Amendment of Definition of ‘Capital Asset’ by Finance Bill 2025
The Finance Bill, 2025, proposes several key changes in the Income Tax Act, 1961, to continue reforms in the direct tax system through tax reliefs, removing difficulties faced by taxpayers, and rationalizing1 various provisions. Here are some of the key changes:
Here are the key bullet points regarding the Finance Bill, 2025, proposal to amend the definition of ‘Capital Asset’:
Definition of Capital Asset: The Income Tax Act, 1961, defines a “capital asset” broadly as any property held by an assessee, with certain exceptions like stock-in-trade and personal assets. Securities held by Foreign Institutional Investors (FIIs) in accordance with SEBI regulations are also considered capital assets.
Uncertainty for Investment Funds: There is ambiguity in determining whether income from securities transactions for investment funds (specified in Section 115UB) is considered capital gains or business income.
Amendment for Clarity: The Finance Bill proposes to amend the definition to explicitly state that securities held by investment funds (as defined in Section 115UB) that comply with SEBI regulations are capital assets. This ensures that income from the transfer of such securities will be treated as capital gains.
Effective Date: This amendment will take effect from April 1, 2026, and will apply to Assessment Year 2026-27 and subsequent years.
Amendment of Definition of ‘Capital Asset’
Section 2(14) of the Act defines the term “capital asset” to include property of any kind held by
an assessee, whether or not connected with his business or profession, but does not include any stockin-
trade or personal assets as provided in the definition. The securities held by a Foreign Institutional
Investor which has invested in such securities in accordance with the regulations made under the
Securities and Exchange Board of India Act, 1992 (15 of 1992) are also defined as capital assets.
2. There is some uncertainty in characterization of income arising from transaction in securities as
to whether it is capital gain or business income for investment funds (specified in clause (a) of
Explanation 1 to section 115UB in the Act).
3. With a view of providing certainty in respect of the above, it is proposed to amend the Act to
provide that any security held by investment funds referred to in Section 115UB which has invested in
such security in accordance with the regulations made under the Securities and Exchange Board of
India Act, 1992 would be treated as capital asset only so that any income arising from transfer of such
security would be in the nature of capital gain.
4. This amendment will take effect from the 1st day of April, 2026 and shall accordingly, apply in
relation to the assessment year 2026-27 and subsequent assessment years.
[Clause 3]