Tag: Capital Gains
by Computation of Capital gain in Case of Depreciable Assets [Sec. 74]
Section 74 of the Income-tax Act, 2025 provides a special method for computing capital gains arising from the transfer of depreciable capital assets forming part of a block of assets on which depreciation has been allowed. The normal capital-gain provisions relating to computation and cost are subject to this special rule. Where the consideration from transfer exceeds the prescribed aggregate of transfer expenses, opening written down value (WDV), and actual cost of additions during the tax year, the excess is treated as capital gain arising from short-term capital assets. Special treatment also applies where the entire block ceases to exist.
1. Where Sale Consideration Exceeds the Block Value
Where one or more depreciable assets belonging to a block of assets are transferred during the tax year, capital gain arises if the total sale consideration exceeds the prescribed aggregate. This aggregate consists of transfer expenses, the opening WDV of the block, and the actual cost of assets added to that block during the tax year. The amount by which the sale consideration exceeds this aggregate is deemed to be short-term capital gain (STCG). This treatment applies under Section 74 irrespective of the period for which the individual depreciable asset was held. Thus, even a depreciable asset held for several years may generate STCG.
Computation Table
| Particulars | Amount (₹) |
|---|---|
| Full Value of Consideration of assets transferred | XXX |
| Less: Transfer Expenses | (XXX) |
| Less: Opening WDV of Block | (XXX) |
| Less: Actual Cost of Assets Added during Tax Year | (XXX) |
| Short-Term Capital Gain (STCG) | XXX |
2. Where the Entire Block of Assets Ceases to Exist
Where all assets forming part of a block are transferred during the tax year and consequently the block ceases to exist, Section 74 provides a special computation rule. The cost of acquisition of the block is taken as its opening written down value, increased by the actual cost of any asset added to that block during the tax year. The income received or accruing from transfer is considered for determining the resulting capital gain or loss under the prescribed mechanism. Any capital gain arising under this provision is treated as gain from short-term capital assets, regardless of the actual holding period of individual assets.
3. Nature of Capital Gain
A significant feature of Section 74 is that capital gain computed on transfer of depreciable assets under the section is treated as short-term capital gain. The normal distinction between short-term and long-term capital assets based upon their period of holding does not determine the character of the gain for this special computation. The rule applies because depreciation has already been allowed on assets forming part of the relevant block. Consequently, where the prescribed conditions result in a capital gain, such gain is deemed to arise from the transfer of short-term capital assets. This special treatment overrides the ordinary holding-period classification for these depreciable assets.
illustration
Suppose the opening WDV of a block is ₹8,00,000. New machinery costing ₹2,00,000 is added during the year. Assets are sold for ₹12,00,000 and transfer expenses are ₹50,000.
| Particulars | Amount (₹) |
|---|---|
| Full Value of Consideration | 12,00,000 |
| Less: Transfer Expenses | (50,000) |
| Less: Opening WDV | (8,00,000) |
| Less: Cost of New Asset Added | (2,00,000) |
| Short-Term Capital Gain | 1,50,000 |
Therefore, ₹1,50,000 is deemed to be short-term capital gain under Section 74.
Deemed or Notional Cost of Acquisition [Sec. 73]
Section 73 of the Income-tax Act, 2025 provides rules for determining the deemed or notional cost of acquisition in specified cases where the actual acquisition cost cannot appropriately be used for computing capital gains. The provision applies to certain capital assets acquired through specified modes or under particular circumstances prescribed by the Act. Instead of relying solely on the amount actually paid by the assessee, the law determines a statutory cost of acquisition for capital-gains purposes. This deemed cost ensures proper computation of taxable capital gains by establishing an appropriate cost base, particularly where an asset has been acquired without an ordinary purchase transaction.
Applicability of Section 73:
1. Assets Acquired by Gift or Will
Section 73 applies where a capital asset becomes the property of the assessee through a gift or will. Since the recipient normally does not pay a purchase price for such an asset, the ordinary rule for determining cost cannot be applied. Therefore, the cost of acquisition is generally taken as the cost for which the previous owner acquired the property, increased by qualifying cost of improvement incurred or borne by the previous owner or the assessee. This deemed cost becomes relevant when the recipient subsequently transfers the asset and capital gain is computed under the Act. Thus, Section 73 provides continuity of cost in such transfers.
2. Assets Acquired by Succession or Inheritance
Where a capital asset is acquired by succession, inheritance or devolution, Section 73 determines its cost for capital-gains purposes. The person inheriting the property generally does not incur an actual acquisition price. Accordingly, the cost to the previous owner is treated as the cost of acquisition of the assessee, together with qualifying improvement cost as provided by the section. This rule becomes important when the inherited asset is later transferred and taxable capital gain has to be determined. By adopting the previous owner’s cost, Section 73 ensures that the original cost base of the asset continues despite the change in ownership through inheritance or succession.
3. Distribution of Assets on Liquidation
Section 73 also applies to specified capital assets received on the distribution of assets upon liquidation of a company. Where an asset becomes the property of an assessee through such distribution, its cost of acquisition is determined according to the special rule prescribed in the section rather than merely by reference to an ordinary purchase price. In the cases covered by the relevant entry, the previous owner’s cost, together with qualifying cost of improvement, forms the basis for determining the deemed cost. This amount becomes relevant when the assessee subsequently transfers the asset. The provision therefore establishes an appropriate cost base for capital-gains computation.
4. Transfer to Revocable or Irrevocable Trust
Where a capital asset becomes the property of the assessee under a transfer to a revocable or irrevocable trust, Section 73 may apply for determining its cost of acquisition. Such transfers may occur without an ordinary sale consideration, making it necessary to prescribe a statutory cost for future capital-gains computation. In the cases specified by Section 73, the cost incurred by the previous owner, increased by qualifying cost of improvement incurred by the previous owner or assessee, is adopted. Therefore, when the capital asset is subsequently transferred, the prescribed deemed cost is used for determining the resulting capital gain or capital loss under the applicable provisions.
5. Shares Received on Amalgamation
Section 73 applies where an assessee receives shares in an amalgamated company, which is an Indian company, in consideration of a qualifying transfer under Section 70(1)(f). In such circumstances, the cost of acquisition of the shares received in the amalgamated company is deemed to be the cost of acquisition of the shares in the amalgamating company. Therefore, no new cost is created merely because old shares are exchanged for shares of the amalgamated company in a qualifying amalgamation. This rule maintains continuity of cost and enables correct computation of capital gains when the shares in the amalgamated company are subsequently transferred.
6. Shares Received on Demerger
Section 73 contains specific rules for determining the cost of shares received pursuant to a demerger. The cost of acquisition of shares in the resulting company is determined by allocating the cost of the original shares in the demerged company according to the statutory formula based on the net book value of assets transferred and the net worth of the demerged company. Correspondingly, the cost of the original shares remaining in the demerged company is reduced by the amount allocated to the resulting company. This mechanism ensures a proper allocation of original cost between the shares of the demerged and resulting companies for future capital-gains computation.
7. Other Specified Modes of Acquisition
Section 73 also applies to several other specifically prescribed capital assets and transactions, including certain specified securities, sweat equity shares, LLP interests, business-trust units, mutual-fund units and corporate restructuring transactions. For each category, the statutory table specifies the amount that must be treated as the cost of acquisition. The applicable cost may be based on the previous asset’s cost, fair market value, prescribed market price or another statutory formula, depending upon the transaction. Therefore, Section 73 is not limited to gifts and inheritances; it provides comprehensive special cost rules for various non-ordinary modes of acquiring capital assets.
Cases Where Cost of Acquisition is Deemed:
1. Property Acquired by Gift or Will
Where a capital asset is acquired by the assessee through gift or will, there is generally no actual purchase price paid by the recipient. Therefore, Section 73 provides that the cost of acquisition is generally taken as the cost for which the previous owner acquired the asset, together with the qualifying cost of improvement as prescribed. This deemed cost is used when the recipient subsequently transfers the capital asset and capital gains are computed. The provision maintains continuity in the cost of the asset and prevents the acquisition cost from becoming nil merely because the assessee received the property without paying consideration.
2. Property Acquired by Succession or Inheritance
Where an assessee acquires a capital asset through succession, inheritance or devolution, the cost of acquisition is determined according to the deemed-cost provisions of Section 73. Since the heir or successor ordinarily does not pay a purchase consideration for acquiring the inherited property, the previous owner’s cost is generally adopted as the assessee’s cost, subject to the prescribed adjustments and qualifying improvement expenditure. When the inherited property is subsequently transferred, this deemed amount is considered while calculating the resulting capital gain or loss. Thus, the provision ensures continuity of the historical acquisition cost even though ownership passes from one person to another through inheritance.
3. Property Received on Partition of HUF
Where a capital asset becomes the property of an assessee on the total or partial partition of a Hindu Undivided Family (HUF), the assessee does not ordinarily incur an independent purchase cost. Therefore, Section 73 provides an appropriate deemed-cost mechanism for determining the asset’s acquisition cost. Generally, the cost attributable to the previous owner is relevant, subject to the conditions and adjustments specified in the Act. This cost becomes important when the member subsequently transfers the asset and capital gains have to be calculated. The provision ensures that distribution of family assets does not result in the loss of the original cost base for capital-gains purposes.
4. Property Acquired through Specified Trust Arrangements
Where a capital asset becomes the property of an assessee through specified revocable or irrevocable trust arrangements, Section 73 may prescribe the cost to be adopted instead of an ordinary purchase price. Since such acquisition may occur without a conventional sale transaction, the Act generally maintains continuity of cost by referring to the cost incurred by the previous owner, together with eligible improvement expenditure where applicable. The deemed cost becomes relevant when the recipient subsequently transfers the capital asset. Thus, the provision establishes a statutory acquisition value and enables proper calculation of the capital gain or capital loss arising on the eventual transfer of the property.
5. Shares Acquired in Amalgamation
Where a shareholder receives shares of an amalgamated company in exchange for shares held in the amalgamating company under a qualifying amalgamation, the new shares do not have an ordinary independent purchase price. Accordingly, Section 73 generally deems the cost of the shares in the amalgamating company to be the cost of acquisition of the corresponding shares received in the amalgamated company. This preserves continuity of the shareholder’s investment cost through the corporate restructuring. When the new shares are subsequently transferred, the deemed cost is used for computing capital gains. The rule prevents an artificial resetting of acquisition cost merely because of a qualifying amalgamation.
6. Shares Acquired in Demerger
In the case of a qualifying demerger, a shareholder may receive shares in the resulting company without making a separate payment for those shares. Section 73 therefore provides a statutory method for allocating the original cost of shares held in the demerged company between the shares of the demerged company and the resulting company. The allocation is generally made using the prescribed relationship between the net book value of assets transferred and net worth of the demerged company. This allocated amount becomes the deemed cost of shares in the resulting company and is used when those shares are subsequently transferred for determining taxable capital gains.
7. Other Specified Capital Assets
Section 73 contains special deemed-cost rules for various other specified capital assets and transactions where the ordinary purchase-price method may not provide an appropriate cost. Depending upon the particular case, the deemed cost may be determined with reference to the cost of an earlier asset, fair market value, prescribed market value or another statutory amount. Such provisions may apply to specified securities, units, business reorganisations and other transactions expressly covered by the Act. The purpose is to provide a definite and consistent cost of acquisition for capital-gains computation where an asset is acquired through a special transaction rather than through an ordinary purchase.
Cost of Acquisition in Specified Modes of Transfer:
1. Gift or Will
Where a capital asset becomes the property of the assessee through a gift or will, the assessee ordinarily does not pay any consideration for acquiring it. Under Section 73, the cost of acquisition is generally deemed to be the amount for which the previous owner acquired the asset, together with the qualifying cost of improvement incurred or borne by the previous owner or the assessee, as applicable. Therefore, the cost is not treated as nil merely because the recipient acquired the asset without payment. This deemed cost is considered when the recipient subsequently transfers the asset and capital gains are computed.
2. Succession, Inheritance or Devolution
Where an asset is acquired through succession, inheritance or devolution, the cost of acquisition is generally determined with reference to the cost to the previous owner. The heir or successor does not ordinarily incur a purchase price while acquiring the property. Therefore, Section 73 preserves the historical cost of the asset for capital-gains purposes. Qualifying cost of improvement may also be considered according to the applicable provisions. When the inherited asset is subsequently sold or otherwise transferred, this deemed acquisition cost is deducted in determining the capital gain. Thus, the provision ensures continuity of cost despite the change in ownership through inheritance.
3. Distribution of Assets on Partition of HUF
Where a capital asset becomes the property of an assessee upon the total or partial partition of an HUF, the acquisition does not involve an ordinary purchase transaction. Consequently, Section 73 applies a deemed-cost rule for determining the asset’s acquisition cost. Broadly, the cost to the previous owner forms the basis for determining the cost in the hands of the recipient, subject to the statutory provisions concerning qualifying improvements and other adjustments. When the member subsequently transfers the asset, this cost is considered for calculating capital gain or capital loss. The rule maintains continuity of the original cost despite distribution of property upon HUF partition.
4. Transfer through Specified Trust
Where a capital asset becomes the property of the assessee through specified revocable or irrevocable trust arrangements, the Act provides a special rule for determining the cost of acquisition. Since the recipient may acquire the asset without paying an ordinary purchase consideration, the previous owner’s acquisition cost is generally relevant, subject to the conditions specified in Section 73. Eligible improvement expenditure may also form part of the cost where permitted. When the asset is subsequently transferred, the deemed cost is used in computing the resulting capital gains. This ensures that a qualifying transfer through a trust does not artificially create a new acquisition cost.
5. Shares Received on Amalgamation
Where shares in an amalgamated company are received in consideration for shares held in the amalgamating company under a qualifying amalgamation, Section 73 provides for continuity of acquisition cost. Generally, the cost of acquiring the shares in the amalgamated company is deemed to be the cost of the corresponding shares in the amalgamating company. The shareholder therefore does not obtain a new cost merely because the shares have been exchanged as part of the amalgamation. When the new shares are subsequently transferred, this deemed cost is considered in computing the resulting capital gain or loss. This treatment facilitates tax-neutral corporate restructuring.
6. Shares Received on Demerger
Where an assessee receives shares in a resulting company pursuant to a demerger, the cost of the original shares is appropriately allocated between the shares of the demerged company and the resulting company. Section 73 provides a statutory formula based broadly on the net book value of assets transferred in relation to the net worth of the demerged company. The amount so allocated becomes the cost of acquisition of shares in the resulting company. Correspondingly, the cost of shares in the demerged company is reduced by that amount. This allocation ensures accurate capital-gains computation when either set of shares is subsequently transferred.
7. Conversion or Corporate Reorganisation
Section 73 also contains special cost rules for assets or securities received under specified conversion, succession or corporate reorganisation transactions. Where the original transaction receives tax-neutral treatment, the cost of the new capital asset is generally determined with reference to the cost of the original asset or interest, or according to another method specifically prescribed by the Act. This prevents taxpayers from obtaining an artificial increase or decrease in acquisition cost merely because the legal form of their investment changes. The deemed cost subsequently becomes relevant when the new asset is transferred and the resulting taxable capital gain or loss is calculated.
Computation of Capital gain in Certain cases:
The Income-tax Act, 2025 contains special provisions for the computation of capital gains in certain cases where the ordinary method of deducting cost from sale consideration may not provide the correct taxable gain. These provisions apply to transactions such as depreciable assets, compulsory acquisition, slump sale, transfer of shares or securities, conversion of capital assets, and other specified transactions. Depending upon the nature of the transaction, the Act may prescribe a special full value of consideration, cost of acquisition, period of holding, or computation method. These rules ensure consistent and appropriate determination of taxable capital gains in specified circumstances.
General Computation
| Particulars | Amount (₹) |
|---|---|
| Full Value of Consideration | XXX |
| Less: Transfer Expenses | (XXX) |
| Less: Cost of Acquisition | (XXX) |
| Less: Cost of Improvement, where applicable | (XXX) |
| Capital Gain | XXX |
| Less: Eligible Exemption, if any | (XXX) |
| Taxable Capital Gain |
XXX |
Computation of Long Term Capital Gain (LTCG)(Sec-72)
Under Section 72 of the Income-tax Act, 2025, capital gains arising from the transfer of a long-term capital asset are computed according to the prescribed capital-gains provisions. A capital asset becomes long-term when it is held for more than the specified period, which varies according to the nature of the asset. The computation generally begins with the full value of consideration received or accruing on transfer. From this amount, eligible transfer expenditure, cost of acquisition and cost of improvement are deducted as permitted by the Act. Applicable exemptions are subsequently considered to determine the taxable long-term capital gain.
Computation of LTCG:
| Particulars | Amount (₹) |
|---|---|
| Full Value of Consideration | XXX |
| Less: Expenditure incurred wholly and exclusively in connection with transfer | (XXX) |
| Less: Cost of Acquisition | (XXX) |
| Less: Cost of Improvement, where allowable | (XXX) |
| Long-Term Capital Gain (LTCG) | XXX |
| Less: Eligible capital-gain exemptions | (XXX) |
| Taxable Long-Term Capital Gain | XXX |
illustration
Suppose Mr. A sells a long-term capital asset for ₹25,00,000. Its allowable cost of acquisition is ₹12,00,000, cost of improvement is ₹2,00,000 and transfer expenses are ₹50,000.
| Particulars | Amount (₹) |
|---|---|
| Sale Consideration | 25,00,000 |
| Less: Transfer Expenses | (50,000) |
| Less: Cost of Acquisition | (12,00,000) |
| Less: Cost of Improvement | (2,00,000) |
| Long-Term Capital Gain | 10,50,000 |
Thus, the LTCG is ₹10,50,000, before considering any exemption available under the Income-tax Act, 2025.
Meaning of “Adjusted”, “Cost of Improvement” and “Cost of Acquisition” (Sec.90)
Section 90 of the Income-tax Act, 2025 provides important definitions for computing income chargeable under the head “Capital Gains.” It explains expressions used in determining the cost attributable to a capital asset, particularly “adjusted,” “cost of improvement” and “cost of acquisition.” These concepts are important because capital gain is generally determined after deducting the allowable cost of acquisition and improvement from the consideration received on transfer. Section 90 also contains special rules for determining these costs in different circumstances. Thus, it helps establish the correct cost base of a capital asset and ensures proper and consistent computation of taxable capital gains.
1. Meaning of “Adjusted”
Under Section 90, the expression “adjusted” is used for specified capital-gains computations where the cost of an asset requires modification according to the provisions of the Act. The adjustment ensures that the amount considered as cost properly reflects the statutory treatment of the capital asset. Depending upon the nature of the asset and transaction, the original cost may require modification by considering prescribed amounts or circumstances. Such adjustment is relevant because the amount treated as cost directly affects the capital gain or capital loss arising on transfer. Therefore, the concept of adjusted cost helps determine the appropriate tax basis for computing taxable capital gains.
2. Cost of Improvement
Cost of improvement generally refers to expenditure of a capital nature incurred in making additions or alterations to a capital asset by the assessee or, in specified cases, by the previous owner. Such expenditure enhances or improves the value, quality or usefulness of the asset and may be considered while computing capital gains, subject to the provisions of Section 90. Ordinary repairs and revenue expenditure are not treated as cost of improvement merely because they maintain the asset. The amount qualifying as cost of improvement is deducted according to the applicable capital-gains computation provisions, thereby helping determine the actual taxable gain arising from transfer of the capital asset.
3. Cost of Acquisition
Cost of acquisition means the amount incurred by the assessee for acquiring a capital asset, subject to the specific rules contained in Section 90 and other applicable provisions. It ordinarily includes the purchase price and qualifying expenditure directly attributable to acquisition. Where an asset is acquired through specified modes such as gift, inheritance, succession or certain reorganisations, the Act may prescribe a special method for determining its cost, including reference to the cost to the previous owner. Special rules may also apply to assets acquired before prescribed dates or without an ascertainable purchase price. The allowable cost is important for calculating the resulting capital gain or loss.
Transactions not regarded as Transfer (Sec. 70)
Under Section 70 of the Income-tax Act, 2025, certain transactions are specifically not regarded as transfer for the purpose of capital gains. Consequently, the charging provision of Section 67 does not apply to such transactions when the prescribed conditions are satisfied. These exclusions generally cover transactions involving family arrangements, gifts, corporate restructuring, amalgamation, demerger and specified conversions. The purpose is mainly to provide tax neutrality where ownership is reorganised without an ordinary commercial sale, subject to fulfilment of the statutory requirements.
1. Distribution of Assets on Partition of HUF
Under Section 70(1)(a), distribution of capital assets on the total or partial partition of a Hindu Undivided Family (HUF) is not regarded as a transfer for capital-gains purposes. When an HUF is partitioned, its assets may be distributed among its members according to their respective rights. Although ownership of the assets changes, such distribution does not attract capital gains under Section 67. The provision recognises partition as a rearrangement or distribution of family property rather than an ordinary commercial transfer. Therefore, no capital gain arises merely because the capital assets of the HUF are distributed among members pursuant to a total or partial partition.
2. Transfer under Gift, Will or Irrevocable Trust
Under Section 70(1)(b), transfer of a capital asset by an individual or HUF under a will, gift or irrevocable trust is not regarded as a transfer for capital-gains purposes. Accordingly, the transferor is generally not liable to capital-gains tax merely because ownership of the capital asset passes to another person through one of these specified modes. The exemption reflects the fact that such transactions are ordinarily not commercial sales for consideration. However, the statutory conditions concerning the nature of the transferor and transaction must be fulfilled. Subsequent transfer of the asset by the recipient may have separate capital-gains consequences under the Act.
3. Transfer by Holding Company to Subsidiary Company
Under Section 70(1)(c), transfer of a capital asset, other than stock-in-trade, by a company to its subsidiary company is not regarded as a transfer if prescribed conditions are satisfied. The parent company or its nominees must hold the whole share capital of the subsidiary, and the subsidiary must be an Indian company. Where these requirements are fulfilled, the transfer does not attract capital-gains taxation under Section 67 at that stage. The provision facilitates restructuring and movement of capital assets within a wholly owned corporate group without immediate capital-gains liability, while ensuring that the benefit is available only in specifically qualifying holding-subsidiary relationships.
4. Transfer by Subsidiary Company to Holding Company
Under Section 70(1)(d), transfer of a capital asset, other than stock-in-trade, by a subsidiary company to its holding company is not regarded as a transfer where the statutory conditions are satisfied. The whole share capital of the subsidiary company must be held by the holding company, and the holding company must be an Indian company. Consequently, qualifying transfers of capital assets within such a wholly owned corporate structure do not immediately attract capital-gains tax under Section 67. The provision provides tax neutrality for genuine intra-group restructuring, although the prescribed ownership and other conditions must continue to be carefully considered for claiming the benefit.
5. Transfer in a Scheme of Amalgamation
Under Section 70(1)(e), transfer of a capital asset by an amalgamating company to an amalgamated company under a scheme of amalgamation is not regarded as a transfer where the amalgamated company is an Indian company. An amalgamation involves combining companies and transferring the assets and liabilities of the amalgamating company to the resulting company. Although legal ownership of capital assets changes, the qualifying transaction receives tax-neutral treatment for capital-gains purposes. Therefore, no immediate capital gain is charged under Section 67 on such transfer when the statutory conditions are fulfilled. This provision facilitates genuine corporate reorganisations and amalgamations without immediate capital-gains taxation.
6. Other Specified Corporate Restructuring Transactions
Section 70 also covers several other qualifying transactions involving amalgamation, demerger, business reorganisation, conversion and corporate restructuring, subject to detailed statutory conditions. These transactions may involve transfer or exchange of capital assets, shares or other interests as part of a genuine restructuring arrangement. Although such transactions might ordinarily fall within the broad meaning of transfer, the Act grants tax-neutral treatment where the specific requirements of Section 70 are fulfilled. The relief generally postpones capital-gains taxation rather than permanently eliminating tax consequences, because subsequent disposal of the resulting asset may become taxable. Thus, Section 70 facilitates qualifying reorganisations without immediate capital-gains liability.
Basis of Charge-Capital Asset [Sec. 2(22)], Types of Capital Asset-Transfer [Sec. 2(109)]
The “Basis of charge“ refers to the fundamental principle determining when and on what footing income under the head “Profits and Gains of Business or Profession” becomes taxable. Under Section 26 of the Income-tax Act, 2025, income is chargeable where a business or profession is carried on at any time during the tax year, even for a single day. Unlike salary or house property, taxability does not depend on continuous operation throughout the year. The charge extends beyond ordinary trading receipts to deemed incomes — compensation, perquisites, export incentives, and converted inventory. Computation generally follows the method of accounting regularly employed (cash or mercantile) under Section 27, ensuring income is recognised consistently with the assessee’s actual accrual or receipt pattern, forming the foundational framework for all subsequent PGBP deductions and adjustments.
Types of Capital Assets:
1. Short-Term Capital Asset [Sec. 2(101)]
A short-term capital asset, as defined under Section 2(101) of the Income-tax Act, 2025, is a capital asset held by the assessee for not more than 24 months immediately preceding the date of its transfer. However, a reduced holding period of 12 months applies to specified financial assets — listed securities (equity shares, preference shares, debentures, bonds, units), units of UTI, units of equity-oriented funds, and zero-coupon bonds, whether listed or unlisted. Assets falling within this shorter threshold are treated as short-term if held for 12 months or less, reflecting the higher liquidity and market-linked nature of such instruments compared to physical or unlisted assets.
2. Long-Term Capital Asset [Sec. 2(67)]
A capital asset that does not satisfy the conditions of a short-term capital asset under Section 2(101) is classified as a long-term capital asset, as defined in Section 2(67). Accordingly, immovable property (land, building) and unlisted shares qualify as long-term only if held for more than 24 months, while listed securities, UTI units, equity-oriented fund units, and zero-coupon bonds qualify as long-term if held for more than 12 months. Gains arising from transfer of such assets are taxed as long-term capital gains, generally attracting concessional tax rates and indexation or exemption benefits under Sections 82 to 89, unlike short-term gains.
3. Deemed Short-Term Asset — Depreciable Business Assets [Sec. 74]
Section 74, corresponding to the erstwhile Section 50, carves out an exception through a non-obstante clause: where a capital asset forms part of a block of assets on which depreciation has been allowed under Section 33, gains on its transfer are deemed short-term, regardless of the actual holding period exceeding 24 months. This deeming fiction applies only for computing capital gains and does not alter the asset’s underlying long-term character for other purposes of the Act, such as claiming exemptions available specifically to long-term capital assets in a broader sense.
Conditions for Chargeability of Capital Gains:
1. There Must Be a Capital Asset [Sec. 2(22)]
The first essential condition for chargeability under Section 67 is that the property transferred must qualify as a “capital asset” as defined in Section 2(22) broadly, property of any kind held by the assessee, whether or not connected with business or profession, including land, buildings, shares, securities, and intangible rights. Assets specifically excluded from this definition — such as stock-in-trade, certain personal effects, and agricultural land meeting prescribed conditions — fall outside the scope of capital gains entirely, and any profit on their transfer is taxed, if at all, under a different head of income.
2. There Must Be a “Transfer” of the Capital Asset
The second condition requires that a “transfer” of the capital asset must have taken place, as defined under Section 2(109) (corresponding to erstwhile Section 2(47)). This includes sale, exchange, relinquishment, extinguishment of rights, compulsory acquisition, and certain deemed transfers such as conversion into stock-in-trade. Mere ownership, appreciation in asset value, or a transmission on death (which is specifically excluded) does not constitute a transfer. Without a qualifying transfer event, no capital gains liability arises, however substantially the asset’s market value may have increased.
3. Transfer Must Occur During the Relevant Tax Year
Section 67(1) specifies that profits or gains are chargeable in the tax year in which the transfer takes place, establishing a clear timing link between the transfer event and the year of taxability. Even if consideration is received in instalments across different years, or the agreement was executed earlier, the gain is generally taxed in the year the transfer is legally effected. Certain deeming provisions such as receipt of insurance money on asset damage/destruction independently fix the tax year of chargeability under Section 67(2).
4. Profit or Gain Must Arise, Subject to Statutory Exemptions
The transfer must actually result in a profit or gain; a transfer at loss or without consideration attracts no positive capital gains charge, though loss computation rules may still apply for set-off purposes. Crucially, chargeability under Section 67 operates “save as otherwise provided” in Sections 82 to 89, which grant specific exemptions — for reinvestment in residential property, specified bonds, or other qualifying assets. Only gains not covered by these exemption provisions ultimately suffer tax under the “Capital Gains” head.
Capital Asset under Section 2(22):
The term “capital asset” is defined under Section 2(22) of the Income-tax Act, 2025, and forms the very foundation of capital gains taxation, since a transfer attracts tax under Section 67 only if the property transferred qualifies as such. The definition is deliberately wide and inclusive, covering property of any kind movable or immovable, tangible or intangible held by an assessee, whether or not connected with a business or profession. It also extends to specific categories such as securities held by FIIs and certain AIFs under SEBI or IFSC regulations, and unit-linked insurance policies not exempt under the corresponding provision. Certain assets, however, are expressly excluded, such as stock-in-trade, ensuring business-trading receipts remain taxed under PGBP rather than as capital gains.
Types of Capital Asset-Transfer [Sec. 2(109)]:
1. Sale, Exchange, or Relinquishment of the Asset
Under Section 2(109) of the Income-tax Act, 2025, the term “transfer” first includes sale, exchange, or relinquishment of a capital asset. Sale involves passing ownership for monetary consideration, while exchange involves consideration in the form of another asset rather than money. Relinquishment covers a scenario where the owner gives up rights in the asset without necessarily transferring it to a specific person, such as surrendering a right in favour of co-owners. Courts have interpreted this category broadly, including transactions like reduction of share capital, where a shareholder’s proportionate rights are given up.
2. Extinguishment of Rights in the Asset
The second category covers the extinguishment of any rights in the capital asset, even without a formal conveyance of title. The Supreme Court, in interpreting the corresponding erstwhile provision, has held that a reduction in share capital amounts to extinguishment of shareholder rights and therefore qualifies as a transfer, even though the shareholder continues holding shares. This category captures situations where the economic substance of ownership or entitlement is diminished or destroyed, ensuring that indirect erosions of rights in an asset are not excluded merely because no outright sale occurred.
3. Compulsory Acquisition Under Any Law
Where a capital asset is compulsorily acquired by the Government or a statutory authority under any law in force such as land acquisition for public projects such acquisition constitutes a “Transfer” under Section 2(109), irrespective of the owner’s willingness. Compensation received for such acquisition is chargeable to capital gains tax in the tax year of transfer, subject to enhanced-compensation timing rules and specific exemptions. This ensures involuntary loss of property still attracts capital gains consequences, since the assessee nonetheless realises value through statutory compensation.
4. Conversion into, or Treatment as, Stock-in-Trade
Where an assessee converts a capital asset into, or treats it as, stock-in-trade of a business carried on by him, such conversion itself is deemed a “transfer” under this clause. This prevents assessees from avoiding capital gains by re-characterising a capital asset as trading stock before eventual sale — the appreciation up to the date of conversion remains taxable as capital gains, computed based on the fair market value on the conversion date, while subsequent gains on actual sale are taxed separately as business income.
5. Maturity or Redemption of a Zero Coupon Bond
The maturity or redemption of a zero-coupon bond is specifically deemed a “transfer” under Section 2(109), even though no conventional sale or exchange occurs. Since zero-coupon bonds are issued at a discount and redeemed at face value without periodic interest, the difference realised at maturity is treated as capital gains rather than interest income, ensuring the appreciation is taxed under the appropriate head consistent with the bond’s discount-based structure.
6. Part-Performance Transactions and Enabling Enjoyment of Immovable Property
Any transaction allowing possession of immovable property to be taken or retained in part performance of a contract under Section 53A of the Transfer of Property Act, 1882, is treated as a transfer, even absent a registered sale deed. Additionally, any transaction — whether by becoming a member of a co-operative society, company, or association, or through any arrangement that has the effect of transferring, or enabling the enjoyment of, immovable property, also falls within this definition, capturing indirect and constructive transfers designed to bypass formal conveyance.
Computation of Short Term and Long Term Capital Gains:
Capital gains arise on the transfer of a capital asset and are chargeable under the head “Capital Gains.” The computation depends upon whether the asset transferred is a short-term capital asset (STCA) or long-term capital asset (LTCA). Broadly, capital gain is calculated by deducting allowable transfer expenditure and the prescribed cost of acquisition and improvement from the full value of consideration.
1. Computation of Short-Term Capital Gain (STCG)
| Particulars | Amount (₹) |
|---|---|
| Full value of consideration | XXX |
| Less: Expenditure incurred wholly and exclusively in connection with transfer | (XXX) |
| Less: Cost of acquisition | (XXX) |
| Less: Cost of improvement, where allowable | (XXX) |
| Short-Term Capital Gain/Loss | XXX |
Illustration: An asset purchased for ₹5,00,000 is sold for ₹7,50,000 and transfer expenses are ₹20,000. STCG = ₹7,50,000 − ₹20,000 − ₹5,00,000 = ₹2,30,000.
2. Computation of Long-Term Capital Gain (LTCG)
| Particulars | Amount (₹) |
|---|---|
| Full value of consideration | XXX |
| Less: Expenditure incurred wholly and exclusively in connection with transfer | (XXX) |
| Less: Cost of acquisition as allowable | (XXX) |
| Less: Cost of improvement, where allowable | (XXX) |
| Long-Term Capital Gain/Loss | XXX |
| Less: Eligible exemptions, where applicable | (XXX) |
| Taxable Long-Term Capital Gain | XXX |
illustration: A long-term capital asset is sold for ₹15,00,000. Its allowable cost is ₹8,00,000 and transfer expenses are ₹50,000. LTCG = ₹15,00,000 − ₹8,00,000 − ₹50,000 = ₹6,50,000, before any eligible exemption.
Problems on Computation of Gross Total Income of an individual (excluding deductions U/S 80)
The computation of Gross Total Income (GTI) is an important part of income tax calculation for an individual. It involves calculating income under the five heads of income and combining them after making the adjustments permitted under the Income Tax Act, 1961. Deductions available under Chapter VI A, such as deductions under Section 80C, 80D and other sections, are not considered while calculating Gross Total Income.
Meaning of Gross Total Income
Gross Total Income means the total income computed under the various heads of income before allowing deductions under Chapter VI A. The five heads of income are:
- Income from Salary
- Income from House Property
- Profits and Gains of Business or Profession
- Capital Gains
- Income from Other Sources
The income under each head is calculated separately according to the relevant provisions of the Income Tax Act. After adjusting eligible losses and setting off losses where permitted, the incomes are added together to determine the Gross Total Income.
General Steps for Computation:
The following steps are generally followed while solving problems relating to Gross Total Income:
Step 1: Classify the Incomes
All receipts and incomes given in the problem should first be classified under the appropriate head of income. For example, salary received from an employer is taxable under Income from Salary, while rental income from a house is taxable under Income from House Property.
Step 2: Calculate Income under Each Head
Income under every head should be calculated separately after considering the applicable exemptions, allowances and deductions available under that particular head. For example, while calculating salary income, the applicable standard deduction and eligible exemptions may be considered.
Step 3: Adjust Losses
Losses under one source or head may be adjusted against income from another source or head according to the provisions relating to set off and carry forward of losses. However, certain restrictions may apply.
Step 4: Add Income under All Heads
After calculating the income under all five heads and adjusting eligible losses, the resulting amounts are added together. The total amount is known as the Gross Total Income.
illustrative Problem
Mr. A provides the following information for the Previous Year:
| Particulars | Amount (₹) |
|---|---|
| Basic Salary | 6,00,000 |
| House Rent Allowance | 1,20,000 |
| Income from House Property | 80,000 |
| Profit from Business | 1,50,000 |
| Long Term Capital Gain | 50,000 |
| Bank Interest | 20,000 |
Assume that there are no exemptions or adjustments other than the information provided.
Computation of Gross Total Income:
| Particulars | Amount (₹) |
|---|---|
| Income from Salary | |
| Basic Salary | 6,00,000 |
| House Rent Allowance | 1,20,000 |
| Gross Salary | 7,20,000 |
| Less: Standard Deduction | (50,000) |
| Income from Salary | 6,70,000 |
| Income from House Property | 80,000 |
| Profits and Gains of Business | 1,50,000 |
| Capital Gains | 50,000 |
| Income from Other Sources | |
| Bank Interest | 20,000 |
| Gross Total Income | 9,70,000 |
Thus, the Gross Total Income of Mr. A is ₹9,70,000. Deductions under Chapter VI A have not been considered because the problem specifically excludes deductions under Section 80.
Important Points While Solving Problems:
While computing Gross Total Income, students should carefully identify whether a particular receipt is taxable, exempt or partially exempt. Fully exempt income should generally not be included in the computation of GTI. Income should always be classified under the correct head before calculation.
Expenses can be deducted only when they are allowed under the relevant head of income. Personal expenses are generally not allowed as deductions. Similarly, deductions under Sections 80C to 80U should not be deducted while calculating Gross Total Income. These deductions are considered only after GTI is calculated to arrive at the Total Income.
Income Tax -I Bangalore City University BBA SEP 2024-25 5th Semester Notes
| Unit 1 | |
| Meaning of Tax, Types of Taxes | VIEW |
| Canons of Taxation | VIEW |
| Important Definitions: | |
| Assessment Year | VIEW |
| Previous year including Exceptions | VIEW |
| Assesses, Person, Income, Casual Income | VIEW |
| Gross Total Income, Total Income | VIEW |
| Agricultural Income | VIEW |
| Tax Rates (Old and New Regimes) | VIEW |
| Exempted Incomes of individuals under Section 10 | VIEW |
| Unit 2 | |
| Meaning of Assessment, Objectives, Types, Process | VIEW |
| Permanent Account Number, Meaning, Procedure for obtaining PAN and Transactions were Quoting of PAN is Compulsory | VIEW |
| Income Tax Authorities their Powers and Function CBDT, CIT and AO | VIEW |
| Unit 3 | |
| Residential Status | VIEW |
| Introduction, Residential Status of an individual | VIEW |
| Determination of Residential Status of an Individual | VIEW |
| Incidence of Tax | VIEW |
| Scope of Total Income | VIEW |
| Problems on Computation of Gross Total Income of an individual (Excluding Deductions U/S 80) | VIEW |
| Unit 4 | |
| Introduction, Meaning of Salary | VIEW |
| Basis of Charge | VIEW |
| Definitions: Salary, Allowances, Perquisites and Profits in Lieu of Salary, Provident Fund, Retirement Benefits, Gratuity, Pension and Leave Salary | VIEW |
| Deductions U/S 16 | VIEW |
| Problems on Computation of Taxable Salary | VIEW |
| Unit 5 | |
| Income from House Property, Introduction | VIEW |
| Basis of Charge of House Property | VIEW |
| Deemed owners | VIEW |
| House Property Incomes exempt from Tax | VIEW |
| Vacancy allowance and Unrealized Rent | VIEW |
| Annual Value, Determination of Annual Value | VIEW |
| Deductions U/S 24 from Net Annual Value | VIEW |
| Problems on Computation of Income from House Property | VIEW |
Income Tax-I Bangalore City University BCOM SEP 2024-25 5th Semester Notes
| Unit 1 | |
| Meaning of Tax, Types of Taxes | VIEW |
| Canons of Taxation | VIEW |
| Important Definitions: | |
| Assessment Year | VIEW |
| Previous year including Exceptions | VIEW |
| Assesses, Person, Income, Casual Income | VIEW |
| Gross Total Income, Total Income | VIEW |
| Agricultural Income | VIEW |
| Tax Rates (Old and New Regimes) | VIEW |
| Exempted Incomes of individuals under Section 10 | VIEW |
| Unit 2 | |
| Meaning of Assessment, Objectives, Types, Process | VIEW |
| Permanent Account Number, Meaning, Procedure for obtaining PAN and Transactions were Quoting of PAN is Compulsory | VIEW |
| Income Tax Authorities their Powers and Function CBDT, CIT and AO | VIEW |
| Unit 3 | |
| Residential Status | VIEW |
| Introduction, Residential Status of an individual | VIEW |
| Determination of Residential Status of an Individual | VIEW |
| Incidence of Tax | VIEW |
| Scope of Total Income | VIEW |
| Problems on Computation of Gross Total Income of an individual (Excluding Deductions U/S 80) | VIEW |
| Unit 4 | |
| Introduction, Meaning of Salary | VIEW |
| Basis of Charge | VIEW |
| Definitions: Salary, Allowances, Perquisites and Profits in Lieu of Salary, Provident Fund, Retirement Benefits, Gratuity, Pension and Leave Salary | VIEW |
| Deductions U/S 16 | VIEW |
| Problems on Computation of Taxable Salary | VIEW |
| Unit 5 | |
| Income from House Property, Introduction | VIEW |
| Basis of Charge of House Property | VIEW |
| Deemed owners | VIEW |
| House Property Incomes exempt from Tax | VIEW |
| Vacancy allowance and Unrealized Rent | VIEW |
| Annual Value, Determination of Annual Value | VIEW |
| Deductions U/S 24 from Net Annual Value | VIEW |
| Problems on Computation of Income from House Property | VIEW |