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Gist of Section 45:

Any Profit or gain arising from the transfer of Capital asset is taxable as a Capital Gain u/s 45 of the Income Tax act, 1961. It is relevant to determine whether Capital Gain is short term capital gain or long term capital gain as it affects the rate of Income Tax.

What is the Capital Asset?

Capital Asset means

1. Property of any kind,

2. Any securities held by FII,

3. Any Unit linked insurance policies,

but does not include the following

1. Stock in trade,

2. Personal effects i.e., movable property for personal use except

1. Jewellery

2. Archaeological Collections

3. Drawings

4. Paintings

5. Sculptures

6. Any work of art

3. Rural Agricultural land in India,

4. 5% Gold Bonds,

5. Special Bearer bonds,

6. Gold Deposit Bonds,

What is Long term or Short Term Capital Gain?

Capital Gain could be short term or long term capital gain on the basis of holding of a Capital Asset.

Any Capital Asset held by assessee for more than 36 Months immediately preceding the date of transfer will be treated as Long Term Capital Asset otherwise Short term Capital Gain except following

Sr No. Particulars Period of Holding
1. Shares listed on recognized stock exchange 12 Months
2. Units of equity oriented mutual fund 12 Months
3. Listed securities like Debentures, Government Securities 12 Months
4. Units of UTI 12 Months
5. Zero Coupon Bonds 12 Months
6. Unlisted shares of Public Company 24 Months
7. Land or building or both 24 Months

Several exemptions are available under income tax act against the Capital Gain on fulfilment of certain conditions which are as follows.

Section Assessee Type of Gain Asset transferred Asset to be procured Conditions Amount to be invested
54 Individual or HUF LTCG Residential House Property i.   1 Residential House Property,

ii.   2 residential House Property if Capital gain exceeds 2 crores.

1)   Time Limit for the procurement – within 1 year before or 2 years after the date of transfer or constructed within 3 years of the date of transfer.

2)   Option ii. (2 Residential House if Capital gain > 2 crores) is permitted only once in lifetime.

Capital Gain
54B Individual or HUF LTCG Agricultural Land Agricultural Land 1)  Land should have been used for agricultural purpose at least 2 years prior to the date of Transfer by the assessee or his parents.

2)  Time limit for the procurement – 2 years from the date of Transfer.

Capital Gain
54D Any assessee LTCG Compulsory acquisition of Land or building or its rights Land or building or its rights procured or constructed for business 1)  Land or building should have been used by assessee for business at least 2 years prior to the date of transfer.

2)  Time Limit for the procurement for the purpose of shifting, re-establishing or setting up an industrial undertaking – 3 years from the date of transfer

Capital Gain
54EC Any Assessee LTCG Land, Building or both Long Term Specified asset i.e., Bonds of NHAI or RECL 1)  Time Limit – 6 months from the date of transfer.

2)  Maximum Investment – 50 Lakhs for the FY in which asset transferred and subsequent FY

3)  Lock in period for the investment – 5 years from the date of acquisition otherwise exempted Capital Gain is taxable u/s 45 in the previous year in which long term specified assed is transferred.

4)  If Loan is taken on the basis of security of long term specified assets, it is deemed that asset is converted into money and taxable according to point 3).

Capital Gain
54EE Any Assessee LTCG Any Asset Long Term specified asset (it is not yet notified therefore making this section irrelevant) 1)  Time Limit for Investment – 6 months from the date of transfer.

2)  Maximum Investment – 50 Lakhs for the FY in which asset transferred and subsequent FY

3)  Lock in period for the investment – 3 years from the date of acquisition otherwise exempted Capital Gain is taxable u/s 45 in the previous year in which long term specified assed is transferred.

4)  If Loan is taken on the basis of security of long term specified assets, it is deemed that asset is converted into money and taxable according to point 3).

Capital Gain
54F Individual or HUF LTCG Any asset other than Residential House Property 1 Residential House Property 1)  Time Limit for the procurement – purchased within 1 year before or 2 years after the date of transfer, or constructed within 3 years from the date of Transfer.

2)  Exemption is not available if assessee, apart from new asset

i.   Holds more than 1 Residential House on the date of Transfer.

ii.  Purchases any Residential house within 2 years of date of Transfer.

iii. Constructs any House within 3 years of date of transfer.

3)  If assessee violates the conditions mentioned in 2) ii. and 2) iii, then exempted capital gain shall be taxable u/s 45 in the year of violation.

4)  Lock in period for holding new asset – 3 years from the date of acquisition or construction.

Net Sales Consideration
54G Any Assessee LTCG Land, Building, Plant or Machinery or rights for land or building used for the business of industrial undertaking in Urban Area. Purchased Land, building plant or machinery or constructed building or acquired rights for land or building 1)  Reason for transfer – Shifting of an undertaking to area other than urban area.

2)  Time Limit – 1 year before or 3 years after the date of transfer.

Capital Gain
54GA Any Assessee LTCG Land, Building, Plant or Machinery or rights for land or building used for the business of industrial undertaking in Urban Area. Purchased Land, building plant or machinery or constructed building or acquired rights for land or building 1)  Reason for transfer – Shifting of an undertaking to SEZ only.

2)  Time Limit – 1 year before or 3 years after the date of transfer.

Capital Gain
  • Note for section 54, 54B, 54D, 54F, 54G and 54GA.
  • If the amount of Capital Gain or Net Sales Consideration is not invested or utilized in procuring new capital asset within the due date of furnishing return u/s 139(1), then assessee shall deposit the amount in Capital Gain deposit account scheme with the specified banks or institution within due date for furnishing return u/s 139(1) in order to claim the exemption.
  • If the amounts so deposited in the Capital gain deposit account with the banks or institution are not utilized or procured within the time specified in their respective section then the unutilized amount would be treated as capital gain on the proportionate basis based on capital gain exemption claimed earlier and shall be chargeable to tax u/s 45 in the previous year in which time prescribed in their respective sections expires.

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