Chargeability of Capital Gains
Introduction
Section 45 of the Income Tax Act, 1961, governs the taxation of profits or gains arising from the transfer of a capital asset. Such income is generally taxable in the year of transfer unless specified otherwise.
Key Provisions
- General Rule (Section 45(1)):Profits or gains from the transfer of a capital asset are taxable in the year of transfer. Deductions include expenses incurred in connection with the transfer, cost of acquisition, and cost of improvement. It’s further reduced by the exemptions provided for reinvestment of capital gains or sale consideration.
- Insurance Compensation (Section 45(1A)):Gains from compensation for damage or destruction of a capital asset are taxable in the year the compensation is received.
- Unit Linked Insurance Policy (ULIP) (Section 45(1B)):If the amount received from a ULIP (including bonus) is not exempt under Section 10(10D), it shall be taxed as capital gains in the year of receipt. CBDT has prescribed Rule 8AD for computing such capital gains.
- Conversion into Stock-in-Trade (Section 45(2)):Any gains from converting a capital asset into stock-in-trade are taxable in the year the stock-in-trade is sold.
- Demat Securities (Section 45(2A)):Any gains from the transfer of securities held in Demat form are taxable in the year of transfer.
- Capital Contribution (Section 45(3)):Gains from the transfer of a capital asset by a partner or member to a firm, AOP, or BOI are taxable in the year of transfer. the value recorded in the firm’s books is deemed to be the full consideration for such transfer.
- Firm Reconstitution (Section 45(4)):When a partner (or member of an AOP/BOI) receives money or a capital asset on reconstitution, the resulting profits are taxable as capital gains in the hands of the firm, AOP or BOI under Section 45(4). Similarly, under Section 9B, if a partner/member receives capital assets or stock-in-trade upon dissolution or reconstitution, the firm, AOP, or BOI is deemed to have transferred such assets and is taxed accordingly. In case of reconstitution, both Sections 9B and 45(4) apply independently.
- Compulsory Acquisition (Section 45(5)):Gains from compulsory acquisition or government/RBI-approved asset transfers are taxable in the year the initial or enhanced compensation is received.
- Joint Development Agreements (Section 45(5A)):Capital gains arising to an individual or HUF from the transfer of land or building under a Joint Development Agreement are taxed in the year the completion certificate is issued.
- Repurchase of ELSS Units (Section 45(6)):Capital gains from Equity Linked Savings Scheme (ELSS) units (UTI/Mutual Funds) held by an individual or HUF are taxable in the year of repurchase or plan termination. The gain is the difference between the repurchase price and the investment amount.