Charging Section & Meaning of Capital Asset [Section 45 & 2(14)]
# Capital Gains — Charging Provision and Capital Asset
## Charging Section [Section 45]
Capital gains is taxable if ALL the following are satisfied:
1. There is a Capital Asset, AND
2. There is a Transfer of that capital asset during the P.Y.
3. Then any gain arising is taxable under 'Capital Gains'
4. In the P.Y. in which transfer takes place (regardless of when consideration is received).
## Meaning of Capital Asset [Section 2(14)]
Capital Asset means property of any kind — movable / immovable / tangible / intangible — held by the assessee, whether business/profession property or personal property.
### Specific Exclusions from 'Capital Asset'
1. Stock-in-trade (taxed under PGBP).
2. Personal movable property (e.g., personal furniture, clothes, car for personal use).
3. Rural agricultural land in India (see note below).
4. Gold Deposit Bonds & Certificates under the gold deposit/monetisation schemes.
### BUT exceptions to (2) — these ARE capital assets even if personal:
Jewellery
Archaeological Collections
Drawings / Paintings
Sculptures
Any Work of Art
### Specific Inclusions
Securities held by Foreign Institutional Investors (FII) and Investment Funds — always treated as capital asset (so gains are always capital gains, not business income).
Unit Linked Insurance Policy (ULIP) — treated as capital asset.
## Rural Agricultural Land — Definition
Agricultural land in India is RURAL (not a capital asset, hence sale gains are tax-free) if it is:
Nearest Municipality / Cantonment Board Population
Minimum Distance from such Area (Aerial)
≤ 10,000
Located within the area itself is enough (no distance test)
> 10,000 but ≤ 1,00,000
More than 2 km outside
> 1,00,000 but ≤ 10,00,000
More than 6 km outside
> 10,00,000
More than 8 km outside
If the land does NOT fall within these limits → it is Urban Agricultural Land = Capital Asset → sale taxable.
Worked example
### Example 1
Example 1 — Personal car: Mr. A sells his personal car (used for private purposes) for ₹6 lacs (cost ₹8 lacs). The car is a personal movable property → NOT a capital asset → no capital gains tax. The loss is also not allowable.
### Example 2
Example 2 — Personal jewellery: Mrs. B sells her personal gold jewellery for ₹12 lacs (cost ₹4 lacs). Jewellery is an EXCEPTION — it IS a capital asset though personal. Capital gain = ₹8 lacs is taxable.
### Example 3
Example 3 — Rural agricultural land: Mr. C sells agricultural land located 3 km outside Pune (population > 10 lakh). Since the distance from Pune (>10 lakh population) is only 3 km but the requirement is >6 km, the land is URBAN agricultural land → it IS a capital asset → gain is taxable.
### Example 4
Example 4 — Stock-in-trade: A real estate dealer sells a plot held as stock. This is taxed under PGBP, NOT capital gains, since stock-in-trade is excluded from 'capital asset'.
⚠️ Common exam mistakes
Treating jewellery / paintings as personal effects and excluding them from capital asset — they are SPECIFIC exceptions and ARE capital assets.
Treating all agricultural land as non-capital asset — only RURAL agricultural land in India is excluded. Urban agricultural land in India IS a capital asset.
Applying the 2/6/8 km test to the area where the land is located, not from where the municipality is.
Forgetting that capital gain arises in the year of transfer, even if consideration is received later.
Treating FII shares/securities as stock-in-trade — by deeming fiction they are always capital assets.
Bare-Act text Sections 45 and 2(14) · Income Tax Act, 1961 · click to expand
Section 45(1): Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54 to 54H, be chargeable to income-tax under the head 'Capital gains' and shall be deemed to be the income of the previous year in which the transfer took place. Section 2(14): 'Capital asset' means property of any kind held by an assessee, whether or not connected with his business or profession; any securities held by a Foreign Institutional Investor; any Unit Linked Insurance Policy not exempt under section 10(10D); but does not include stock-in-trade, personal effects (excluding jewellery, archaeological collections, drawings, paintings, sculptures, or any work of art), agricultural land in India not within specified urban areas, Gold Bonds, Special Bearer Bonds, and Gold Deposit Bonds.