# Capital Gains Chapter — Smart/Bird's-Eye View (Sec 45–54)

Capital Gains arises on TRANSFER of a CAPITAL ASSET in the Previous Year. Three components must be tested together.

## The Trigger — Section 45 (Charging Section)

> Profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to tax under the head 'Capital Gains' and shall be deemed to be the income of the previous year in which the transfer took place.

### Year-of-taxability — 3 Exceptions to general rule

Sec	Scenario	Year of Taxability
45(2)	Conversion of Capital Asset into Stock-in-Trade	Year in which the converted stock is sold
45(1A)	Compulsory Acquisition under any law	Year of receipt of compensation (initial)
45(1A)	Damage / Destruction (with insurance compensation)	Year of receipt of insurance

## Classifying as STCG or LTCG (based on POH — Period of Holding)

```

Listed Equity Shares / Eq. MF / Business Trust unit >12 m → LTCG

Unlisted Shares / Land & Building / Immovable Property >24 m → LTCG

Debt MF / Gold / Jewellery / Other Assets >36 m → LTCG

(Note: rules vary by amendments — check current FA)

```

## Capital Gains Computation

```

Full Value of Consideration (FVOC) xxx

Less: Expenses on transfer (xxx)

--- Net Sale Consideration xxx

Less: Cost of Acquisition (COA) (Indexed if LTCG) (xxx)

Less: Cost of Improvement (COI) (Indexed if LTCG) (xxx)

----- Capital Gain (STCG / LTCG) xxx

Less: Exemptions u/s 54 / 54B / 54D / 54EC / 54F (xxx)

----- Taxable Capital Gain xxx

```

## Deeming Sections — FVOC

Sec	Deals With
50C	L&B — FVOC = higher of Stamp Duty Value or Actual Consideration (tolerance band of 10%)
50CA	Unlisted Shares — FVOC = higher of FMV or Actual
50D	Unascertainable Consideration — FVOC = FMV

## Special COA Cases

Depreciable Asset (Sec 50) → Block-of-asset concept; always STCG.
Gift / Will / Inheritance (Sec 49(1)) → COA = COA to previous owner; POH includes previous owner's.
Right shares / Bonus shares → Specific COA rules (Bonus = Nil if acquired post 1/4/2001).

## Tax Rates on Capital Gains

Section	Asset	Rate
111A	STCG on listed equity shares / eq. MF / Business Trust unit (STT paid)	15% (20% post Jul 2024)
112	LTCG on other assets	20% with indexation (10% without, in certain cases)
112A	LTCG on listed equity shares / eq. MF / Business Trust unit (STT paid)	10% (12.5% post Jul 2024) on gains > ₹1 lakh / ₹1.25 lakh

## Special Cases

Slump Sale (Sec 50B) — Transfer of an undertaking for lump-sum consideration; FVOC = FMV; COA = Net Worth.
Sec 47 — Not a Transfer — gifts, will, partition of HUF, conversion of co. to LLP, etc.
Sec 54 Series — Exemptions if sale proceeds re-invested (residential house, agri land, bonds, etc.).

## Cases Where CG is NOT Taxable

1. Transactions covered by Sec 47 (Not regarded as transfer).

2. Eligible Sec 54 series exemptions claimed and fulfilled.

Worked example

### Example 1

Example — Sec 50C trigger: Mr. A sells a building for ₹80 lakh; Stamp Duty Value is ₹95 lakh. Since SDV exceeds 110% of actual consideration (₹88 lakh), tolerance band fails → FVOC = ₹95 lakh for computing capital gain.

### Example 2

Example — Conversion to SIT (Sec 45(2)): Mr. B converts a plot of land (held for 5 years; COA ₹10L, FMV on conversion date ₹40L) into stock of his real-estate business and sells it in PY 2024-25 for ₹50L. Treatment: (i) Capital Gain = FMV ₹40L – Indexed COA, taxable in PY of sale (not PY of conversion); (ii) Business Income = ₹50L – ₹40L = ₹10L, taxable in PY 2024-25.

### Example 3

Example — Sec 47 not-a-transfer: Father gifts shares to son. No capital gain on gift. When son later sells, his COA = father's COA, and POH includes father's holding period (Sec 49(1) + Sec 2(42A)).

### Example 4

Example — STCG vs LTCG: Listed equity shares (STT paid) held for 14 months and sold at gain ₹2 lakh. POH > 12 m → LTCG → taxable u/s 112A at 10% on gains exceeding ₹1 lakh = 10% × ₹1 lakh = ₹10,000 tax.

⚠️ Common exam mistakes

Forgetting that Sec 50 (depreciable assets) always gives STCG even if held > 36 months.
Computing capital gain in year of conversion to SIT — it is taxed in the year of SALE of stock (Sec 45(2)).
Indexing COA for STCG — indexation applies only to LTCG.
Ignoring the 10% tolerance band under Sec 50C — adjustment is needed only if SDV exceeds 110% of actual consideration.
Treating bonus shares (acquired post 1/4/2001) with some COA — their COA is NIL.
Not claiming Sec 54 series exemption when reinvestment conditions are fulfilled.

Bare-Act text Section 45, 47, 48, 49, 50, 50B, 50C, 50CA, 50D, 54 series, 111A, 112, 112A · 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, 54B, 54D, 54EC, 54F, 54G and 54GA, 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.

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Smart View — Structure of Capital Gains (Sec 45 to 54)

Worked example

⚠️ Common exam mistakes