Capital gains and income from other sources

1. Capital asset: section 2(22) [section 2(14)]

A capital asset is property of any kind held by an assessee, whether or not connected with business, together with securities held by foreign institutional investors and certain unit-linked insurance policies. It does not include:

• stock-in-trade, consumable stores or raw materials held for business (their sale gives business income);
• personal effects (movable property for personal use), but jewellery, archaeological collections, drawings, paintings, sculptures and works of art are capital assets even if held for personal use;
• rural agricultural land in India, that is, land outside a municipality or cantonment of 10,000 or more population and beyond the specified aerial distance from such limits.

2. Transfer: section 2(109) [section 2(47)]

Transfer includes sale, exchange or relinquishment; extinguishment of rights; compulsory acquisition; conversion of a capital asset into stock-in-trade; maturity of a zero-coupon bond; any transaction that has the effect of transferring or enabling the enjoyment of immovable property; and allowing possession in part performance under section 53A of the Transfer of Property Act. Section 70 [section 47] lists transactions not regarded as transfer, such as a gift or will, distribution on partition of an HUF, transfers between a holding company and its wholly owned subsidiary, and transfers in an amalgamation or demerger.

3. The charge: section 67 [section 45]

Any profits or gains arising from the transfer of a capital asset effected in a tax year are chargeable under “Capital gains” and are deemed income of the year of transfer, subject to the reinvestment exemptions in sections 82 to 89 [sections 54 to 54H]. Special cases include insurance money for destruction of an asset (section 67(2)), conversion into stock-in-trade, and distribution of assets on liquidation (section 68 [section 46]).

4. Short-term and long-term

Under section 2(101) [section 2(42A)], a short-term capital asset is one held for not more than 24 months immediately before transfer. For listed securities, units of the UTI, units of equity-oriented funds and zero-coupon bonds the period is 12 months. Any other capital asset is long-term (section 2(67)). The period of the previous owner is included where the asset came by gift, will, partition or similar mode, and special rules apply to bonus and amalgamation shares.

• Short-term capital gains are generally taxed at the normal slab rates. STCG on equity shares, equity-oriented fund units and business trust units on which securities transaction tax is paid is taxed at 20% (section 196 [section 111A]).
• Long-term capital gains are taxed at 12.5% (section 197 [section 112]). LTCG on STT-paid listed equity and equity-fund units is taxed at 12.5% only on the amount exceeding ₹1,25,000 in a year (section 198 [section 112A]). Indexation of cost was withdrawn for transfers from 23 July 2024; a resident individual or HUF selling land or buildings acquired before that date may compute the gain with indexation at 20% if that results in lower tax (the alternative in section 197(3)).
• Long-term gains qualify for the reinvestment exemptions; short-term gains (except under section 83 [section 54B]) generally do not.

5. Computation: section 72 [section 48]

• Full value of consideration received or accruing (for land and buildings, the stamp duty value if higher, under section 78 [section 50C])
• less expenditure incurred wholly and exclusively in connection with the transfer (brokerage, legal costs)
• less cost of acquisition and cost of improvement
• = capital gain

No deduction is allowed for securities transaction tax or for interest already claimed elsewhere (section 72(3)). For depreciable assets the block-of-assets rule in section 74 [section 50] treats the gain as short-term.

Where cost cannot be conceived. In Commissioner of Income-tax v. B.C. Srinivasa Setty, 1981 INSC 41, (1981) 2 SCC 460, a firm sold its business including self-generated goodwill. The Court held that the charging section and the computation provisions are an integrated code; if the cost of acquisition of an asset cannot be conceived of, the computation fails and the gain cannot be charged. Goodwill built up over time has no date or cost of acquisition, so no capital gain arose. Parliament responded by deeming the cost of self-generated goodwill and similar rights to be nil, now in section 90(3) [section 55(2)(a)], so the whole consideration is taxed. The principle of Srinivasa Setty still applies to assets the deeming provision does not cover.

6. Exemptions on reinvestment

• Section 82 [section 54]: LTCG on a residential house, invested in one residential house in India purchased within one year before or two years after, or constructed within three years after the transfer (individual and HUF).
• Section 83 [section 54B]: gain on agricultural land used for agriculture in the two preceding years, reinvested in agricultural land.
• Section 85 [section 54EC]: LTCG on land or building invested within six months in specified long-term bonds, up to the prescribed ceiling.
• Section 86 [section 54F]: LTCG on any asset other than a house, where the net consideration is invested in a residential house.
• Sections 84, 87, 88 [sections 54D, 54G, 54GA]: compulsory acquisition of industrial land, shifting of industrial undertakings from urban areas or to SEZs.

Capital losses are set off only against capital gains; a long-term loss only against long-term gains; carry forward for eight years (sections 108(2) and 111 [sections 70 and 74]).

7. Income from other sources: sections 92 to 95 [sections 56 to 59]

Section 92(1) charges income of every kind not excluded from total income and not chargeable under any of the first four heads. It is residuary. Section 92(2) specifically includes:

• dividends; winnings from lotteries, crossword puzzles, races, card games, gambling and online games (taxed at flat rates without basic exemption);
• employees’ contributions to welfare funds received by an employer and not paid over; interest on securities not taxed as business income; income from letting machinery, plant or furniture, with or without buildings, where not business income;
• advance money forfeited in negotiations for transfer of a capital asset;
• interest on compensation or enhanced compensation;
• gifts (section 92(2)(m) [section 56(2)(x)]): money exceeding ₹50,000 in the aggregate in a year received without consideration; immovable property received without consideration where the stamp duty value exceeds ₹50,000, or for inadequate consideration where the difference exceeds the limit; and specified movable property on the same footing. Gifts from relatives, on marriage, by will or inheritance, or in contemplation of death are excluded.

Deductions (section 93 [section 57]) include commission for realising dividends or interest, and 50% of interest on compensation. Personal expenses and income-tax are not deductible (section 94 [section 58]).

8. Problem

X bought listed shares (STT paid) in March 2025 for ₹4,00,000 and sold them in June 2026 for ₹6,10,000. He also received ₹80,000 in cash from a friend on his birthday. How are these taxed?

Law. Listed shares held for more than 12 months are long-term (section 2(101)). LTCG on STT-paid listed shares is taxed at 12.5% on the excess over ₹1,25,000 (section 198). Cash gifts from non-relatives above ₹50,000 in aggregate are taxed under section 92(2)(m).

Application. The shares were held about fifteen months: long-term. Gain = 6,10,000 − 4,00,000 = ₹2,10,000; taxable at 12.5% on ₹85,000. The friend is not a “relative” and a birthday is not one of the excluded occasions; the gift of ₹80,000 exceeds ₹50,000, so the whole ₹80,000 is income from other sources.

Conclusion. LTCG of ₹2,10,000 (tax on ₹85,000 at 12.5%), and ₹80,000 under other sources at slab rates.

How this is examined

February 2025 Q. 2(a): meaning of capital gain and the distinction between short-term and long-term capital gain. Short notes on capital asset, transfer, and income from other sources are common. For the 10-mark answer, define capital asset and transfer, state the holding periods, the rates under sections 196 to 198, the computation in section 72, and Srinivasa Setty.