Capital Gains (fourth head, S.45-55A) arise on the transfer of a capital asset. The gain is the excess of consideration received over the cost of acquisition and improvement. Capital gains are classified as Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG) based on the holding period of the asset.
Legal Framework
| Provision | Content |
|---|---|
| S.2(14) | Definition of "capital asset" (property of any kind, with exclusions) |
| S.2(42A) | Definition of "short-term capital asset" (held for ≤ specified period) |
| S.2(29A) | Definition of "long-term capital asset" |
| S.45(1) | Charging section: gains from transfer of capital asset |
| S.47 | Transactions not regarded as transfer (exempted transfers) |
| S.48 | Mode of computation of capital gains |
| S.49 | Cost with reference to certain modes of acquisition |
| S.50C | Stamp duty value as deemed consideration (immovable property) |
| S.54-54GB | Exemptions from capital gains |
| S.111A | STCG on listed equity (special rate) |
| S.112 | LTCG general rate |
| S.112A | LTCG on listed equity exceeding Rs.1.25 lakh |
Capital Asset: What It Includes and Excludes
| Includes (S.2(14)) | Excludes |
|---|---|
| Property of any kind (movable/immovable) | Stock-in-trade, consumable stores, raw materials |
| Securities (shares, debentures, mutual funds) | Personal effects (movables for personal use), EXCEPT jewellery, art, archaeological collections |
| Jewellery, drawings, paintings | Agricultural land in rural India (not within municipality limits) |
| Rights in/related to Indian company | Gold deposit bonds under Gold Deposit Scheme 1999 |
| Any interest in entity (partnership) | Specified gold bonds issued under Gold Monetisation Scheme |
Holding Period Classification
| Asset type | Short-term if held ≤ | Long-term if held > |
|---|---|---|
| Listed equity shares / equity mutual funds | 12 months | 12 months |
| Unlisted shares | 24 months | 24 months |
| Immovable property (land/building) | 24 months | 24 months |
| All other assets | 36 months | 36 months |
Computation (S.48)
| Step | STCG | LTCG |
|---|---|---|
| Full value of consideration | Sale price / deemed consideration | Sale price / deemed consideration |
| Less: Transfer expenses | Brokerage, commission, legal fees | Same |
| Less: Cost of acquisition | Actual cost (or deemed cost u/s 49) | Indexed cost (CII adjustment) |
| Less: Cost of improvement | Actual cost | Indexed cost |
| Capital Gain | STCG = Net amount | LTCG = Net amount |
Note: Post Finance Act 2024 (from 23 July 2024): Indexation benefit removed for all assets except those acquired before 23 July 2024 with option to choose between indexed @20% or unindexed @12.5%.
Tax Rates
| Type | Rate | Section |
|---|---|---|
| STCG on listed equity (STT paid) | 20% | S.111A |
| STCG on other assets | Normal slab rates | S.45 read with S.4 |
| LTCG on listed equity (STT paid) | 12.5% (above Rs.1.25 lakh exemption) | S.112A |
| LTCG on other assets | 12.5% (no indexation, post 23 July 2024) | S.112 |
Key Exemptions
| Section | Asset transferred | New asset acquired | Time limit |
|---|---|---|---|
| S.54 | Residential house (long-term) | One residential house | 1 year before / 2 years purchase / 3 years construction |
| S.54B | Agricultural land | Agricultural land | 2 years |
| S.54EC | Any long-term capital asset | Specified bonds (NHAI/REC) | 6 months, max Rs.50 lakh |
| S.54F | Any long-term asset (other than residential house) | One residential house | 1 year before / 2 years / 3 years |
How Much Is Exempt (Exam Formula)
S.54 (house sold → house bought):
- If cost of new house ≥ capital gain → ENTIRE gain exempt
- If cost of new house < capital gain → Exempt = cost of new house; Balance = taxable LTCG
S.54EC (any asset sold → bonds bought):
- Exempt = Amount invested in bonds (max Rs.50 lakh)
- Balance LTCG = Total gain minus amount invested
S.54F (non-house asset sold → house bought):
- If full net consideration invested in new house → ENTIRE gain exempt
- If partial → Exempt = Gain × (Amount invested / Net consideration)
- Key difference from S.54: S.54F looks at net consideration, not just gain
Worked Example: S.54 Exemption Computation
Facts: Mr. Iyer sells his old house for Rs.80 lakh (LTCG = Rs.30 lakh after cost deduction). He purchases a new residential house for Rs.25 lakh within 1 year.
Under S.54:
- Capital gain = Rs.30 lakh
- Cost of new house = Rs.25 lakh
- Since cost of new house (25L) < capital gain (30L):
- Exempt = Cost of new house = Rs.25 lakh
- Taxable LTCG = 30L minus 25L = Rs.5 lakh
If instead Mr. Iyer bought a house for Rs.35 lakh:
- Cost of new house (35L) ≥ capital gain (30L)
- Entire Rs.30 lakh exempt. No taxable capital gain.
Worked Example: S.54F Exemption (Different Formula)
Facts: Mr. Reddy sells shares (not a house) for Rs.1 crore (net consideration). LTCG = Rs.40 lakh. He buys a house for Rs.60 lakh.
Under S.54F:
- Net consideration = Rs.1,00,00,000
- Amount invested in house = Rs.60,00,000
- Exempt = Gain × (Amount invested / Net consideration) = 40L × (60L / 100L) = Rs.24 lakh
- Taxable LTCG = 40L minus 24L = Rs.16 lakh
If Mr. Reddy invested the full Rs.1 crore in the house: Entire Rs.40 lakh exempt.
Key exam distinction: S.54 compares cost of new house with GAIN. S.54F compares investment with NET CONSIDERATION (sale price). S.54F is proportionate; S.54 is "up to the gain amount."
Recall Check
- What is the holding period for an immovable property to qualify as long-term capital asset?
- What is the charging section for capital gains?
- What does S.47 provide regarding certain transfers?
Key Cases
CIT v. BC Srinivasa Setty (1981) CIT-v-BC-Srinivasa-Setty-1981 Issue: Whether capital gains can be computed when the cost of acquisition of an asset (self-generated goodwill) is nil/indeterminate. Rule: S.48 mandates deduction of "cost of acquisition"; if cost cannot be determined, the computation machinery fails and no capital gains tax can be levied. Held: Where the cost of acquisition of a capital asset is indeterminate (e.g., self-generated goodwill), the computation provision fails, and capital gains cannot be charged. The charging section and computation provisions form an integrated code.
CIT v. Balbir Singh Maini (2017) CIT-v-Balbir-Singh-Maini-2017 Issue: Whether a collaboration agreement (development agreement) where possession is handed to developer constitutes "transfer" under S.2(47). Rule: S.2(47)(v) read with S.53A of Transfer of Property Act; "transfer" includes arrangements allowing possession under part performance. Held: Unless conditions of S.53A of TPA are strictly satisfied (including willingness to perform one's part of the contract), mere handing over of possession under a development agreement does not constitute "transfer" for capital gains purposes.
Distinctions
| Feature | STCG | LTCG |
|---|---|---|
| Holding period | Within prescribed limit (12/24/36 months) | Beyond prescribed limit |
| Indexation | Not available | Available for assets acquired before 23 July 2024 (old regime) |
| Tax rate (listed equity) | 20% (S.111A) | 12.5% above Rs.1.25L (S.112A) |
| Tax rate (others) | Slab rates | 12.5% flat (S.112) |
| Set off | Against any capital gain (STCG or LTCG) | LTCL only against LTCG |
| Exemptions | Limited (S.54D) | S.54, 54B, 54EC, 54F available |
Flashcards
Q: What is the charging section for capital gains? A: Section 45(1) of the Income Tax Act.
Q: What is excluded from the definition of "capital asset" under S.2(14)? A: Stock-in-trade, personal effects (except jewellery/art), agricultural land in rural India, gold bonds under specified schemes.
Q: What is the holding period for listed equity shares to become long-term? A: More than 12 months.
Q: What exemption is available under S.54EC? A: LTCG invested in specified bonds (NHAI/REC) within 6 months, maximum Rs.50 lakh, lock-in 5 years.
Q: What happens when cost of acquisition is indeterminate? A: Per CIT v. BC Srinivasa Setty, the computation machinery fails and capital gains cannot be charged.
Q: What is the LTCG tax rate on listed equity shares from AY 2025-26? A: 12.5% on gains exceeding Rs.1,25,000 per year (S.112A).
Exam Scenario
Mr. Verma purchased a residential house in April 2020 for Rs.40 lakh and sells it in July 2026 for Rs.1.2 crore. He invests Rs.50 lakh in NHAI bonds within 4 months of sale and purchases a new residential house for Rs.45 lakh within 2 years. Compute capital gains tax liability.
Approach: Holding period = 6+ years (> 24 months) → LTCG. Full consideration = Rs.1.2 crore. Cost of acquisition = Rs.40 lakh (indexation may apply for pre-23/7/2024 acquisition under old regime, or compute at 12.5% without indexation). Exemption u/s 54EC = Rs.50 lakh (NHAI bonds, within 6 months). Exemption u/s 54 = proportionate (Rs.45 lakh invested in new house). Apply S.54 first, then S.54EC on remaining LTCG. Net taxable LTCG = Total gain minus exemptions. Tax at applicable rate.