be questioned. Hence, in case the assessee
claims the FMV to be higher than its cost of acquisition and the Assessing Officer is of a
different opinion, the same can be referred to the valuation officer. (Applicable from
1.7.2012)

If report of the registered valuer is not attached

• If assessing officer is of the opinion that
• the market value of the asset exceeds the value of the asset as claimed by the assessee
• and the difference is more than 15% of the value claimed by assessee or more than Rs.
25000 of the value claimed by the assessee.

Capital gains on compensation received on compulsory acquisition of agricultural

land situated within specified urban limits (sec 10(37) )
Compensation received by Individual or H.U.F on or after 1-4-2004 on compulsory
acquisition will be exempt from tax whether it is short term or long term capital gain. Date is
acquisition is irrelevant; date of compensation received is to be considered.

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GIBS INCOME TAX LAW & PRACTICE CAPITAL GAINS

Losses under the head “Capital Gains” (Sec. 74)

1) If there is loss under the head “Capital Gains”, the loss shall be carried forward to the
following assessment year and-against income under the head ‘Capital Gains” in
respect of any other capital asset;
a) if loss relates to long term capital asset, it shall be set off only against long term
capital gains.
b) If the loss cannot be wholly set off, the amount of loss not so set off shall be carried
forward to the
following assessment year and so on.
2) No loss shall be carried forward under this section for more than eight assessment
years immediately succeeding the assessment year for which the loss was first
computed.

MISCELLANEOUS POINTS OF CAPITAL GAINS

Jewellery
Jewellery includes:-

1) Ornaments made of gold, silver, platinum or any other precious metal or any alloy
containing one or more of such precious metal whether or not containing any precious or
semi-precious stone and whether or not worked or sewn into any wearing apparel.

2) Precious or semi-precious stone whether or not set in any furniture, utensil or other
article or worked or sewn into any wearing apparel.

PROBLEMS

Problem 1 During the previous year 2024-25, X sells the following assets :
Non-listed bonds Gold Shares (non-listed) Debent. (non-listed)

Date of sale March 31, 2025 April 10,2024 May 17, 2024 March 5, 2025
Date of acquisition April 10, 2017 June 3, 2001 April 10, 2009 April 10, 1985
Sale consideration 1,90,000 6,15,000 5,25,000 2,30,000
Cost of acquisition 44,000 60,000 55,000 40,000
Fair market value on 1.4. 2001 69,000 _____ 34,000
Income from other sources is Rs.1,48,000. The assessee deposits Rs.16,000 in public
provident fund. Find out the tax liability.

Problem 2 On April 1, 2024, X owns two house properties at Agra apart from investment in
units. During the previous year 2024-25, X sells the following assets:
Units of SBI Mutual Fund Residential house property at Agra
Date of sale May 10, 2024 June 15,2024
Date of purchase June 9, 2015 May 17, 2017

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GIBS INCOME TAX LAW & PRACTICE CAPITAL GAINS

Sale consideration Rs.88,00,00 Rs.18,15,000

Cost of acquisition Rs.2,25,000 Rs.4,00,000
Income of X from other sources is Rs.5,86,000.

Assuming that X makes the following investments during the previous year 2024-25, Find
out the tax liability of X for the assessment year 2025-26.
a. Purchase of a residential house property: Rs.6,22,000.
b. Deposit in the public provident fund account: Rs.60,000.

Problem 3 Find out the tax liability of X, a resident individual for the assessment year
2025-26 from the data given below:
Long-term capital gain arising on transfer of gold Rs.30,000
Interest on deposit with a firm Rs.45,000
Contribution towards public provident fund 11,000
Does it make any difference if X is a non-resident foreign citizen?

Problem 4 X, a resident individual has the following income for the previous year 2024-25:
Business income (-) Rs.15,000
Short-term capital gain Rs.13,000
Long-term capital gain on sale of land Rs.61,000
Find out the tax liability for the assessment year 2025-26, assuming that he pays life
insurance premium of Rs.4000.

Problem 5 Mrs. X has the following income for the previous year 2024-25:
Salary Rs. 48,000
Business income Rs. (-)54,000
Short-term capital gain Rs.2,000
Long-term capital gain on sale of non-listed shares Rs.79,000
She deposits Rs.5000 in the public provident fund account find out the tax liability for the
assessment year 2024-25 on the assumption that Mrs. X is (a) resident and ordinarily
resident or (b) resident but ordinarily resident or (c) nonresident in India.

Problem 6 During the previous year 2024-25, X sells the following assets on July 1, 2024:
Shares in A Shares in B Shares in C Ltd
Ltd (listed) Ltd (listed) (non-listed)
Sale consideration Rs. 500,000 Rs.410000 Rs.689000
Cost of acquisition Rs.26000 Rs.110000 Rs.20000
Date of acquisition May 10, 2009 June 6, 2010 April 6, 2011
Income of X from other sources is Rs.7,86,000. X deposits Rs.50,000 in public provident
fund. Find out the net income and tax liability for the assessment year 2025-26.

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 V- STUDY [INCOME TAX LAW & PRACTICE]

Exemptions under the head ‘Capital Gains’. (Section 54)

Type of capital Who Capital asset New asset to Time to acquire new Amount of Period to In case of Not utilising amt. of
gain can eligible for acquire to get asset exemption hold new transfer of Capital gain
claim exemption exemption asset to new asset account scheme
exempti get before with in stipulated
on exemption stipulated period
period(Defa
ult)
CG from transfer Ind/HUF Long term Res. HP 1 year back or 2 yrs. CG or 3 yrs. Short term long term CG
of residential Residential HP forward investment, CG
HP(54) (const. 3 yrs) whichever is
less
CG from transfer Ind. Agriculture Agriculture 2 yrs. Forward CG or 3 yrs. Short term Short term or long
of land used for land used for land investment, CG term CG depending
agriculture(54B) atleast two whichever is on original CG
years prior to less
transfer
CG from Any L&B of ind. L&B of ind. 3 yrs. Forward CG or 3 yrs Short term Short term or long
compulsory acq. person used for Undertaking investment, CG term CG depending
of L&B forming atleast two whichever is on original CG
part of ind. (54D) years prior to less
transfer
CG not to be Any Any Long term Bonds issued within a period of six CG or 3 yrs. Long term N.A
charged on person asset. by RECI, NHAI months after the sale of investmentnot CG
investment in and long term capital asset exceeding fifty
certain bonds any notified lakh rupees,
(54EC) bonds whichever is
redeemable less
after three
years

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 V- STUDY [INCOME TAX LAW & PRACTICE]

CG from any Ind./HU Any Long term HP ( don’t own 1 year back or 2 yrs. Proportionate 3 yrs. Long term long term CG
asset except F asset except more than 1 Forward CG
residential HP HP HP on date of const. 3 yrs)
(54F) transfer
CG from shifting Any Short term/ L&B, P&M 1 year back or 3 yrs. CG or 3 yrs. Short term Short term or long
of Ind. From person Long Term forward investment, CG term CG depending
urban area to L&B, P&M whichever is on original CG
SEZ (54GA) less

• CG from shifting of Industrial undertaking from urban area (54G)Same as 54 GA

NOTES:

1. The amount of investment should be utilized for specific assets as mentioned above in all cases except 54EC upto
due date of furnishing return or it should be deposited in Capital Gains A/C Scheme upto due date.
2. In the event of death of an individual before the stipulated period, the unutilized amount is not chargeable to tax in
the hands of legal heirs of the diseased individual.
3. The period for acquiring the new asset referred in all above sections shall be computed from the date of receipt of
compensation and not from the date on which the asset was originally transferred, the case of compulsory
acquisition. (Section 54H)
4. The provisions contained in sub-section (1) of section 54 and sub-section (1) of section 54F inter alia,
provide that subject to certain conditions, capital gains to the extent invested in residential house is not
chargeable to tax under section 45 of the Act. Since this benefit was intended for investment in one
residential house within India. Accordingly, provisions of section 54 (1) and 54F(1) has been amended vide
Finance (No. 2) Act, 2014 so as to provide that the relief under the said sections are available if the
investment is made in one residential house situated in India.

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VIDYASAGAR INSTITUTE [Link]- INCOME TAX & AUDITINGCAPITAL GAINS

Illustration 7:

R owns a residential house which was purchased by him in 1995 for 60,000. The fair
market value of the house as on 1.4.2001 was 1,70,000. This house is sold by him on
16.7.2024 for a consideration of 26,00,000. The brokerage and other expenses on the
transfer were 12,000. The due date of furnishing the return of income is 31.7.2025.
Compute the capital gain for the assessment year 2025-26 in the following situations:

(a) he invests 3,00,000 for purchase of a new house on 14.5.2025.

(b) he purchased a piece of land for construction of a house on 21.10.2024 for

1,60,000 and deposited 1,30,000 in the Capital Gains Accounts Scheme on
15.7.2025 and a further sum of 1,50,000 on 31.7.2026.

(c) he invested 3,15,000 on construction of an additional floor at a residential

house already owned by him. The investment is made during the period
1.10.2024 to 31.12.2026.

(d) he invested 3,40,000 in Capital Gains Accounts Scheme on 29.7.2025 and

1,00,000 on 1.8.2025. He purchased a house property on 5.8.2025 for 3,25,000
by withdrawing this amount from the Scheme. No further investments were
made by him.

Solution:

Rs. Rs.

Sale consideration 26,00,000

Less: 1. Expenses on transfer 12,000

2. Indexed cost of acquisition 1,70,000 x 363 6,17,100 6,29,100

100

Long-term capital gain 19,70,900

The exemption u/s 54 from long-term capital gain under various situations will be as under:

(a) The exemption will be 3,00,000. Hence taxable capital gain will be 16,70,900.

(b) The exemption will be 1,60,000 + 1,30,000 = 2,90,000. Hence taxable capital
gain will be 16,80,900. No deduction of 1,50,000 as it is deposited on
31.7.2026.

(c) The exemption will be 3,15,000. Hence taxable capital gains will be 16,55,900.

(d) Exemption for assessment year 2023-24 will be 3,40,000 i.e. the amount
deposited in the Capital Gains Accounts Scheme before the due date of
furnishing the return specified under section 139(1) or the amount of capital
gain, whichever is less. Hence, taxable capital gain for assessment year 2025-
26 will be 16,30,900. However, as a sum of 3,25,000 only has been utilised for
purchase of the house, the balance amount of 15,000 remaining unutilised for
which exemption was claimed under section 54 shall be the taxable capital gain
of the assessment year 2027-28 (previous year 2026-27).

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VIDYASAGAR INSTITUTE [Link]- INCOME TAX & AUDITINGCAPITAL GAINS

Illustration 8:

G sold a residential house on 28.6.2024 for 20,00,000. He had purchased this house on
1.10.2011 for 1,20,000 and had spent 70,000 on improvement of the house during the year
2012-13. He purchased a new house on 21.10.2024 for 3,50,000. This house was also sold
by him on 16.7.2025 for 6,00,000. He purchased another house on 21.11.2025 for
8,00,000. Compute the capital gains for the assessment year 2025-26 and 2026-27.

Solution

Assessment year 2025-26 Rs. Rs.

Full value of consideration 20,00,000

Less: (i) Indexed cost of acquisition — 1,20,000 x 363 2,36,739

184

(ii) Indexed cost of improvement-— 70,000 x 363 1,27,050 3,63,789

200

Long-term capital gain 16,36,211

Less: Exemption u/s 54 — Amount invested 3,50,000

3,50,000

Long-term capital gain 12,86,211

Assessment year 2024-25

Full value of consideration 6,00,000

Less: Cost of acquisition (3,50,000 — Capital gain

exempt u/s 54 earlier i.e., 3,50,000) Nil

Short-term capital gain 6,00,000

There will be no exemption under section 54 for house purchased on 21.11.2025

because the above capital gain Is a short-term capital gain.

Illustration 9:

R acquired shares of G Ltd., on 15.12.2014 for 5,00,000 which were sold on 15.5.2024 for
19,50,000. Expenses of transfer were 20,000. He invests 4,00,000 in the bonds of Rural
Electrification Corporation Ltd. on 16.10.2024.

(a) Compute the capital gain for the assessment year 2025-26.

(b) State the period for which the bonds should be held by the assessee. What will be the
consequences if such bonds are sold within the specified period.

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VIDYASAGAR INSTITUTE [Link]- INCOME TAX & AUDITINGCAPITAL GAINS

(c) What will be the consequences if R takes a loan against the security of such bonds.

Solution
Rs.
(a) Sales consideration 19,50,000
Less: (i) Expenses of transfer 20,000
(ii) Indexed cost of acquisition — 5,00,000 x 363 7,56,250 7,76,250
240
Long-term capital gain 11,73,750
Less: Exemption u/s 54EC 4,00,000
Taxable long-term capital gain 7,73,750

(b) R should not transfer or convert (otherwise then transfer) into money such bonds within
3 years from the date of their acquisition. If these bonds are transferred or converted
into money within 3 years, capital gain of 4,00,000 exempt u/s 54EC earlier, will be long
term capital gain of the previous year in which such asset is transferred or converted
into money.

(c) if any loan is taken against the security of such bonds, it will be treated as if it is
converted into money as such capital gain exempt earlier on such bonds, shall be long
term capital gain of the previous year in which such loan is taken against the security of
such bonds.

Illustration 10:

M sold gold ornaments on 16.7.2024 for a sum of 20,00,000. This gold was purchased in
1998 for 60,000 by his father. The fair market value of the gold as on 1.4.2001 was
1,00,000. His father gifted the gold to M on 14.7.2024. He spent 8,00,000 till 31.7.2025 (the
due date for filing of the return) on construction of a house property and deposited 9,00,000
on 31.7.2025 under capital gain scheme and a further sum of 1,50,000 on 31.8.2025. He
withdrew from the capital gain scheme a sum of 8,00,000 for construction of the house
property till the stipulated time. Compute the capital gain chargeable to tax on this
transaction for various relevant assessment years.

Solution:

Capital Gain for the assessment year 2025-26

Rs. Rs.
Sale consideration 20,00,000
Less: (i) Expenses on transfer Nil
(ii) Indexed cost of acquisition — 1,00,000 x 363
100 3,63,000 3,63,000
Long-term capital gain 16,37,000
Less: Exemption u/s 54F (16,37,000 x 1700000) 13,91,450
2000000
Taxable long-term capital gain 2,45,550

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VIDYASAGAR INSTITUTE [Link]- INCOME TAX & AUDITINGCAPITAL GAINS

Capital Gain for the assessment year 2029-30

Step 1 Exemption already claimed u/s 54F in assessment year 2025-26

(16,37,000 x 1700000) 13,91,450
2000000
Step 2 Exemption allowed based upon the actual amount spent within
3 years from the date of transfer of the original
asset i.e. upto 15.7.2025 (16,37,000 x 1600000 ) 13,06,900
2000000
Step 3 Taxable long-term capital gain (1-2) 84,550

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