Chapter 4: Capital Gains | CA Final Direct Tax Notes

Sec 66 Scope & Year of Chargeability of Capital Gains

Charging Section

Three Statutory Prerequisites for Chargeability [Section 66 (Old Sec 45)]

Under Section 66 of the Income-tax Act, 2025, any profits or gains arising from the transfer of a capital asset effected in the tax year shall be chargeable to income-tax under the head "Capital gains" and shall be deemed to be the income of the tax year in which the transfer took place.

There must be a Capital Asset as defined under Section 2(14).
There must be a Transfer of such capital asset within the meaning of Section 2(47).
There must be Profits or Gains arising from such transfer (or loss).

Definition of "Capital Asset" [Section 2(14)] & Statutory Exclusions

Category	Statutory Inclusions & Exclusions
Inclusions [Sec 2(14)]	• Property of any kind held by an assessee, whether or not connected with business or profession. • Any securities held by a Foreign Institutional Investor (FII / FPI). • Any Unit Linked Insurance Policy (ULIP) where aggregate annual premium exceeds ₹2,50,000. • High-premium Life Insurance Policies (issued on or after 01.04.2023) where annual premium exceeds ₹5,00,000.
Statutory Exclusions (NOT Capital Assets)	1. Stock-in-trade: Consumable stores or raw materials held for business or profession. 2. Personal Effects: Movable property held for personal use by the assessee or family. Exceptions (Capital Assets): Jewellery, archaeological collections, drawings, paintings, sculptures, or any work of art. 3. Rural Agricultural Land in India: Agricultural land not situated within municipal limits (pop ≥ 10,000) or notified aerial distances (2 km / 6 km / 8 km). 4. Notified Gold Bonds: 6.5% Gold Bonds 1977, 7% National Defence Gold Bonds 1980, Special Bearer Bonds 1991, and Gold Deposit Bonds / Sovereign Gold Bonds (SGBs).

Rationalized Holding Periods: 12-Month & 24-Month Regimes

Under the amended statutory architecture of the Income-tax Act, 2025 (Tax Year 2026-27), the holding period for classifying assets as Short-Term Capital Assets (STCA) versus Long-Term Capital Assets (LTCA) has been streamlined into only two distinct thresholds (the former 36-month holding period has been abolished):

Holding Period Threshold	Eligible Classes of Capital Assets	Classification
≤ 12 Months	• Listed equity shares in a company (traded on recognized stock exchange). • Units of an equity-oriented mutual fund. • Units of a business trust (REITs / InvITs). • Zero Coupon Bonds (ZCBs).	STCA if ≤ 12 mos LTCA if > 12 mos
≤ 24 Months	• All other capital assets, including: - Immovable property (land, building, residential house, commercial premises). - Unlisted shares of public and private companies. - Unlisted debentures, bonds, government securities. - Jewellery, paintings, sculptures, works of art. - Units of debt mutual funds (acquired before 01.04.2023).	STCA if ≤ 24 mos LTCA if > 24 mos

Scope of "Transfer" under Section 2(47)

Sale, Exchange, or Relinquishment: Absolute alienation or surrender of rights in a capital asset.
Extinguishment of Any Rights: Complete destruction, forfeiture, or cancellation of contractual rights.
Compulsory Acquisition: Acquisition of an asset under any Central, State or local statute.
Conversion into Stock-in-Trade: Assessee converts an investment capital asset into business stock-in-trade.
Maturity/Redemption of Zero Coupon Bonds: Payment on redemption treated as transfer.
Part Performance [Sec 53A of Transfer of Property Act]: Handing over possession of immovable property in part performance of contract for consideration, even without formal registration.
Co-operative Housing Society Transactions: Transfer of shares/allotment letters conferring title to enjoy an apartment or building.

Sec 67 - 69 Special Charging Scenarios & Deemed Capital Gains

Statutory Deeming

Section Reference	Nature of Event	Year of Chargeability & Full Value of Consideration
Section 67(1) (Old Sec 45(2))	Conversion of Capital Asset into Stock-in-Trade	• Year of Taxability: Deferred to the tax year in which such stock-in-trade is sold or otherwise transferred. • Capital Gains Consideration: Fair Market Value (FMV) of the asset on the date of conversion. • Business Profit (PGBP): Actual sale price of stock minus FMV on conversion date.
Section 67(2) (Old Sec 45(1A))	Insurance Compensation for Destroyed Assets	• Trigger: Damage/destruction of capital asset by flood, fire, explosion, riot, civil commotion, enemy action. • Taxability: Year in which money or other asset is actually received from insurer. • Consideration: Cash received + FMV of replacement asset received.
Section 67(5) (Old Sec 45(5))	Compulsory Acquisition & Enhanced Compensation	• Initial Compensation: Taxable in the tax year of first receipt. • Enhanced Compensation: Taxable in the tax year of receipt; cost of acquisition and improvement taken as Nil. • Interest on Enhanced Compensation [Sec 145B]: Taxable under Income from Other Sources; 50% flat deduction under Section 57(iv).
Section 67(6) (Old Sec 45(5A))	Joint Development Agreements (JDAs)	• Eligible Assessee: Individual or HUF entering into a registered development agreement. • Year of Taxability: Tax year in which the Certificate of Completion (CC) is issued by the competent authority. • Full Value of Consideration: Stamp Duty Value (SDV) of the assessee's share in the developed project on the date of CC + monetary consideration received.
Section 68 (Old Sec 46)	Liquidation of a Company	• In Hands of Company [Sec 68(1)]: Distribution of assets to shareholders upon liquidation is NOT a transfer. • In Hands of Shareholders [Sec 68(2)]: Money received + FMV of assets distributed, minus deemed dividend under Section 2(22)(c) = Full value of consideration for Capital Gains.
Section 69 (Old Sec 46A)	Buyback of Shares	In hands of shareholder: Consideration received from company minus cost of acquisition of shares = Capital Gains (STCG or LTCG based on holding period).

ICAI Illustration 1: Conversion of Shares into Stock-in-Trade & Dual Split ICAI Illustration 1

Question: X converts his capital asset (shares of a company acquired on June 10, 2020 for ₹60,000) into stock-in-trade on October 15, 2024. The fair market value of the shares on that date was ₹1,50,000. He subsequently sells these shares for ₹2,10,000 on January 10, 2027.
Determine the tax implications under the Income-tax Act, 2025 for Tax Year 2026-27.

Head of Income	Amount (₹)	Statutory Working & Legal Basis
I. Capital Gains [Sec 67(1)] • Full value of consideration (FMV on conversion date) • Less: Cost of Acquisition (acquired 10.06.2020)	1,50,000 (60,000)	Held from 10.06.2020 to 15.10.2024 (> 24 months / 12 months) = Long-Term Capital Asset. Indexation removed for transfers on or after 23.07.2024.
Long-Term Capital Gain (LTCG)	90,000	Chargeable to tax in T.Y. 2026-27 (year of sale of stock) @ 12.5% u/s 197.
II. Business Profits (PGBP) [Sec 26] • Actual Sale Consideration of stock (10.01.2027) • Less: FMV on conversion date treated as cost	2,10,000 (1,50,000)	Commercial profits from sale of stock-in-trade.
Profits & Gains of Business or Profession	60,000	Taxable at normal slab / applicable tax rates in T.Y. 2026-27.

ICAI Illustration 6: Conversion of Capital Asset into Stock-in-Trade by ABC Ltd. ICAI Illustration 6

Question: ABC Ltd. converts its capital asset acquired for ₹50,000 in June 2004 into stock-in-trade in T.Y. 2022-23 (FMV on conversion date was ₹3,00,000). The stock-in-trade is sold in T.Y. 2026-27 for ₹3,50,000.
Compute Capital Gains and Business Income for Tax Year 2026-27.

Particulars	Amount (₹)	Governing Legal Section & Principles
Long-Term Capital Gains [Sec 67(1)]: • Full Value of Consideration (FMV on conversion date) • Less: Cost of Acquisition	3,00,000 (50,000)	Held from June 2004 to conversion date in T.Y. 2022-23 (> 24 months). Long-Term Capital Asset.
Taxable Long-Term Capital Gain	2,50,000	Taxable in T.Y. 2026-27 under Section 197 @ 12.5%.
Business Income (PGBP) [Sec 26]: • Sale Proceeds of Stock-in-Trade • Less: Cost of Stock (FMV on conversion date)	3,50,000 (3,00,000)	Business income recognized upon sale of stock.
Taxable Business Profits (PGBP)	50,000	Taxable under Section 26 at applicable corporate tax rates.

Sec 70 Transactions Not Regarded as Transfer (Statutory Exemptions)

Tax Neutrality

Under Section 70 of the Income-tax Act, 2025 (formerly Section 47), the following transactions are expressly declared NOT to be transfers, and consequently, no capital gains tax liability arises at the time of the transaction:

Clause	Nature of Transaction	Statutory Conditions & Cost/Period Treatment
Sec 70(1)(a)	Total or Partial Partition of HUF	Any distribution of capital assets on the total or partial partition of a Hindu Undivided Family. Cost to coparcener/member is cost to the HUF [Sec 73(1)].
Sec 70(1)(b)	Gift, Will, or Irrevocable Trust	Any transfer of a capital asset under a gift or will or an irrevocable trust. (Except gifts of shares/debentures allotted under ESOP to employees).
Sec 70(1)(d)/(e)	Holding & 100% Subsidiary Companies	Transfer between a parent company and its 100% subsidiary, provided the transferee company is an Indian company.
Sec 70(1)(g)/(h)	Amalgamation of Companies	• Transfer of capital assets by amalgamating company to amalgamated Indian company. • Transfer of shares by a shareholder in amalgamating company in consideration of allotment of shares in amalgamated Indian company.
Sec 70(1)(j)/(k)	Demerger of Undertakings	Transfer of capital assets from demerged company to resulting Indian company, and issue of shares by resulting company to shareholders of demerged company.
Sec 70(1)(m)/(n)	Conversion of Bonds / Preference Shares	• Conversion of bonds, debentures, or deposit certificates into equity shares of the company. • Conversion of preference shares into equity shares of that company.
Sec 70(1)(p)/(q)	Succession of Firm / Proprietorship into Company	All assets and liabilities transferred; partners/proprietor receive consideration only in equity shares; aggregate shareholding is not less than 50% of voting power for at least 5 years.
Sec 70(1)(zh)	Reverse Mortgage Scheme	Any transfer of a capital asset in a transaction of reverse mortgage made under a scheme notified by the Central Government.

Reverse Mortgage Scheme for Senior Citizens [Sec 70(1)(zh) & Sec 10(43)]

• Eligible Borrowers: Senior citizens (individuals aged 60 years or above, or married couples where at least one spouse is 60+).
• Tax Exemption of Loan Inflows [Sec 10(43)]: Any amount received by the senior citizen as a loan, either in lump sum or in monthly installments, is completely exempt from income-tax.
• Alienation of Property: The mortgaging of the residential house with the approved lending institution does not constitute a transfer under Section 70(1)(zh). Capital gains arise only if the lending institution sells the property to recover loan dues upon the borrower's death (heirs can redeem the mortgage by repaying loan without sale).

Withdrawal of Exemption in Certain Cases [Section 71 (Old Sec 47A)]:

Holding-Subsidiary Violation: If the 100% shareholding relationship ceases or the capital asset is converted into stock-in-trade within 8 years from the date of transfer, the exemption granted under Section 70 is deemed withdrawn. The capital gains are charged to tax in the hands of the transferor company in the year of violation.
Firm/Proprietorship Succession Violation: If the partners/proprietor fail to maintain ≥ 50% voting power for 5 years, the capital gains exempt at succession are taxed in the hands of the successor company in the year of default.

ICAI Illustration 2: Amalgamation of Companies & Shareholder Tax Neutrality ICAI Illustration 2

Question: M held 2,000 shares in ABC Ltd. (acquired in 2018 for ₹2,00,000). ABC Ltd. amalgamated with XYZ Ltd. during Tax Year 2026-27. Under the scheme of amalgamation, M was allotted 1,000 shares in XYZ Ltd. (FMV ₹4,50,000).
Examine the tax consequences of this transaction in the hands of M and state the cost of acquisition and holding period of shares in XYZ Ltd.

Aspect	Statutory Provision	Conclusion & Tax Treatment
Taxability of Exchange on Amalgamation	Section 70(1)(h) / Section 47(vii)	No Capital Gain arises. Transfer of shares in amalgamating company in exchange for shares in amalgamated Indian company is exempt.
Cost of Acquisition of shares in XYZ Ltd.	Section 73(2) / Section 49(2)	Cost to previous shares: The cost of acquisition of 1,000 shares in XYZ Ltd. shall be deemed to be the cost of 2,000 shares in ABC Ltd., i.e. ₹2,00,000.
Period of Holding of shares in XYZ Ltd.	Section 2(42A)(b)	Includes predecessor period: Holding period is counted from the date of acquisition of shares in ABC Ltd. (2018), not from the date of amalgamation.

ICAI Illustration 3: Statutory Non-Taxable Transactions under Section 70 ICAI Illustration 3

Question: In which of the following situations does capital gains tax liability not arise?
(i) Mr. A purchased gold jewellery for ₹5,00,000 in 2012 and gifted it to his sister on her wedding in T.Y. 2026-27.
(ii) Assets distributed to members on total partition of HUF.
(iii) Transfer of a work of art/painting to a notified public museum or university.

Transaction	Governing Section	Capital Gains Taxability
(i) Gift of Gold Jewellery to Sister	Section 70(1)(b)	Not a transfer. No capital gains tax liability arises on gift of capital asset. (Recipient sister is exempt u/s 56(2)(x) as relative).
(ii) Distribution on Total Partition of HUF	Section 70(1)(a)	Not a transfer. Any distribution of capital assets to coparceners upon partition of HUF is completely non-taxable.
(iii) Transfer of Work of Art to University	Section 70(1)(ix)	Not a transfer. Transfer of any work of art, archaeological collection, book, manuscript or painting to Government, university, National Museum or public art gallery is exempt.

ICAI Illustration 4: Senior Citizen Reverse Mortgage Scheme ICAI Illustration 4

Question: Mr. Abhishek, a senior citizen (aged 68), mortgaged his residential house with a bank under a notified Reverse Mortgage Scheme. He receives ₹35,000 per month from the bank.
Discuss the tax consequences of (a) monthly loan disbursements received by Mr. Abhishek, and (b) creation of mortgage in favor of the bank.

Transaction Component	Statutory Provision	Tax Consequences
Monthly receipts of ₹35,000	Section 10(43)	Completely Exempt: Any amount received by an individual as a loan under reverse mortgage is expressly exempt from income-tax.
Mortgage of house with bank	Section 70(1)(zh)	Not a Transfer: No capital gains arise on mortgaging the property with the lending institution under the notified scheme.

ICAI Illustration 5: Succession of Sole Proprietorship to Company (Neerja Textiles) ICAI Illustration 5

Question: Neerja was carrying on textile business under sole proprietorship Neerja Textiles. On 30.12.2026, the proprietorship was succeeded by Neerja Textiles Pvt. Ltd. All assets and liabilities were transferred at book values. Neerja was allotted 80% equity shares in the company and received no other consideration.
Examine taxability in hands of Neerja and the company, and state conditions for continuity of exemption under Section 70(1)(p) & Section 71.

Entity / Aspect	Governing Section	Tax Analysis & Compliance Requirements
Taxability on Transfer	Section 70(1)(p) / Section 47(xiv)	Exempt from Capital Gains: All statutory conditions are satisfied: (1) All assets and liabilities transferred; (2) Consideration paid only by allotment of shares; (3) Shareholding is 80% (≥ 50%).
Cost of Assets to Company	Section 73(1) / Section 49(1)	Cost to company is the cost to previous owner (Neerja).
Condition for Retaining Exemption	Section 71 / Section 47A	Neerja must continue to hold not less than 50% voting power for at least 5 years from 30.12.2026. If her holding falls below 50% within 5 years, the exempt capital gain will become taxable in the hands of the company in that year.

Sec 72 Mode of Computation & Removal of Indexation

Section 72 Formula

Statutory Computation Formula under Section 72 (Old Sec 48)

$$\text{Full Value of Consideration (FVOC)} - \text{Expenses wholly & exclusively incurred on transfer} = \text{Net Sale Consideration}$$ $$\text{Net Consideration} - \text{Cost of Acquisition (COA)} - \text{Cost of Improvement (COI)} = \text{Capital Gains}$$

• Removal of Indexation Benefit: For transfers of long-term capital assets effected on or after 23rd July 2024 (Tax Year 2026-27), the indexation benefit under the second proviso to Section 48 has been withdrawn across all asset classes.
• Special Grandfathering for Real Estate [Resident Ind/HUF]: Where land or building was acquired prior to 23rd July 2024, resident Individuals and HUFs are given the statutory option to pay tax at:
  (a) 12.5% without indexation, OR
  (b) 20% with indexation (indexed up to FY 2024-25 / CII 363),
  whichever results in lower tax liability!

Determination of Cost of Acquisition [Section 73 / Old Sec 49 & 55]

Asset Category	Statutory Cost Determination Rule
Assets Acquired before 01.04.2001	Higher of actual cost of acquisition or Fair Market Value (FMV) as on 01.04.2001. Proviso for Land/Building: FMV as on 01.04.2001 cannot exceed the Stamp Duty Value (SDV) of the property as on 01.04.2001.
Cost of Improvement [Sec 55(1)(b)]	• Any capital expenditure incurred on or after 01.04.2001 to increase the value of the asset. • Any cost of improvement incurred prior to 01.04.2001 is completely ignored.
Gifts, Wills, Partition [Sec 73(1)]	Cost of acquisition is deemed to be the cost to the previous owner who acquired it otherwise than by gift/will, plus any cost of improvement incurred by the previous owner and the assessee on or after 01.04.2001.
Bonus Shares	• Allotted before 01.04.2001: FMV as on 01.04.2001. • Allotted on or after 01.04.2001: Cost is NIL.
Right Shares & Renunciation	• Original Rights: Amount actually paid to company. • Renouncer of Right: Cost of right entitlement is NIL; entire sale consideration is Short-Term Capital Gain. • Purchaser of Right: Purchase price of right paid to renouncer + subscription price paid to company.

Treatment of Advance Money Received & Forfeited [Section 81 / Old Sec 51]

Forfeited BEFORE 01.04.2014 [Section 81 / 51]:
The forfeited advance money is deducted from the cost of acquisition (or FMV as on 01.04.2001) while computing capital gains upon subsequent transfer of the capital asset.
Forfeited ON OR AFTER 01.04.2014 [Section 56(2)(ix)]:
The forfeited advance money is taxable as Income from Other Sources (IFOS) in the year of forfeiture. It is NOT deducted from the cost of acquisition of the asset!

ICAI Illustration 7: Capital Gains on Sale of Original & Bonus Shares in Unlisted Company ICAI Illustration 7

Question: Ms. Usha purchases 1,000 equity shares in X (P) Ltd., an unlisted company, at ₹30 per share (brokerage 2%) on 10.04.2017. The company issues 1:1 bonus shares on 20.05.2019. On 15.12.2026, she sells 500 original shares and 500 bonus shares at ₹250 per share (brokerage 2%).
Compute capital gains for Tax Year 2026-27.

Particulars of Computation	Original Shares (₹)	Bonus Shares (₹)	Statutory Basis
Sale Proceeds (500 shares × ₹250)	1,25,000	1,25,000	Gross sale value
Less: Brokerage @ 2% on sale	(2,500)	(2,500)	Transfer expense allowable u/s 72
Net Consideration	1,22,500	1,22,500	Base for computation
Less: Cost of Acquisition:	-	-	-
• Original: 500 shares × (₹30 + 2% ₹0.60) = ₹30.60	(15,300)	-	Actual cost + acquisition brokerage
• Bonus: Allotted after 01.04.2001	-	(Nil)	Cost of bonus shares allotted post-2001 is NIL
Long-Term Capital Gain (LTCG)	1,07,200	1,22,500	Held > 24 months. Total LTCG = ₹2,29,700 (Taxable @ 12.5% u/s 197).

ICAI Illustration 8: Bonus Shares Allotment & Renunciation of Right Entitlement ICAI Illustration 8

Question: Mr. R holds 1,000 shares in Star Minus Ltd. (unlisted) acquired in 2001-02 for ₹15 per share.
1. Receives 1,000 bonus shares in 2018 (Cost = Nil).
2. Receives 1,000 right shares offer at ₹50 per share. He subscribes to 500 right shares and renounces 500 right entitlements in favor of Mr. S at ₹30 per share on 10.08.2026.
Compute capital gains on renunciation in hands of Mr. R and cost of shares to Mr. S.

Party & Transaction	Amount (₹)	Tax Treatment & Section Reference
Mr. R (Renunciation of 500 Rights): • Sale Proceeds of Rights (500 × ₹30) • Less: Cost of Right Entitlement	15,000 (Nil)	Under Section 73, the cost of right entitlement to the original shareholder is NIL. The holding period begins from the date of offer to renunciation date (< 24 months).
Short-Term Capital Gain to Mr. R	15,000	Entire ₹15,000 is taxable as STCG at normal slab rates.
Cost to Mr. S (Purchaser of Renounced Rights): • Amount paid to Mr. R for right entitlement • Subscription amount paid to company (500 × ₹50)	15,000 25,000	Cost of acquisition of shares subscribed by purchaser of rights is the aggregate of amount paid for entitlement and price paid to company.
Total Cost of Acquisition for Mr. S	40,000	(₹80 per share for 500 shares). Holding period begins from date of allotment.

ICAI Illustration 9: HUF Partition & Section 73(1) Cost to Previous Owner ICAI Illustration 9

Question: X & sons, HUF, purchased a plot of land for ₹1,20,000 in T.Y. 2002-03. In T.Y. 2006-07, a total partition of HUF took place, and the land was allotted to coparcener Mr. Y. Mr. Y incurred boundary wall construction expenditure of ₹80,000 in T.Y. 2009-10. On 10.02.2027, Mr. Y sold the land for ₹35,00,000.
Compute capital gains for Tax Year 2026-27.

Particulars	Amount (₹)	Statutory Explanation
Full Value of Consideration (Sale Proceeds)	35,00,000	Sold on 10.02.2027
Less: Cost of Acquisition [Sec 73(1) / 49(1)]	(1,20,000)	Cost to previous owner (HUF) who acquired it in 2002-03
Less: Cost of Improvement [Sec 73(1)]	(80,000)	Boundary wall incurred in 2009-10 (≥ 01.04.2001)
Taxable Long-Term Capital Gain (LTCG)	33,00,000	Held > 24 months (period held by HUF included). Taxable @ 12.5% under Section 197.

ICAI Illustration 10: Pre-2001 House Property, SDV Cap & Ignored Improvements ICAI Illustration 10

Question: Mr. C purchased a house property for ₹1,06,000 on May 15, 1975.
• Expenses on construction of second floor in 1982: ₹50,000.
• Expenses on construction of third floor in 2008-09: ₹2,00,000.
• Fair Market Value as on 01.04.2001: ₹8,50,000. Stamp Duty Value as on 01.04.2001: ₹8,00,000.
• Sold on 25.01.2027 for ₹48,00,000. Compute capital gains for Tax Year 2026-27.

Particulars of Computation	Amount (₹)	Statutory Working Notes
Full Value of Consideration	48,00,000	Actual sale consideration received
Less: Cost of Acquisition [Sec 73 / 55(2)(b)]	(8,00,000)	Higher of actual cost (₹1.06L) or FMV on 01.04.2001 (₹8.5L), capped at Stamp Duty Value on 01.04.2001 (₹8,00,000).
Less: Cost of Improvement:	-	-
• Incurred in 1982 (Pre-2001)	Nil	Ignored: All improvements incurred prior to 01.04.2001 are strictly ignored.
• Incurred in 2008-09 (Post-2001)	(2,00,000)	Allowable as cost of improvement incurred after 01.04.2001.
Taxable Long-Term Capital Gain (LTCG)	38,00,000	₹48,00,000 - ₹8,00,000 - ₹2,00,000 = ₹38,00,000. (Taxable under grandfathered 12.5% / 20% indexed regime).

ICAI Illustration 13: Advance Money Forfeiture Pre-2014 & Post-2014 Bifurcation ICAI Illustration 13

Question: Mr. Kay purchased a house property on 10.04.1992 for ₹65,000. FMV on 01.04.2001 was ₹1,50,000 (SDV ₹1,50,000). He received and forfeited advance of ₹20,000 in May 2008 from a prospective buyer. On 18.01.2027, he sells the house for ₹18,00,000.
Compute capital gains for Tax Year 2026-27.

Particulars	Amount (₹)	Governing Legal Principles
Full Value of Consideration	18,00,000	Sale proceeds received on 18.01.2027
Cost of Acquisition as on 01.04.2001	1,50,000	Higher of cost (₹65,000) or FMV/SDV on 01.04.2001
Less: Advance Money forfeited in 2008 [Sec 81 / 51]	(20,000)	Forfeited prior to 01.04.2014: Deducted from cost of acquisition.
Adjusted Cost of Acquisition	1,30,000	₹1,50,000 - ₹20,000 = ₹1,30,000
Long-Term Capital Gain (LTCG)	16,70,000	₹18,00,000 - ₹1,30,000 = ₹16,70,000.

Sec 74 & 75 Capital Gains on Depreciable Assets, MLDs & Debt Funds

Always STCG

Depreciable Assets Capital Gains [Section 74 / Old Sec 50]

Capital gains on assets forming part of a block of assets on which depreciation has been allowed under Section 33 are ALWAYS treated as Short-Term Capital Gains (STCG), irrespective of the period of holding. Capital gains arise only in two situations:

When Moneys Payable Exceeds Block Value: Where the full value of consideration (moneys payable) for assets sold/discarded during the year exceeds the aggregate of [Opening WDV + Actual additions during the year + Transfer expenses]. The excess is chargeable as STCG under Section 74, and the closing WDV of the block becomes NIL.
When Entire Block Ceases to Exist: Where all assets in the block are transferred during the tax year, and the sale proceeds are less than the WDV base. The shortfall is allowable as a Short-Term Capital Loss (STCL), and no depreciation is allowable.

Market Linked Debentures & Specified Mutual Funds [Section 75 / Old Sec 50AA]

Under Section 75, any capital gain arising from the transfer, redemption, or maturity of:

Market Linked Debentures (MLDs): Securities having underlying components of financial derivatives.
Specified Mutual Funds: Mutual funds acquired on or after 01.04.2023 where not more than 35% of total proceeds are invested in equity shares of domestic companies (debt mutual funds).

Mandatory Short-Term Treatment: Notwithstanding anything contained in the Act, capital gains on MLDs and specified debt mutual funds are deemed to be Short-Term Capital Gains taxable at applicable slab rates, irrespective of whether they were held for more than 24 months. No indexation benefit is allowable.

Computation of Capital Gains in Slump Sale [Section 76 / Old Sec 50B]

A slump sale means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to individual assets and liabilities.

Component	Statutory Computation Rules under Section 76
Full Value of Consideration (FVOC)	Fair Market Value (FMV) of the capital assets as on the date of transfer, calculated in the prescribed manner under Rule 11UAE (higher of monetary consideration or FMV of assets transferred).
Cost of Acquisition (COA)	Net Worth of the undertaking transferred, without indexation. $$\text{Net Worth} = \text{Aggregate Value of Total Assets} - \text{Total Liabilities of Undertaking}$$
Asset Valuation in Net Worth	• Depreciable Assets: Written Down Value (WDV) computed under Section 43(6). • Section 35AD Assets: Value taken as NIL. • All other assets: Book values appearing in books of account. • Revaluation Effect: Any revaluation of assets is strictly ignored!
Holding Period Classification	If the undertaking was owned and held for more than 24 months, the capital gain is treated as Long-Term Capital Gain (LTCG); otherwise, Short-Term Capital Gain.

Deemed Full Value of Consideration & Real Estate Safe Harbor [Sections 77 & 78]

Section Reference	Asset Transferred	Statutory Mandate & Safe Harbor Rule
Section 77 (Old Sec 50C)	Land or Building or Both	Where the Stamp Duty Value (SDV) assessed by State authorities exceeds the actual consideration: • 110% Safe Harbor Rule: If SDV does not exceed 110% of the apparent consideration, the actual consideration is accepted as FVOC. • SDV on Agreement Date: If date of agreement and registration differ, SDV on agreement date can be adopted provided advance consideration (or part) was paid on or before agreement date by account payee cheque, bank draft, or electronic clearing system (ECS).
Section 78 (Old Sec 50CA)	Unquoted Shares of Company	Where consideration for transfer of unquoted equity shares is less than the Fair Market Value (FMV) determined under Rule 11UA, such FMV is deemed to be the full value of consideration.
Section 79 (Old Sec 50D)	Consideration Not Determinable	Where consideration received or accruing is not ascertainable, the FMV of the capital asset on the date of transfer is deemed to be full consideration.

ICAI Illustration 11: Depreciable Assets Short-Term Capital Gains under Section 74 ICAI Illustration 11

Question: Rajawat & Co., a sole proprietorship, owns six machines in the 15% plant & machinery block. Opening WDV as on 01.04.2026 was ₹8,50,000. It purchased one new machine on 10.06.2026 for ₹1,50,000. On 15.01.2027, it sold all seven machines for ₹12,50,000.
Compute capital gains and depreciation for Tax Year 2026-27.

Particulars	Amount (₹)	Statutory Analysis under Section 74
Opening WDV as on 01.04.2026	8,50,000	6 existing machines in 15% block
Add: Actual cost of new machine acquired on 10.06.2026	1,50,000	Cost of addition
Total WDV Base before Sale	10,00,000	Base for depreciation and sale deduction
Less: Moneys payable on sale of all 7 machines	(12,50,000)	Sale proceeds exceed the block value
Short-Term Capital Gain (STCG) under Section 74	2,50,000	Taxable as STCG: Excess over WDV is ₹2,50,000.
Depreciation Allowable under Section 33	Nil	Closing WDV is NIL; all assets transferred.

ICAI Illustration 12: Slump Sale Net Worth & Capital Gains for Sriram Enterprises ICAI Illustration 12

Question: M/s Sriram Enterprises transfers Unit 1 (started 5 years ago) on 01.04.2026 by way of slump sale for ₹25,00,000. Transfer expenses: ₹28,000. Unit 1 balance sheet particulars:
• Plant & Machinery (WDV as per IT Act): ₹7,50,000 (Book value ₹12,00,000 including revaluation ₹3,00,000).
• Debtors: ₹4,00,000; Inventories: ₹2,50,000.
• Liabilities: Creditors ₹3,00,000; Bank Loan ₹2,00,000.
Compute capital gains arising on slump sale for Tax Year 2026-27.

Step / Particulars	Amount (₹)	Statutory Explanation & Section 76 Rules
Step 1: Computation of Net Worth: • Depreciable Plant & Machinery (Tax WDV) • Debtors (Book value) • Inventories (Book value)	7,50,000 4,00,000 2,50,000	Under Section 76(2), depreciable assets are valued at tax WDV under Section 43(6). Revaluation reserve is strictly excluded.
Total Assets of Unit 1	14,00,000	₹7,50,000 + ₹4,00,000 + ₹2,50,000
Less: Total Liabilities (Creditors ₹3L + Loan ₹2L)	(5,00,000)	Third-party liabilities
Net Worth of Unit 1 (Cost of Acquisition)	9,00,000	Deemed cost of acquisition under Section 76
Step 2: Capital Gains Computation: • Slump Sale Consideration • Less: Transfer Expenses	25,00,000 (28,000)	Lump sum consideration received
Net Sale Consideration	24,72,000	₹25,00,000 - ₹28,000
Less: Net Worth (Cost of Acquisition)	(9,00,000)	No indexation benefit permissible in slump sale
Long-Term Capital Gain (LTCG)	15,72,000	Held > 24 months = LTCG. Taxable @ 12.5% u/s 197.

ICAI Illustration 14: Compulsory Acquisition, Enhanced Compensation & Section 145B Interest ICAI Illustration 14

Question: Mr. X house property purchased in Dec 1993 for ₹5,25,000 (improvement in 2004 ₹1,75,000) was compulsorily acquired in 2018 for ₹35,00,000. In T.Y. 2026-27, the High Court awarded enhanced compensation of ₹12,00,000 and interest on enhanced compensation of ₹2,50,000. Mr. X incurred litigation expenses of ₹60,000.
Compute taxable income for Tax Year 2026-27.

Head of Income / Item	Amount (₹)	Statutory Provisions & Treatment
I. Capital Gains [Sec 67(5) / Old Sec 45(5)]: • Enhanced Compensation received • Less: Litigation expenses incurred	12,00,000 (60,000)	Taxable in the year of receipt (T.Y. 2026-27). Cost of acquisition and improvement taken as Nil.
Long-Term Capital Gain (LTCG)	11,40,000	Taxable @ 12.5% under Section 197.
II. Income from Other Sources [Sec 145B / 56(2)(viii)]: • Interest on Enhanced Compensation • Less: 50% Standard Deduction u/s 57(iv)	2,50,000 (1,25,000)	Interest is taxable on receipt basis under Section 145B. Statutory deduction of flat 50% is mandatory. No other expense allowed.
Taxable Income from Other Sources (IFOS)	1,25,000	Taxable at normal applicable slab rates.
Total Taxable Income for Tax Year 2026-27	12,65,000	₹11,40,000 (LTCG) + ₹1,25,000 (IFOS) = ₹12,65,000.

Sec 82 - 90 Capital Gains Statutory Exemptions (Sections 54 to 54GB Equivalent)

Tax Relief

Under the Income-tax Act, 2025, capital gains exemptions are codified under Sections 82 through 90 (formerly Sections 54 to 54GB). The table below outlines the comparative statutory requirements:

Section	Eligible Assessee	Original Asset Transferred	New Asset to be Acquired / Reinvested	Time Limit & Statutory Ceiling Limits
Section 82 (Old Sec 54)	Individual or HUF	Residential House Property (Long-Term)	One Residential House in India (or two houses if LTCG ≤ ₹2 Crores, once in lifetime)	• Purchase: 1 yr before or 2 yrs after transfer. • Construction: Within 3 yrs after transfer. • Cap: Eligible investment capped at ₹10 Crores. • Lock-in: 3 years.
Section 83 (Old Sec 54B)	Individual or HUF	Urban Agricultural Land (used for agri for 2 years)	Agricultural Land (Urban or Rural)	Purchase within 2 years after date of transfer. Lock-in: 3 years.
Section 84 (Old Sec 54D)	Any Assessee	Land/Building of Industrial Undertaking (Compulsory Acq.)	Land/Building for shifting/re-establishing industrial undertaking	Purchase/Construct within 3 years after receipt of compensation. Lock-in: 3 years.
Section 85 (Old Sec 54EC)	Any Assessee	Land or Building or both (Long-Term)	Bonds of NHAI, REC, PFC, IRFC (redeemable after 5 years)	Investment within 6 months from transfer date. • Cap: Maximum ₹50 Lakhs during the financial year of transfer and subsequent financial year.
Section 87 (Old Sec 54F)	Individual or HUF	Any Long-Term Capital Asset other than a Residential House	One Residential House in India (Assessee should not own more than 1 house on transfer date)	• Purchase: 1 yr before or 2 yrs after; Construct: 3 yrs. • Proportionate Exemption: $$\text{Exemption} = \text{LTCG} \times \frac{\text{Cost of New House}}{\text{Net Consideration}}$$ • Cap: Eligible cost capped at ₹10 Crores.

Capital Gains Account Scheme (CGAS), 1988: If the capital gain or net consideration is not utilized for purchase/construction before the due date of filing return under Section 263(1) [formerly Section 139(1)], it must be deposited in a notified bank account under CGAS 1988. Proof of deposit must be furnished with the return. If unutilized within the prescribed 2/3 years, it is taxed as capital gain of that tax year.

ICAI Illustration 15: Compulsory Acquisition of Urban Agricultural Land under Section 10(37) ICAI Illustration 15

Question: Mr. Kumar has an agricultural land costing ₹6 lakhs in Lucknow acquired on 01.04.2003 and used for agricultural purposes by him. The land was compulsorily acquired by the State Government on 15.06.2026 for ₹25,00,000, and full compensation was received on 10.11.2026.
Determine the tax liability in the hands of Mr. Kumar for Tax Year 2026-27.

Particulars	Governing Section	Tax Consequences & Working
Compulsory Acquisition of Urban Agri Land	Section 10(37)	100% Tax Exempt: Under Section 10(37), any capital gain arising to an Individual or HUF from compulsory acquisition of urban agricultural land (used for agriculture for at least 2 years prior to acquisition) is completely exempt from income-tax.
Taxable Capital Gain	-	NIL (No capital gains tax payable).

ICAI Illustration 16: Voluntary Sale of Urban Agricultural Land (Section 10(37) Inapplicable) ICAI Illustration 16

Question: Will your answer to Illustration 15 be different if Mr. Kumar had voluntarily sold this urban agricultural land to his friend Mr. Sharma for ₹25,00,000 on his own accord?

Voluntary Sale is NOT Compulsory Acquisition: Section 10(37) exemption applies strictly to compulsory acquisition under law. A private or voluntary sale does not qualify for Section 10(37). The gain is fully taxable as Long-Term Capital Gain (subject to rollover exemption under Section 83 / 54B if reinvested in agricultural land).

Particulars	Amount (₹)	Tax Analysis
Full Value of Consideration (Voluntary Sale)	25,00,000	Actual sale consideration
Less: Cost of Acquisition (Acquired 01.04.2003)	(6,00,000)	No indexation for transfers on/after 23.07.2024
Taxable Long-Term Capital Gain (LTCG)	19,00,000	Taxable @ 12.5% under Section 197 (unless invested u/s 83).

ICAI Illustration 17: Compulsory Acquisition of Urban Non-Agricultural Land ICAI Illustration 17

Question: Will your answer to Illustration 15 be different if Mr. Kumar had NOT used this land for agricultural activities during the two years preceding the date of compulsory acquisition?

Condition	Status	Tax Treatment
Use for Agricultural Purposes for 2 Years	Condition Failed	Section 10(37) mandatorily requires agricultural use by individual/parents for 2 years prior to acquisition. Since not so used, exemption u/s 10(37) is denied.
Taxable Long-Term Capital Gain	₹25L - ₹6L	₹19,00,000 is fully taxable as LTCG @ 12.5% u/s 197.

ICAI Illustration 18: Compulsory Acquisition of Agricultural Land Belonging to Company ICAI Illustration 18

Question: Will your answer to Illustration 15 be different if the urban agricultural land belonged to ABC Ltd. (a company) instead of Mr. Kumar?

Parameter	Statutory Mandate	Conclusion
Eligible Assessee under Section 10(37)	Section 10(37) is available ONLY to an Individual or HUF.	Exemption DENIED to ABC Ltd. Companies are strictly ineligible for Section 10(37). Entire LTCG of ₹19,00,000 is taxable in hands of ABC Ltd.

ICAI Illustration 19: Section 82 / Section 54 Residential House Property Exemption ICAI Illustration 19

Question: Mr. Cee purchased a residential house on July 20, 2024 for ₹10,00,000 and made additions costing ₹2,00,000 in August 2024. On November 15, 2026, he sold this house for ₹25,00,000 (transfer expenses ₹50,000). On January 10, 2027, he purchased another residential house in Pune for ₹12,00,000.
Compute capital gains and deduction under Section 82 (Old Sec 54) for Tax Year 2026-27.

Particulars	Amount (₹)	Statutory Working & Section 82 Rules
Full Value of Consideration	25,00,000	Sold on 15.11.2026
Less: Brokerage & Transfer Expenses	(50,000)	Incurred wholly and exclusively on transfer
Net Consideration	24,50,000	Base for computation
Less: Cost of Acquisition (Purchased 20.07.2024)	(10,00,000)	Original purchase price
Less: Cost of Improvement (August 2024)	(2,00,000)	Additions to house property
Long-Term Capital Gain before Exemption	12,50,000	Held > 24 months (20.07.2024 to 15.11.2026 = 28 mos) = LTCA.
Less: Deduction under Section 82 [Old Sec 54]	(12,00,000)	Purchased new residential house within 2 years (₹12,00,000 ≤ ₹10 Crores cap).
Taxable Long-Term Capital Gain	50,000	₹12,50,000 - ₹12,00,000 = ₹50,000.

ICAI Illustration 20: Section 84 / Section 54D Industrial Land & Building Exemption ICAI Illustration 20

Question: PQR Ltd. purchased land for industrial undertaking in May 2004 for ₹3,50,000. It was compulsorily acquired by State Government on 10.05.2026 for ₹18,00,000. The company received compensation on 20.09.2026. On 15.02.2027, it purchased land for industrial undertaking for ₹12,00,000 and deposited ₹4,00,000 in CGAS.
Compute capital gains and deduction under Section 84 for Tax Year 2026-27.

Particulars	Amount (₹)	Statutory Explanation under Section 84
Compulsory Acquisition Compensation	18,00,000	Received on 20.09.2026
Less: Cost of Acquisition (May 2004)	(3,50,000)	Actual acquisition cost
Long-Term Capital Gain before Exemption	14,50,000	Industrial land used > 2 years
Less: Deduction under Section 84 [Old Sec 54D]: • Land purchased for industrial undertaking • Amount deposited in CGAS before return due date	(12,00,000) (2,50,000)	Total investment / deposit = ₹16,00,000. Deduction is limited to LTCG of ₹14,50,000.
Taxable Long-Term Capital Gain	Nil	Entire capital gain is exempt under Section 84.

ICAI Illustration 21: Section 85 / Section 54EC Bonds Ceiling Limit of ₹50 Lakhs ICAI Illustration 21

Question: LTCG of ₹75 lakhs arose from transfer of a commercial building on 01.05.2026. Assessee invested ₹50 lakhs in REC bonds on 15.09.2026 and ₹25 lakhs in NHAI bonds on 20.10.2026 (both within 6 months).
Compute the deduction allowable under Section 85 (Old Sec 54EC) for Tax Year 2026-27.

Statutory Ceiling under Section 85: Investment in specified bonds (NHAI/REC/PFC/IRFC) cannot exceed ₹50,00,000 in aggregate during the financial year in which the original asset is transferred and the subsequent financial year.

Particulars	Amount (₹)	Analysis & Statutory Limitation
Long-Term Capital Gain arising on building	75,00,000	Original gain
Total amount invested in specified bonds (₹50L + ₹25L)	75,00,000	Invested within 6 months
Deduction Permissible under Section 85 [Old Sec 54EC]	(50,00,000)	Capped at ₹50,00,000: Proviso to Section 85 restricts total exemption to ₹50 Lakhs.
Taxable Long-Term Capital Gain	25,00,000	₹75,00,000 - ₹50,00,000 = ₹25,00,000.

ICAI Illustration 22: Section 87 / Section 54F Proportionate Exemption Formula ICAI Illustration 22

Question: Mr. D sold commercial land on 10.06.2026 for ₹60,00,000 (purchased in 2010 for ₹12,00,000). Transfer expenses: ₹1,00,000. He owns no residential house. On 20.01.2027, he purchased a residential house for ₹35,00,000.
Compute taxable capital gains for Tax Year 2026-27 under Section 87 (Old Sec 54F).

Step / Particulars	Amount (₹)	Proportionate Formula & Section 87 Rules
Full Value of Consideration Less: Transfer Expenses	60,00,000 (1,00,000)	Commercial land sold
Net Sale Consideration	59,00,000	Net consideration
Less: Cost of Acquisition	(12,00,000)	Actual acquisition cost
Long-Term Capital Gain before Exemption	47,00,000	Eligible for Section 87 proportionate exemption
Less: Deduction under Section 87 [Old Sec 54F]: $$\text{LTCG} \times \frac{\text{Cost of New House}}{\text{Net Consideration}}$$	(27,88,136)	$$47,00,000 \times \frac{35,00,000}{59,00,000} = \mathbf{27,88,136}$$
Taxable Long-Term Capital Gain	19,11,864	₹47,00,000 - ₹27,88,136 = ₹19,11,864. (Taxable @ 12.5% u/s 197).

Sec 196 - 198 Rationalized Capital Gains Tax Rates (12.5% & 20% Regimes)

Finance Act Architecture

Section	Nature of Capital Gain	Tax Rate	Key Conditions & Relief Mechanisms
Section 196 (Old Sec 111A)	Short-Term Capital Gains on STT-paid equity shares, equity-oriented fund units, or business trust units	20%	• Transaction chargeable to STT. • Chapter VIII-C deductions not allowable. • Resident Individuals/HUFs can adjust unexhausted basic exemption limit.
Section 198 (Old Sec 112A)	Long-Term Capital Gains on STT-paid equity shares, equity-oriented fund units, or business trust units	12.5% > ₹1.25 Lakhs	• Taxable @ 12.5% on LTCG in excess of ₹1,25,000. • Grandfathering [Sec 112A(4)]: For shares acquired before 01.02.2018, Cost = Higher of actual cost and [Lower of FMV on 31.01.2018 and Sale price]. • Unexhausted basic exemption adjustment available for resident Ind/HUF.
Section 197 (Old Sec 112)	All Other Long-Term Capital Gains (Unlisted shares, immovable properties, jewellery, etc.)	12.5%	• Flat rate of 12.5% without indexation. • Grandfathering Option for Resident Ind/HUF: Pre-23.07.2024 land/building can pay lower of 12.5% without indexation or 20% with indexation.

Reference to Departmental Valuation Officer (DVO) [Section 91 / Old Sec 55A]

The Assessing Officer may refer the valuation of any capital asset to a Valuation Officer where:
1. The value of the asset claimed by the assessee is in accordance with the estimate of a registered valuer, but the AO is of the opinion that the value so claimed is at variance with its fair market value.
2. In any other case, the AO is of opinion that the FMV exceeds the value claimed by more than 15% or by more than ₹25,000, having regard to the nature of the asset and other relevant circumstances.

ICAI Illustration 23: Income-Tax Liability under Section 196 & 197 with Basic Exemption Adjustment ICAI Illustration 23

Question: Calculate income-tax liability for Tax Year 2026-27 in the following cases (Default tax regime):
1. Mr. A (resident, age 45): Total Income ₹4,80,000, comprising LTCG u/s 197 ₹1,20,000, STCG u/s 196 ₹1,10,000, and other income ₹2,50,000.
2. Mrs. B (resident senior citizen, age 62): Total Income ₹3,20,000, consisting solely of LTCG u/s 197 ₹3,20,000.
3. Mr. C (non-resident, age 65): Total Income ₹3,50,000, comprising LTCG u/s 197 ₹1,50,000 and other income ₹2,00,000.

Assessee & Profile	Income Components & Unexhausted Exemption Working	Tax Payable (₹)
Mr. A (Resident, Age 45) Basic Exemption: ₹3,00,000	• Other Income: ₹2,50,000 absorbs ₹2,50,000 of basic exemption. • Unexhausted Basic Exemption = ₹3,00,000 - ₹2,50,000 = ₹50,000. • Priority: Adjust unexhausted ₹50,000 against STCG u/s 196 (taxable @ 20%). - STCG taxable = ₹1,10,000 - ₹50,000 = ₹60,000 @ 20% = ₹12,000. - LTCG u/s 197: ₹1,20,000 @ 12.5% = ₹15,000. - Total Tax before cess = ₹27,000 + 4% HEC (₹1,080) = ₹28,080. (Rebate u/s 156 / 87A not available against special rate CG under new regime).	28,080
Mrs. B (Resident Senior Citizen, 62) Basic Exemption: ₹3,00,000	• Total Income: LTCG ₹3,20,000. • Unexhausted basic exemption of ₹3,00,000 adjusted against LTCG. • Taxable LTCG = ₹3,20,000 - ₹3,00,000 = ₹20,000 @ 12.5% = ₹2,500. • Add: 4% HEC = ₹100. Total Tax = ₹2,600.	2,600
Mr. C (Non-Resident, Age 65) Basic Exemption: ₹3,00,000	• Other Income = ₹2,00,000 (taxable within basic slab). • Non-Resident Restriction: Unexhausted basic exemption (₹1,00,000) CANNOT be adjusted against capital gains! • Entire LTCG ₹1,50,000 is taxable @ 12.5% = ₹18,750. • Add: 4% HEC = ₹750. Total Tax = ₹19,500.	19,500

TYK 1 - 5 Test Your Knowledge: Practical Problems (Questions 1 to 5)

ICAI Exam Standards

Problem 1: Hari Residential House Sale & Dual Replacement Purchases TYK Question 1

Question: Hari acquired a residential house in Delhi on 15.04.2002 for ₹9,00,000. In May 2005, he forfeited advance of ₹25,000 from Ms. Pari. On 03.06.2026, he sold this house for ₹43,00,000.
• On 04.04.2026, he purchased a residential house in Delhi for ₹7,00,000 (staying on rent for 5 yrs, full payment made, but unregistered agreement).
• On 14.10.2026, he purchased another old house in Chennai for ₹5,00,000 (registered with authorities).
Determine taxable capital gains in hands of Hari for Tax Year 2026-27.

Particulars	Amount (₹)	Statutory Explanation & Section 82 / 54 Analysis
Full Value of Consideration (Delhi house sold)	43,00,000	Sold on 03.06.2026
Less: Cost of Acquisition (Acquired 15.04.2002)	9,00,000	Original purchase cost
Less: Advance forfeited in May 2005 [Sec 81 / 51]	(25,000)	Forfeited prior to 01.04.2014; deducted from cost
Adjusted Cost of Acquisition	(8,75,000)	₹9,00,000 - ₹25,00,000 = ₹8,75,000 (No indexation post 23.07.2024)
Long-Term Capital Gain before Exemption	34,25,000	₹43,00,000 - ₹8,75,000 = ₹34,25,000.
Less: Deduction under Section 82 [Old Sec 54]:	-	-
• Delhi House (Unregistered agreement, full possession)	(7,00,000)	Allowable: In CIT v. Podar Cement Pvt. Ltd. (SC) and Balraj v. CIT, taking possession in part performance u/s 53A TPA constitutes purchase under Section 54.
• Chennai House (Old registered house purchased)	(5,00,000)	Allowable: Since LTCG does not exceed ₹2 Crores, Hari can claim exemption for two residential houses in India (once in lifetime).
Total Taxable Long-Term Capital Gain for T.Y. 2026-27	22,25,000	₹34,25,000 - ₹12,00,000 = ₹22,25,000.

Problem 2: Ganesh Mumbai House – Two Adjacent Flats Treated as One Residential House TYK Question 2

Question: Mr. Ganesh sold his residential house in Mumbai and earned LTCG of ₹2.5 Crores. He purchased two adjacent residential flats on the same day via two separate registered sale deeds from two different persons. The builder certified that necessary modifications were made to combine them into one residential apartment. The A.O. restricted deduction under Section 82 / 54 to one flat only because LTCG exceeded ₹2 Crores.
Examine the correctness of the A.O.'s contention.

Legal Issue	Landmark Judicial Precedents	Conclusion & Ruling
Two adjacent flats combined into one residential unit	• In CIT v. D. Ananda Basappa (2009) (Kar HC) and CIT v. K.G. Rukminiamma (2011) (Kar HC), it was held that where adjacent flats are converted into a single habitable residential unit, they constitute "one residential house". • The mere fact that they were purchased under two separate sale deeds or occupied by different tenants prior to sale does not alter their physical integration into one unit.	A.O.'s contention is INCORRECT. Mr. Ganesh is entitled to deduction under Section 82 in respect of the aggregate cost of both flats as they constitute a single residential house.

Problem 3: Vijay Co-Owned Residential House Share Purchase from Brothers TYK Question 3

Question: Vijay owned 3 let-out residential houses and co-owned another residential house with his 4 brothers (equal shares). He sold one residential house during T.Y. 2026-27. Within a month, his 4 brothers executed a release deed transferring their 4/5th shares in the co-owned house to Vijay for consideration. Vijay utilized the entire LTCG to pay his brothers. Vijay let out the new house. Is Vijay eligible for Section 82 / 54 deduction? Does non-self-occupation disentitle him?

Sub-Issue	Statutory Mandate & Landmark Law	Conclusion
Acquisition of co-owners' shares via Release Deed	In CIT v. T.N. Aravinda Reddy (1979) 120 ITR 46 (SC), the Supreme Court held that acquiring co-owners' shares in a residential property amounts to the "purchase" of a residential house.	Eligible as Purchase: Executing release deed for consideration qualifies under Section 82.
Letting out the new residential house	Section 82 / 54 requires investment in "a residential house". There is no statutory condition that the assessee must personally reside in the new house.	Exemption Allowed: Letting out the new residential house does NOT disentitle Vijay from deduction under Section 82.

Problem 4: Aries Tubes Pvt. Ltd. Liquidation & Deemed Dividend Bifurcation TYK Question 4

Question: Aries Tubes Pvt. Ltd. went into liquidation on 01.06.2026. Funds prior to distribution:
• Share capital (issued 01.04.2013): ₹5,00,000 | Reserves prior to 01.06.2026: ₹3,00,000 | Excess realization in liquidation: ₹5,00,000.
Total funds distributed to shareholders = ₹13,00,000.
Shareholder X holds 10% shares (cost of acquisition in 2014 was ₹60,000). Compute tax consequences in hands of X.

Head of Income	Amount (₹)	Statutory Basis & Sections 68 / 2(22)(c)
Total Distribution received by X (10% of ₹13,00,000)	1,30,000	10% shareholding entitlement
I. Deemed Dividend under Section 2(22)(c): • 10% of accumulated profits prior to liquidation (₹3,00,000)	30,000	Taxable under Income from Other Sources at normal slab rates.
II. Capital Gains under Section 68(2) / 46(2): • Full Value of Consideration (₹1,30,000 - ₹30,000 deemed div) • Less: Cost of Acquisition of shares (acquired in 2014)	1,00,000 (60,000)	Under Section 68(2), the distribution in excess of accumulated profits is deemed consideration for capital gains.
Taxable Long-Term Capital Gain (LTCG)	40,000	₹1,00,000 - ₹60,000 = ₹40,000. Taxable @ 12.5% u/s 197.

Problem 5: Xavier & Abraham – Mortgage Clearance by Inheritor as Cost of Acquisition TYK Question 5

Question: Xavier mortgaged his house (purchased on 26.05.2002 for ₹5 lakhs) for a loan. Property inherited by son Abraham in FY 2009-10 by Will. To obtain clear title, Abraham paid outstanding loan of ₹15 lakhs on 12.02.2010. Abraham sold the house on 16.04.2026 for ₹55 lakhs.
Compute capital gains in the hands of Abraham for Tax Year 2026-27.

Particulars	Amount (₹)	Statutory Explanation & Supreme Court Jurisprudence
Full Value of Consideration	55,00,000	Sale proceeds received on 16.04.2026
Less: Cost of Acquisition to Previous Owner [Sec 73(1)]	(5,00,000)	Cost to father Xavier who acquired it in 2002
Less: Cost of clearing mortgage encumbrance [Sec 73(1)]	(15,00,000)	In RM. Arunachalam v. CIT (1997) 227 ITR 222 (SC), it was held that where mortgage was created by the predecessor, payment by successor to clear mortgage is deductible cost of acquisition/improvement.
Taxable Long-Term Capital Gain (LTCG)	35,00,000	₹55,00,000 - ₹5,00,000 - ₹15,00,000 = ₹35,00,000. (Taxable @ 12.5% u/s 197).

TYK 6 - 13 Test Your Knowledge: Practical Problems (Questions 6 to 13)

Comprehensive Calculations

Problem 6: Gama Ltd. – Shifting of Industrial Undertaking from Urban Area under Section 88 TYK Question 6

Question: Gama Ltd., located within municipal corporation limits, decided to shift its industrial undertaking to a non-urban area in December 2026. It sold:
• Plant & Machinery: STCG under Section 74 of ₹18,00,000.
• Land & Factory Building: LTCG of ₹42,00,000.
Within 1 year before or 3 years after the date of transfer, the company incurred expenses for shifting:
1. Purchased new plant & machinery in rural area: ₹22,00,000; 2. Acquired land in rural area: ₹15,00,000; 3. Constructed new building: ₹12,00,000; 4. Shifting expenses: ₹3,00,000.
Explain the tax treatment under Section 88 (Old Sec 54G) for Tax Year 2026-27.

Category of Capital Gain	Gain (₹)	Exemption u/s 88 (₹)	Taxable Gain (₹)
Short-Term Capital Gain (Machinery) [Sec 74]	18,00,000	18,00,000	Nil
Long-Term Capital Gain (Land & Building)	42,00,000	34,00,000	8,00,000
Total Capital Gains / Exemption	60,00,000	52,00,000	8,00,000

*Note: Total qualifying expenditure incurred on new assets and shifting is ₹22L + ₹15L + ₹12L + ₹3L = ₹52,00,000. Exemption is first adjusted against STCG (₹18L) and the balance ₹34,00,000 against LTCG. Net taxable LTCG = ₹42L - ₹34L = ₹8,00,000.

Problem 7: Insurance Compensation on Destroyed Depreciable Machinery TYK Question 7

Question: An art-silk manufacturing company had one machine in the 15% plant & machinery block. Opening WDV as on 01.04.2026 was ₹1,87,850. The machine was completely destroyed in an accidental fire. The insurance company settled the claim for ₹4,00,000, which was received in T.Y. 2026-27. No other asset was acquired.
Compute capital gains under Section 67(2) / 45(1A) read with Section 74 / 50.

Particulars	Amount (₹)	Governing Legal Provisions
Full Value of Consideration [Sec 67(2) / 45(1A)]	4,00,000	Insurance money received on destruction by fire
Less: Opening WDV as on 01.04.2026 [Sec 74 / 50]	(1,87,850)	WDV of the destroyed machinery
Short-Term Capital Gain (STCG) under Section 74	2,12,150	Taxable as STCG: ₹4,00,000 - ₹1,87,850 = ₹2,12,150.

Problem 8: Tani Land Conversion, Multi-Unit Flats Construction & Section 85 Exemption TYK Question 8

Question: Tani purchased land in FY 2004-05 for ₹35 lakhs. On 01.08.2022, she converted it into stock-in-trade (FMV on conversion date: ₹2.10 Crores). She constructed 15 residential flats on the land (total construction cost ₹1.50 Crores). During T.Y. 2026-27, she sold 10 flats for ₹30 lakhs each (₹3 Crores). On 15.02.2027, she invested ₹50 lakhs in REC capital gains bonds.
Compute Capital Gains and Business Income for Tax Year 2026-27.

Head of Income / Stream	Amount (₹)	Statutory Working & Explanations
I. Capital Gains [Sec 67(1) / 45(2)]: • Total Capital Gain on conversion (₹2.10 Cr - ₹35L) • Proportionate LTCG attributable to 10 flats sold (10/15)	1,75,00,000 1,16,66,666	Conversion capital gain is taxable only in the year in which the stock-in-trade is sold, proportionately (10 out of 15 flats sold).
Less: Deduction under Section 85 [Old Sec 54EC]	(50,00,000)	Invested in REC bonds within 6 months (Max limit ₹50L).
Taxable Long-Term Capital Gain	66,66,666	Taxable @ 12.5% under Section 197.
II. Business Income (PGBP) [Sec 26]: • Sale Proceeds of 10 Flats (10 × ₹30 Lakhs) • Less: Cost of Land attributable (₹2.10 Cr × 10/15) • Less: Construction Cost attributable (₹1.50 Cr × 10/15)	3,00,00,000 (1,40,00,000) (1,00,00,000)	Commercial profits from real estate development: Sales - Fair Value of Land - Construction Costs.
Taxable Business Profits (PGBP)	60,00,000	₹3,00,00,000 - ₹2,40,00,000 = ₹60,00,000.

Problem 9: Mr. Singh – Section 77 / 50C Safe Harbor Check & Section 82 / 85 Deductions TYK Question 9

Question: Mr. Singh sold residential property: Actual consideration ₹38,00,000; Stamp Duty Value ₹45,00,000. Cost of acquisition in 2008 was ₹15,00,000. He invested ₹10,00,000 in Section 54EC bonds and ₹12,00,000 in a new residential house within 6 months.
Compute capital gains and total income for Tax Year 2026-27.

Step / Particulars	Amount (₹)	Governing Legal Provisions
Apparent Sale Consideration Stamp Duty Value (SDV)	38,00,000 45,00,000	110% of apparent consideration = ₹41,80,000. Since SDV (₹45L) > 110%, SDV of ₹45,00,000 is deemed as FVOC under Section 77 / 50C.
Full Value of Consideration	45,00,000	Deemed consideration
Less: Cost of Acquisition	(15,00,000)	Acquired in 2008
Long-Term Capital Gain before Exemption	30,00,000	₹45,00,000 - ₹15,00,000
Less: Deduction under Section 85 [Old Sec 54EC] (Bonds)	(10,00,000)	Invested in capital gains bonds within 6 months
Less: Deduction under Section 82 [Old Sec 54] (New House)	(12,00,000)	Invested in new residential house within 2 years
Taxable Long-Term Capital Gain	8,00,000	₹30,00,000 - ₹22,00,000 = ₹8,00,000.

Problem 10: SS(P) Ltd. Demerger to RV(P) Ltd. & Cost Apportionment for Shareholder TYK Question 10

Question: SS(P) Ltd. (net worth ₹40 Crores) demerged its cement division (net book value ₹10 Crores) to RV(P) Ltd. in January 2027. Shareholder Mr. N.K. held 25,000 shares in SS(P) Ltd. acquired in 2004-05 for ₹6,00,000. He received 50,000 shares from RV(P) Ltd. and sold them for ₹8,00,000 in March 2027.
Examine taxability of demerger and compute capital gains on sale of shares by Mr. N.K.

Transaction / Step	Statutory Provision	Tax Implications (₹)
Demerger in hands of SS(P) Ltd. and RV(P) Ltd.	Section 70(1)(j) & (k)	Exempt (Nil) (Transfer to Indian resulting company)
Receipt of shares of RV(P) Ltd. by Mr. N.K.	Section 70(1)(vid)	Exempt (Nil) (Allotment on demerger not a transfer)
Sale of RV(P) Ltd. shares by Mr. N.K.: • Sale Proceeds of 50,000 shares • Less: Cost of Acquisition [Sec 49(2C) / 73]	$$\text{Cost} = 6,00,000 \times \frac{10\text{ Cr}}{40\text{ Cr}} = 1,50,000$$	8,00,000 (1,50,000)
Long-Term Capital Gain to Mr. N.K.	Holding period includes SS(P) Ltd. period (since 2004)	6,50,000 (Taxable @ 12.5% u/s 197)

Problem 11: PQR Limited – Slump Sale of Software Unit for ₹385 Lakhs TYK Question 11

Question: PQR Limited transferred its software unit as a going concern by slump sale for ₹385 lakhs on 31.03.2027 (held > 3 years). Balance sheet assets of software unit: Plant & Machinery (tax WDV) ₹60 lakhs; Patents (tax WDV) ₹25 lakhs; Debtors & other assets ₹155 lakhs (revaluation reserve ₹40 lakhs). Liabilities: Creditors & provisions ₹55 lakhs.
Compute capital gains and tax liability under Section 76 / 50B.

Step / Component	Amount (₹ Lakhs)	Statutory Net Worth Rules
Total Assets of Software Unit: • Plant & Machinery (Tax WDV) • Patents (Tax WDV) • Other Assets (Book value excluding revaluation)	60.00 25.00 155.00	Section 76 mandates WDV for depreciable assets and book value for other assets. Revaluation is strictly ignored.
Aggregate Value of Assets	240.00	₹60L + ₹25L + ₹155L
Less: Total Liabilities (Creditors & Provisions)	(55.00)	External liabilities deducted
Net Worth (Cost of Acquisition)	185.00	Deemed cost of acquisition under Section 76
Slump Sale Consideration Less: Net Worth (Cost of Acquisition)	385.00 (185.00)	No indexation benefit allowed
Long-Term Capital Gain (LTCG)	200.00	Held > 24 months = LTCG.
Tax on LTCG u/s 197 @ 12.5% on ₹200 Lakhs	25.00	12.5% flat rate
Add: Surcharge @ 7% (Total income > ₹1 Cr to ₹10 Cr)	1.75	7% of ₹25 Lakhs
Add: Health & Education Cess @ 4%	1.07	4% of ₹26.75 Lakhs
Total Tax Liability of PQR Limited	27.82	₹27.82 Lakhs

Problem 12: Section 198 / 112A Grandfathering Formula for Listed Shares & Mutual Funds TYK Question 12

Question: Determine capital gains and tax payable under Section 198 (Old Sec 112A) for T.Y. 2026-27:
1. Mr. Prasun: 300 shares in A Ltd. bought on 20.05.2017 @ ₹400. Sold on 31.05.2026 @ ₹1,200. FMV on 31.01.2018 (NSE highest) = ₹700.
2. Mr. Gautam: 500 units of equity fund bought @ ₹10. Sold @ ₹32. FMV on 31.01.2018 = ₹35.
3. Mr. Dharam: 100 shares bought @ ₹100. Sold @ ₹80. FMV on 31.01.2018 = ₹200.

Assessee	Actual Cost (₹)	FMV 31.01.18 (₹)	Sale Price (₹)	Deemed Cost (₹)	Capital Gain / (Loss) (₹)
Mr. Prasun (300 shares)	400	700	1,200	700 max(400, min(700, 1200))	+ 1,50,000 (1200 - 700) × 300
Mr. Gautam (500 units)	10	35	32	32 max(10, min(35, 32))	Nil (32 - 32) × 500
Mr. Dharam (100 shares)	100	200	80	100 max(100, min(200, 80))	(2,000) (80 - 100) × 100

*Tax for Mr. Prasun: LTCG of ₹1,50,000 exceeds ₹1,25,000 statutory exemption by ₹25,000. Tax @ 12.5% = ₹3,125 + 4% HEC = ₹3,250.

Problem 13: Mr. Shyam – Pre-2001 House, Advance Forfeitures & Section 77 SDV Rules TYK Question 13

Question: Mr. Shyam purchased a house property on 15.02.1989 for ₹3,24,000 (paid 10% stamp duty on SDV of ₹3,50,000). Total cost = ₹3,59,000.
• Advance forfeited in April 2008: ₹1,11,000. Advance forfeited in May 2015: ₹1,51,000.
• In August 2015, constructed first floor for ₹3,90,000.
• On 15.11.2026, agreement to sell to Manish for ₹30,50,000 (advance received ₹1,50,000 by cheque). Transferred on 20.02.2027. Brokerage paid 1%.
• FMV on 01.04.2001: ₹11,85,000; SDV on 01.04.2001: ₹10,70,000.
• SDV on agreement date (15.11.2026): ₹39,00,000; SDV on registration date (20.02.2027): ₹41,00,000.
Compute capital gains for Tax Year 2026-27 under Section 77 and Section 197.

Step / Computation Item	Amount (₹)	Governing Legal Provisions & Calculations
Full Value of Consideration (FVOC) [Sec 77 / 50C]	39,00,000	Since advance paid by account payee cheque on/before agreement date, SDV on agreement date (₹39,00,000) is adopted. Since ₹39L > 110% of ₹30.5L (₹33.55L), SDV of ₹39,00,000 is deemed consideration.
Less: Brokerage & Transfer Expenses (1% of ₹30.5L)	(30,500)	Brokerage on actual sale consideration
Net Sale Consideration	38,69,500	Base consideration
Cost of Acquisition as on 01.04.2001:	-	Higher of actual cost (₹3.59L) or FMV on 01.04.2001 (₹11.85L), capped at Stamp Duty Value as on 01.04.2001 (₹10,70,000).
• Less: Advance forfeited in April 2008 (Pre-2014)	(1,11,000)	Forfeited prior to 01.04.2014; deducted from cost
Adjusted Cost of Acquisition	(9,59,000)	₹10,70,000 - ₹1,11,000 = ₹9,59,000
Advance forfeited in May 2015 (Post-2014)	Nil	Taxed u/s 56(2)(ix): Taxable under IFOS in T.Y. 2015-16; NOT deducted from cost.
Less: Cost of Improvement (August 2015)	(3,90,000)	Incurred post-01.04.2001
Taxable Long-Term Capital Gain (Without Indexation)	25,20,500	₹38,69,500 - ₹9,59,000 - ₹3,90,000 = ₹25,20,500. (Tax @ 12.5% u/s 197 = ₹3,15,063).

📌 Chapter 4 Statutory Master Summary & Exam Keypoints

Charging Section 66: 3 prerequisites (Capital asset, Transfer, Gains). Personal effects exclude jewellery, paintings, archaeological collections, sculptures, works of art.
Streamlined Holding Periods: 12 Months for listed equity shares, equity funds, business trust units, and ZCBs; 24 Months for all other assets including land, building, and unlisted shares. (36-month period eliminated).
New Capital Gains Tax Rates:
• Section 196 (STCG on STT equity): 20%.
• Section 198 (LTCG on STT equity): 12.5% on gains exceeding ₹1,25,000 (with 31.01.2018 grandfathering).
• Section 197 (Other LTCG): 12.5% without indexation (Grandfathering option for resident Ind/HUF for pre-23.07.2024 land/building: lower of 12.5% unindexed or 20% indexed).
Depreciable Assets & MLDs: Section 74 (depreciable assets) and Section 75 (MLDs & specified debt mutual funds) are ALWAYS treated as Short-Term Capital Gains.
Slump Sale [Sec 76]: Gain is LTCG if held > 24 months. Cost of acquisition is Net Worth (WDV for depreciable assets, NIL for Sec 35AD, book values for others; revaluation ignored).
Real Estate 110% Safe Harbor [Sec 77]: SDV accepted as actual consideration if within 110% of sale price. Agreement date SDV valid if advance received by banking channel on/before agreement date.
Advance Money [Sec 81]: Forfeited before 01.04.2014 deducted from cost; forfeited on/after 01.04.2014 taxed under IFOS u/s 56(2)(ix).
Statutory Exemptions: Section 82 (Residential house - ₹10 Cr cap); Section 85 (Bonds - ₹50L cap within 6 months); Section 87 (Proportionate formula on non-residential asset - ₹10 Cr cap).