Computation of Capital Gain in Certain Special Cases

Here we discuss all the Provisions towards Computation of Capital Gain in certain Special Cases and the method of Computation is different.

1.  Taxation of Zero-Coupon Bonds as “Capital Gains”

Zero-coupon bonds (ZCBs) are unique debt instruments that do not pay periodic interest but are issued at a discount and redeemed at face value upon maturity. In India, their tax treatment depends on:

1. Listing status(listed vs. unlisted)
2. Holding period(short-term vs. long-term)
3. CBDT notification status(whether officially classified as ZCBs under Section 2(48) of the Income Tax Act).

1. Tax Treatment Based on Holding Period

(A) Listed Zero-Coupon Bonds (e.g., REC Bonds)

HOLDING PERIOD	TAX TREATMENT	RATE
<12 months	Short-Term Capital Gains (STCG)	As per income tax slab
≥12 months	Long-Term Capital Gains (LTCG)	10% (without indexation)

Example:

• You buy an REC ZCB for ₹80,000 (face value: ₹1,00,000).
• Sell after 18 monthsfor ₹1,00,000 → LTCG = ₹20,000 taxed at 10% (₹2,000 tax).

(B) Unlisted Zero-Coupon Bonds

HOLDING PERIOD	TAX TREATMENT	RATE
<36 months	STCG	As per slab
≥36 months	LTCG	20% (with indexation)

Note: From 23rd July 2024, unlisted bonds are always treated as STCG, taxed at slab rates.

2. Key Conditions for Capital Gains Taxation

• CBDT Notification Required: Only bonds officially notifiedunder Section 2(48) (e.g., REC ZCBs) qualify for LTCG benefits.
• Non-Notified ZCBs: Treated as “Income from Other Sources”(not capital gains) if not classified under Section 2(48).
• Premature Sale: If sold before maturity, gains are taxed based on holding period (STCG/LTCG).

3. Comparison with Traditional Bonds

FEATURE	ZERO-COUPON BONDS	REGULAR BONDS
Interest Payments	None (issued at discount)	Periodic (taxable annually)
Tax on Gains	Capital gains (if notified)	Interest taxed annually + capital gains on sale
Indexation Benefit	No (for listed ZCBs)	Yes (for unlisted bonds held >36 months)

4. Practical Implications

• Tax Efficiency: Listed ZCBs (like REC bonds) are more tax-efficientfor long-term holders (10% flat LTCG vs. slab rates).
• Liquidity Risk: Selling before maturity may trigger STCG (higher tax).
• Documentation: Maintain purchase records, CBDT notification proof, and demat statementsfor compliance.

5. Recent Changes (2024 Budget)

• Unlisted bondssold after 23rd July 2024 are always STCG (slab rates apply).
• Listed ZCBsretain LTCG benefits if held ≥12 months.

Example:

• Buy unlisted ZCB in 2023→ Sell in 2025 (holding: 24 months).
• Pre-2024: LTCG at 20% with indexation.
• Post-2024: STCG at slab rate(higher tax)

2.  Capital Gains on Insurance Compensation for Damaged/Destroyed Assets [Section 45(1A)]

Section 45(1A) of the Income Tax Act, 1961, specifies the tax treatment of insurance proceeds received due to the damage or destruction of a capital asset. This provision ensures that such compensation is taxed as capital gains in the year of receipt, rather than as regular income.

Key Provisions of Section 45(1A)

1.   Applicability

• Applies when an insurance company pays compensationfor:
  • Damage(partial loss) or destruction (total loss) of a capital asset.
  • Theft or confiscationof an asset (if covered by insurance).
• Exclusions:
  • Compensation for personal injury/health insurance.
  • Amounts received under life insurance policies.

2.  Tax Treatment

• Full compensation amountis taxable as capital gains in the year it is received.
• Nature of gain(STCG/LTCG) depends on:
  • Holding periodof the original asset.
  • Type of asset(e.g., immovable property, shares, machinery).

ASSET TYPE	HOLDING PERIOD	TAX TREATMENT
Immovable Property	>24 months	LTCG (20% with indexation)
Shares/Mutual Funds	>12 months	LTCG (10% without indexation)
Other Assets	>36 months	LTCG (20% with indexation)
Any Asset (Short-Term)	Below threshold	STCG (as per slab rates)

3.  Cost of Acquisition Adjustment

• If the asset is partially damagedand not replaced, the cost of acquisition is reduced by the insurance claim received.
• If the asset is fully destroyed, the entire compensation is taxable as capital gains.

Example:

• A factory building (purchased for ₹50 lakh in 2010) is partially damagedin a fire (2024).
• Insurance pays ₹30 lakhfor repairs.
• Taxable Capital Gain= ₹30 lakh (compensation) – (Indexed cost of ₹50 lakh, if applicable).

2. Exceptions & Special Cases

(A) Reinvestment in Replacement Asset

• If the insurance money is used to buy a replacement asset within 2 years, the capital gains tax can be deferredunder Section 54/54F (for residential property) or Section 54EC (for bonds).

(B) Depreciable Assets (Section 50)

• If the damaged asset was part of a depreciable block, the insurance money is adjusted against the block’s WDV, and any excess is taxed as STCG.

(C) Compulsory Acquisition by Government

• Similar rules apply if the asset is acquired/confiscated by the government(e.g., land acquisition).

3. Practical Examples

Case 1: Full Destruction of Property (LTCG)

• Asset: Residential flat (bought in 2015 for ₹40 lakh, indexed cost = ₹60 lakh).
• Destroyed in 2024, insurance pays ₹1 crore.
• Taxable LTCG= ₹1 crore – ₹60 lakh = ₹40 lakh (20% tax = ₹8 lakh).

Case 2: Partial Damage to Machinery (STCG)

• Asset: Factory machine (bought in 2022 for ₹20 lakh).
• Damaged in 2024, insurance pays ₹12 lakh.
• Taxable STCG= ₹12 lakh (slab rate applies).

3.  Capital Gains on High-Premium ULIP Maturity [Section 45(1B)]

Introduced in the Finance Act 2021, Section 45(1B) governs the taxation of maturity proceeds from high-premium Unit Linked Insurance Policies (ULIPs). This provision ensures that profits from ULIPs with annual premiums exceeding ₹2.5 lakh are taxed as capital gains, not as tax-free income.

Key Provisions of Section 45(1B)

1.  Applicability

• Applies to ULIPs issued on or after 1st February 2021.
• Trigger: Annual premium > ₹2.5 lakh(for any policy year).
• Exclusions:
  • ULIPs with premiums ≤ ₹2.5 lakh/year(remain tax-free under Section 10(10D)).
  • Death benefits (always tax-free).

2.  Tax Treatment

SCENARIO	TAXABILITY	RATE
Maturity proceeds	Capital Gains (LTCG/STCG)	10% (LTCG) / Slab rate (STCG)
Partial withdrawals	Taxable if annual premium > ₹2.5 lakh	Slab rate
Death benefit	Fully exempt (Section 10(10D))	N/A

3.  Calculation of Capital Gains

• Capital Gain = Maturity Amount – Total Premiums Paid
• Holding Period:
  • <12 months → STCG(taxed as per slab).
  • ≥12 months → LTCG(flat 10% beyond ₹1 lakh exemption).

Example:

• Premiums paid: ₹3 lakh/year × 5 years = ₹15 lakh.
• Maturity value: ₹25 lakh.
• Taxable LTCG= ₹25 lakh – ₹15 lakh = ₹10 lakh.
• Tax= 10% of (₹10 lakh – ₹1 lakh exemption) = ₹90,000.

2. Comparison with Traditional ULIPs

FEATURE	HIGH-PREMIUM ULIP (SEC 45(1B))	REGULAR ULIP (SEC 10(10D))
Annual Premium Limit	>₹2.5 lakh	≤₹2.5 lakh
Maturity Taxation	LTCG/STCG	Tax-free
Death Benefit	Tax-free	Tax-free
Partial Withdrawals	Taxable if premium > ₹2.5 lakh	Tax-free

3. Exceptions & Planning Tips

(A) Multiple Policies Avoidance

• If combined ULIP premiums > ₹2.5 lakh/year, all policies become taxable.
• Solution: Spread investments across family members.

(B) Equity Exposure Impact

• Since ULIPs invest in market-linked instruments, returns fluctuate.
• LTCG benefitapplies only after 12 months of holding.

(C) Switching Funds

• Intra-fund switchesdo not trigger tax if held within the same ULIP.

4. Compliance & Reporting

• Disclose maturity proceedsin ITR under “Capital Gains”.
• Maintain premium payment proofs(to justify cost of acquisition).

4.  Capital Gains on Conversion of Capital Asset into Stock-in-Trade or vice versa [Section 45(2)]

Section 45(2) of the Income Tax Act, 1961, governs the taxation of capital gains when a capital asset is converted into stock-in-trade (business inventory) or vice versa. This provision ensures that the notional profit from such conversion is taxed in the year the converted asset is sold by the business.

Key Provisions of Section 45(2)

1.   Conversion of Capital Asset into Stock-in-Trade

• Tax Trigger: The fair market value (FMV)of the asset on the date of conversion is treated as the sale consideration for capital gains purposes.
• Taxable in the year the stock-in-trade is sold(not at the time of conversion).
• Nature of Gain:
  • Capital Gains(STCG/LTCG) on the difference between FMV and original cost.
  • Business Incomeon any further profit when the stock is sold.

Formula:

Capital Gain=FMV at Conversion−Indexed Cost of Acquisition (if LTCG)

Example:

• A land (capital asset) bought in 2010 for ₹10 lakh(indexed cost in 2024: ₹30 lakh).
• Converted to stock-in-trade in 2024 (FMV = ₹50 lakh).
• Taxable LTCG= ₹50 lakh – ₹30 lakh = ₹20 lakh (taxed at 20% with indexation).
• If later sold for ₹60 lakh, business profit= ₹60 lakh – ₹50 lakh = ₹10 lakh.

2.  Conversion of Stock-in-Trade into Capital Asset

• Tax Trigger: The book valueof the stock becomes the cost of acquisition for the new capital asset.
• Capital gainsarise only when the asset is eventually sold.

Example:

• Business inventory (book value: ₹20 lakh) converted into a capital asset.
• Later sold for ₹35 lakh→ Capital Gain = ₹35 lakh – ₹20 lakh = ₹15 lakh.

Tax Treatment Based on Holding Period

ASSET TYPE	HOLDING PERIOD	TAX RATE
Land/Building	>24 months	20% (with indexation)
Shares/MFs	>12 months	10% (without indexation)
Other Assets	>36 months	20% (with indexation)
Short-Term	Below threshold	As per slab

Exceptions & Special Cases

1.   Depreciable Assets (Section 50)

• If the converted asset was part of a depreciable block, the WDV is adjusted, and gains are taxed as STCG.

2.  Business Reorganizations (Amalgamation/Demerger)

• Conversion during restructuring may qualify for tax-neutral treatmentunder Section 47.

3.  Capital Gains Exemptions

• Reinvestment benefits under Section 54/54F(for residential property) or Section 54EC (bonds) may apply if proceeds are reinvested.

Practical Implications

Advantages

• Deferred tax: Capital gains tax is postponed until the stock is sold.
• Indexation benefit: Reduces LTCG liability for long-held assets.

Disadvantages

• Double taxation risk: First as capital gains, then as business income.
• Valuation challenges: FMV disputes may arise with tax authorities.

Compliance & Documentation

✔ Valuation report (for FMV at conversion).

✔ Board resolution (for business conversions).

✔ Sale deeds (for eventual stock sales).

5.  Capital Gains on Transfer of Capital Asset by a Partner to a Firm/AOP/BOI [Section 45(3)]

Section 45(3) of the Income Tax Act, 1961, provides the tax treatment when a partner or member transfers a capital asset to a firm, AOP (Association of Persons), or BOI (Body of Individuals) as capital contribution.

Key Provisions of Section 45(3)

1.   Taxability of Capital Gains

• No immediate capital gains taxis levied at the time of transfer.
• The amount recorded in the firm’s booksas the value of the asset is deemed as the full value of consideration for tax purposes.
• Capital gains are deferreduntil the firm/AOP/BOI sells the asset.

Formula:

Capital Gain=Book Value in Firm’s Records−Indexed Cost of Acquisition (if LTCG)

2.  Applicability

• Applies to:
  • Partnerstransferring assets to a partnership firm.
  • Memberscontributing assets to an AOP/BOI.
• Exclusions:
  • Transfer to LLP (Limited Liability Partnership)→ Treated as a sale (Section 45).
  • Transfer to company(treated under Section 47(xiii)).

3.  Nature of Capital Gains (STCG/LTCG)

HOLDING PERIOD	TAX TREATMENT
<36 months (for land/building)	Short-Term Capital Gains (STCG) – Taxed at slab rates
≥36 months (for land/building)	Long-Term Capital Gains (LTCG) – 20% with indexation
<12 months (for shares/MFs)	STCG – 15%
≥12 months (for shares/MFs)	LTCG – 10% (above ₹1 lakh exemption)

Practical Examples

Case 1: Land Transferred to Partnership Firm

• Asset: Land bought in 2010 for ₹10 lakh(indexed cost in 2024: ₹30 lakh).
• Transferred to firm in 2024→ Recorded in books at ₹50 lakh.
• Taxable LTCG= ₹50 lakh – ₹30 lakh = ₹20 lakh (20% tax = ₹4 lakh).

Case 2: Shares Transferred to AOP

• Asset: Shares bought in 2022 for ₹5 lakh.
• Transferred to AOP in 2024→ Recorded at ₹8 lakh.
• Holding period: 24 months → LTCG= ₹8 lakh – ₹5 lakh = ₹3 lakh (10% tax = ₹30,000).

Exceptions & Special Cases

1.  Depreciable Assets (Section 50)

• If the asset was part of a depreciable block, the WDV is adjusted, and gains are taxed as STCG.

2.  Reintroduction of Asset by Firm to Partner

• If the firm later transfers the asset back to the partner, capital gains tax applies again(Section 45(4)).

3.  Conversion of Firm into LLP/Company

• Transfer to LLP→ Taxable under Section 45.
• Transfer to company→ Exempt under Section 47(xiii) if conditions are met.

Tax Planning & Compliance

Advantages

✔ Deferred tax: No immediate tax on transfer (only when firm sells).

✔ Indexation benefit: Reduces LTCG liability for long-held assets.

Disadvantages

✖ Double taxation risk: If asset is later sold by the firm or transferred back.

✖ Valuation disputes: Tax authorities may challenge the book value.

Compliance Requirements

✔ Proper valuation report (to justify book value).

✔ Partnership deed amendment (recording capital contribution).

✔ ITR disclosure (under “Capital Gains”).

6. Capital Gains on Dissolution/Reconstitution of Specified Entities [Sections 45(4) & 45(4A)]

The Income Tax Act taxes capital gains when a partnership firm, AOP, or BOI dissolves or undergoes reconstitution, leading to asset distribution. The key provisions are:

1. Section 45(4) – Tax on Asset Distribution

Applies when:

✅ Firm/AOP/BOI transfers capital assets to partners/members during dissolution / reconstitution.

✅ LLP transfers assets to partners (treated as a sale).

Tax Treatment

• Deemed full value consideration= Fair Market Value (FMV) on date of distribution.
• Capital Gains= FMV – Indexed Cost (if LTCG).
• Taxable in the hands of the firm/AOP/BOI(not the partner).

Example:

• Firm owns land (purchased in 2010 for ₹10L, indexed cost ₹30L).
• Distributed to Partner X in 2024 (FMV = ₹50L).
• Taxable LTCG= ₹50L – ₹30L = ₹20L (20% tax = ₹4L).

2. Section 45(4A) – Tax on Money/Asset Receipt by Partner

Introduced in Budget 2023, this applies when:

✅ Partner receives money or other assets (not capital assets) from the firm.

✅ Taxable as capital gains in the partner’s hands.

Example:

• Partner Y receives ₹25L cash during dissolution.
• Taxable as STCG(slab rate) if held <36 months.

Key Exceptions

• No taxif assets are distributed due to death of a partner.
• LLPs treated as firms(Section 45(4) applies).

7.  Capital Gains on Compulsory Acquisition of Assets [Section 45(5)]

Section 45(5) of the Income Tax Act, 1961, governs the taxation of capital gains when a capital asset is compulsorily acquired by the government or any authority under a law (e.g., land acquisition for infrastructure projects). This provision specifies when and how such gains are taxed, including the treatment of enhanced compensation and interest.

Key Provisions of Section 45(5)

1.  Taxability Timing

• Initial compensation: Taxable in the year it is first received(not when the property is acquired).
• Enhanced compensation: Taxable in the year it is received(e.g., after court orders).
• Reduced compensation: If compensation is later reduced, the tax liability is recomputedunder Section 155.

2.  Calculation of Capital Gains

COMPONENT	TREATMENT
Initial Compensation	Taxable as capital gains (LTCG/STCG based on holding period).
Enhanced Compensation	Taxable separately in the year received; cost of acquisition = Nil.
Interest on Compensation	– Interest under Section 28 of Land Acquisition Act: Treated as compensation (taxable as capital gains). – Interest under Section 34: Taxable as “Income from Other Sources” (50% deduction allowed under Section 57(iv)).

3.  Exemptions

• Agricultural land (Section 10(37)): Compensation for rural agricultural landis tax-free if conditions are met.
• Reinvestment relief (Section 54D/54Q):
  • Section 54D: Exemption if compensation is reinvested in industrial propertywithin 3 years.
  • Section 54Q (Smart City Projects): Exemption for urban acquisitions if proceeds are reinvested in new propertywithin 3 years.

4.  Indexation Benefit

• For long-term assets, the cost of acquisitionis adjusted using the Cost Inflation Index (CII) from the year of purchase (not the year of acquisition).

Practical Example

Scenario:

• Land bought in 2000 for ₹5 lakh(FMV on 1.4.2001 = ₹10 lakh).
• Acquired in 2024with initial compensation = ₹50 lakh.
• 2025: Court awards enhanced compensation= ₹20 lakh.

Tax Calculation:

1. Initial Compensation (2024):
   • Indexed Cost= ₹10 lakh × (CII 2024 / CII 2001) = ₹10 lakh × (348/100) = ₹34.8 lakh.
   • Taxable LTCG= ₹50 lakh – ₹34.8 lakh = ₹15.2 lakh (20% tax).
2. Enhanced Compensation (2025):
   • Taxable Gain= ₹20 lakh (treated as separate income, no cost deduction).
3. Interest:
   • If ₹5 lakh is received as interest under Section 28, it is taxable as capital gains.
   • If ₹3 lakh is delay interest (Section 34), it is taxable as “Income from Other Sources”(50% deductible).

8.  Special Provision for Capital Gains in Joint Development Agreements (JDAs) [Section 45(5A)]

Section 45(5A) of the Income Tax Act, 1961, introduced by the Finance Act 2017, provides a deferred tax mechanism for capital gains arising from Joint Development Agreements (JDAs). This provision addresses the mismatch between the timing of tax liability and actual receipt of benefits by landowners in real estate projects.

Key Features of Section 45(5A)

1.  Applicability

• Eligible Assessees: Only individuals and HUFstransferring land/building under a registered JDA.
• Asset Type: Applies to capital assets(not stock-in-trade).
• Consideration: Must include a share in the constructed property(flats/land) + optional cash payment.

2.  Tax Trigger

• Capital gains are taxed in the year the Completion Certificate (CC) is issued(not at the time of signing the JDA).
• Exception: If the owner transfers their share before CC issuance, gains are taxable in the year of transfer.

3.  Calculation of Capital Gains

COMPONENT	FORMULA
Full Value of Consideration (FVC)	Stamp Duty Value (SDV) of flats/property received on CC date + Cash (if any)
Indexed Cost of Acquisition	Original cost (or FMV as of 1.4.2001 if higher) × (CII of CC year / CII of purchase year)
Taxable Capital Gain	FVC – Indexed Cost of Acquisition

Example:

• Land bought in 2000 for ₹5L(FMV on 1.4.2001: ₹10L).
• JDA signed in 2020; CC issued in 2025(SDV of 2 flats: ₹1Cr + Cash: ₹20L).
• Indexed Cost= ₹10L × (348/100) = ₹34.8L.
• Taxable Gain= ₹1.2Cr – ₹34.8L = ₹85.2L (20% LTCG tax).

Conditions & Exceptions

1. Registration Mandatory: JDA must be registeredto avail benefits.
2. No Cash-Only Deals: Section 45(5A) does not applyif the entire consideration is monetary.
3. Depreciable Assets: Not eligible (Section 50 applies).
4. Exemptions: Reinvestment benefits under Sections 54/54Fapply if proceeds are used to buy residential property.

Tax Implications for Developers

• Income Type: Treated as business income(not capital gains).
• TDS Obligation: Developers must deduct 10% TDSon cash payments to landowners under Section 194-IC.

Why Was Section 45(5A) Introduced?

• Pre-2017 Issue: Tax was levied at JDA signing, causing hardship as landowners paid taxes before receiving flats/cash.
• Post-2017 Relief: Tax deferred until CC issuance, aligning liability with actual receipt of benefits

9.  Capital Gains on Conversion of Debentures into Shares [Sections 47(x), 49(2A), and Rule 8AA]

The conversion of debentures into shares is governed by specific tax provisions under the Income Tax Act, 1961. Below is a detailed breakdown of the tax treatment, exemptions, and compliance requirements.

1. Key Provisions

(A) Section 47(x) – Conversion Not Treated as “Transfer”

• Exemption: Conversion of bonds, debentures, or deposit certificatesinto shares of the same company does not qualify as a “transfer” under Section 47(x).
• Implication: No capital gains tax is triggered at the time of conversion.

(B) Section 49(2A) – Cost of Acquisition of New Shares

• Deemed Cost: The cost of the converted sharesis taken as the original cost of the debentures.
• Indexation Benefit: If the debentures were held long-term, indexation applies from the date of debenture purchase(not conversion date).

(C) Rule 8AA – Holding Period Calculation

• Holding Period: The holding period of the new sharesincludes the period for which the debentures were held.
  • If debentures were held for >36 months (or >12 months for listed securities), the shares are deemed long-termfrom the date of conversion.

2. Tax Implications

SCENARIO	TAX TREATMENT
Conversion of Debentures into Shares	No capital gains tax (Section 47(x))
Sale of Converted Shares	Taxable as LTCG (10% for listed shares, 20% with indexation for unlisted) or STCG (15% for listed, slab rate for unlisted)
Holding Period	Includes debenture holding period (Rule 8AA)

Example:

• You buy convertible debenturesin 2020 for ₹1 lakh.
• Converted into equity shares in 2023.
• Sell shares in 2025 for ₹3 lakh.
• Taxable LTCG= ₹3 lakh – ₹1 lakh (indexed if applicable) = ₹2 lakh (10% tax if listed).

3. Compliance & Documentation

✔ Debenture certificate & conversion notice (proof of holding period).

✔ Fair market valuation report (if disputed).

✔ Disclosure in ITR under “Capital Gains” when shares are sold.

10. Tax Treatment of Conversion of Preference Shares into Equity Shares [Sections 47(xb), 49(2AE), and Explanation 1 to Section 2(42A)]

The conversion of preference shares into equity shares is governed by specific tax provisions under the Income Tax Act, 1961. These rules ensure tax neutrality at the time of conversion while defining how capital gains are computed when the converted shares are later sold.

Key Provisions

1.  Section 47(xb) – Conversion Not Treated as “Transfer”

• Exemption: Conversion of preference shares into equity sharesof the same company is not considered a “transfer” under Section 47(xb).
• Implication: No capital gains taxis triggered at the time of conversion.

2.  Section 49(2AE) – Cost of Acquisition of Converted Equity Shares

• Deemed Cost: The cost of the equity sharesreceived after conversion is the same as the original cost of the preference shares.
• Indexation Benefit: If the preference shares were held long-term, indexation applies from the date of purchase of the preference shares(not the conversion date).

3.  Explanation 1 to Section 2(42A) – Holding Period Calculation

• Holding Period: The holding period of the equity sharesincludes the period for which the preference shares were held.
  • If the preference shares were held for >12 months (listed) or >24 months (unlisted), the equity shares are deemed long-termfrom the date of conversion.

Tax Implications

SCENARIO	TAX TREATMENT
Conversion of Preference Shares into Equity Shares	No capital gains tax (Section 47(xb))
Sale of Converted Equity Shares	Taxable as LTCG (10% for listed, 20% with indexation for unlisted) or STCG (15% for listed, slab rate for unlisted)
Holding Period	Includes the holding period of the original preference shares (Explanation 1 to Section 2(42A))

Example:

• You buy preference sharesin 2020 for ₹1 lakh.
• Converted into equity shares in 2023.
• Sell equity shares in 2025 for ₹3 lakh.
• Taxable LTCG= ₹3 lakh – ₹1 lakh (indexed if applicable) = ₹2 lakh (10% tax if listed).

Exceptions & Special Cases

1.  Compulsorily Convertible vs. Non-Convertible Preference Shares

• Compulsorily Convertible Preference Shares (CCPS): Automatically convert into equity shares at a pre-determined date/ratio.
  • Tax Treatment: Same as above (no tax on conversion).
• Optionally Convertible Preference Shares (OCPS): Conversion is at the holder’s discretion.
  • Tax Treatment: May be treated as an “exchange” (potentially taxable) if not covered under Section 47(xb).

2.  Grandfathering Under Tax Treaties (e.g., India-Mauritius Treaty)

• If preference shares were acquired before 1st April 2017, their conversion into equity shares may still qualify for tax exemption under the treaty.

3.  Depreciable Assets

• If the preference shares were part of a depreciable block, gains are taxed as short-term capital gains (STCG)under Section 50.

Practical Implications

✔ Tax Deferral: No immediate tax on conversion; liability arises only upon sale of equity shares.

✔ Indexation Benefit: Available if preference shares were held long-term.

✔ Documentation: Maintain conversion notices, purchase records, and holding period proofs for compliance.

Note: For foreign investors, check applicability of tax treaties (e.g., Mauritius/Singapore) to avoid double taxation

11.  Capital Gains on Distribution of Assets by Companies in Liquidation [Section 46]

Section 46 of the Income Tax Act, 1961, governs the tax treatment of assets distributed by companies during liquidation, addressing both the company’s and shareholders’ liabilities. Below is a detailed breakdown of its provisions, exceptions, and judicial interpretations.

Key Provisions

1.  Tax Treatment for the Company [Section 46(1)]

• No capital gains taxon the company for distributing assets to shareholders during liquidation, as it is not considered a “transfer” under Section 45.
• Exception: If the liquidator sells assets(e.g., converts them to cash), the company is taxed on capital gains from such sales.

2.  Tax Treatment for Shareholders [Section 46(2)]

• Shareholders are taxed on:
  • Money receivedor
  • Market value of assets distributed(as of the distribution date),
    minus any amount treated as dividend under Section 2(22)(c).
• Cost of acquisition: Original share purchase cost (with indexation if held long-term).
• Holding period: Includes only the period before liquidation; post-liquidation tenure is excluded.

Example:

• Shareholder buys shares for ₹10L (indexed cost: ₹15L).
• Receives assets worth ₹25L during liquidation (₹5L deemed dividend).
• Taxable gain: ₹25L – ₹5L (dividend) – ₹15L (cost) = ₹5L(LTCG at 20% if asset held >36 months).

Special Cases & Exceptions

1.  Foreign Companies

• Post-1971 amendments, foreign companiesare included under Section 2(17), making Section 46 applicable to their liquidation.
• Supreme Court Ruling: Earlier excluded foreign companies (pre-1971), but now taxable.

2.  Depreciable Assets

• If distributed assets are depreciable(e.g., machinery), shareholders’ gains are taxed as short-term capital gains (STCG) under Section 50.

3.  Loss Claims

• Shareholders can claim capital lossif the distributed amount is less than their share cost.

Practical Implications

For Companies

✔ Distribute assets in specie (not as cash) to avoid company-level tax.

✔ Document liquidation resolutions and asset valuations for compliance.

For Shareholders

✔ Tax deferral: No tax if assets are held post-distribution; liability arises only on sale.

✔ Indexation benefit: Available for long-term holdings.

12.  Capital Gains on Sale of Goodwill, Trademarks, Tenancy Rights & Business Rights

Under the Income Tax Act, 1961, the sale of goodwill, trademarks, tenancy rights, route permits, loom hours, or business rights attracts capital gains tax, with different rules for self-generated vs. purchased assets.

1. Tax Treatment Under Section 55(2)(a)

ASSET TYPE	COST OF ACQUISITION (IF SELF-GENERATED)	COST OF ACQUISITION (IF PURCHASED)	TAX RATE (LTCG/STCG)
Goodwill of a Business	Nil	Purchase Price	20% (LTCG, indexed) / Slab (STCG)
Trademark/Brand Name	Nil	Purchase Price	20% (LTCG, indexed) / Slab (STCG)
Tenancy Rights	Nil	Actual Payment	20% (LTCG, indexed) / Slab (STCG)
Route Permits/Loom Hours	Nil	Purchase Price	20% (LTCG, indexed) / Slab (STCG)
Right to Manufacture/Carry on Business	Nil	Purchase Price	20% (LTCG, indexed) / Slab (STCG)

Key Rules:

✔ Self-generated assets (e.g., goodwill built over time) → Cost = Nil → Full sale value taxable.

✔ Purchased assets → Cost = Actual payment → Only profit taxed.

✔ Holding Period:

• >36 months→ LTCG (20% with indexation).
• <36 months→ STCG (as per slab rate).

2. Practical Examples

Case 1: Sale of Self-Generated Goodwill

• You run a restaurant for 10 yearsand sell the business, including goodwill, for ₹50 lakh.
• Taxable Gain: ₹50 lakh (since cost = Nil).
• Tax: 20% of ₹50 lakh (if held >36 months) = ₹10 lakh.

Case 2: Sale of Purchased Trademark

• You buy a trademark for ₹20 lakhin 2015 (indexed cost in 2024: ₹35 lakh).
• Sell it in 2024 for ₹60 lakh.
• Taxable LTCG: ₹60L – ₹35L = ₹25 lakh(20% tax = ₹5 lakh).

3. Exemptions & Planning Tips

✔ Reinvestment in Residential Property (Section 54F): If proceeds are reinvested in a house, LTCG exemption may apply.

✔ Business Reorganization (Section 47): No tax if transferred to a LLP/firm under a scheme of amalgamation.

✔ Documentation: Maintain purchase agreements, valuation reports, and sale deeds for tax compliance.

13. Capital Gains on Transfer of Depreciable Assets [Section 50]

Section 50 of the Income Tax Act, 1961 provides a special mechanism for computing capital gains on the sale of depreciable assets (assets eligible for depreciation under the Income Tax Act). Unlike regular capital assets, depreciable assets are always treated as short-term capital assets, regardless of the holding period.

1. Key Features of Section 50

(A) Tax Treatment of Depreciable Assets

• All depreciable assets(e.g., machinery, vehicles, patents) are treated as short-term capital assets (even if held for years).
• Gains are always taxed as Short-Term Capital Gains (STCG)→ Taxed at normal slab rates (not 15%/20%).

(B) Calculation of Capital Gains

Since depreciable assets are part of a “block of assets”, the tax calculation is based on the Written Down Value (WDV) of the entire block, not individual assets.

Formula:

Capital Gain = Sale Price − WDV of the Block at the Year’s 

• If WDV > Sale Price→ Short-Term Capital Loss (STCL) can be set off against other income.
• If Sale Price > WDV→ STCG is taxable.

2. Practical Examples

Case 1: Sale of a Single Asset (Profit)

• Block of Machinery (15% depreciation rate)
  • Opening WDV (1st April 2023) = ₹10 lakh
  • New machine bought in 2023-24 = ₹2 lakh
  • Old machine sold for ₹5 lakh (WDV = ₹3 lakh)
• Adjusted WDV= ₹10L + ₹2L – ₹3L = ₹9 lakh
• Taxable STCG= ₹5L (sale) – ₹3L (WDV) = ₹2 lakh (taxed at slab rate).

Case 2: Sale of Entire Block (Loss)

• Opening WDV = ₹8 lakh
• No new purchases
• Sold entire block for ₹6 lakh
• STCL= ₹6L – ₹8L = ₹2 lakh (can be set off against other income).

3. Exceptions & Special Cases

(A) Assets Not Used for Business

• If a depreciable asset was never used for business, it is not part of the block→ Normal capital gains rules apply (Section 45).

(B) Conversion to Personal Use

• If a business asset is converted to personal use, its WDV at the time of conversionbecomes the cost for future capital gains.

(C) Higher Depreciation Assets (e.g., EVs, Renewable Energy Equipment)

• Some assets (e.g., electric vehicles) have higher depreciation rates (40-80%), reducing WDV faster → Lower capital gains on sale.

4. Comparison with Non-Depreciable Assets

ASPECT	DEPRECIABLE ASSETS (SECTION 50)	NON-DEPRECIABLE ASSETS (SECTION 45/48)
Tax Treatment	Always STCG (slab rates)	LTCG (20% with indexation) or STCG (15%)
Cost Basis	Block’s WDV (not individual cost)	Actual purchase price + indexation
Indexation	Not allowed	Allowed for LTCG
Sale of Entire Block	STCG = Sale price – (WDV + additions)	Normal capital gains calculation

5. Compliance & Tax Planning

✔ Maintain depreciation records (ITR-3/ITR-6 for businesses).

✔ Claim STCL against other income (if applicable).

✔ Avoid mixing assets with different depreciation rates in the same block.

Tax Tip: If planning to sell, delay new purchases to reduce WDV and minimize STCG.

14.  Capital Gains on Depreciable Assets of Electricity Companies [Section 50A]

Section 50A of the Income Tax Act, 1961, provides special rules for computing capital gains on the transfer of depreciable assets used in the generation or distribution of electricity. This section ensures that gains from such assets are taxed consistently, considering their unique depreciation treatment under the Act.

Key Features of Section 50A

1. Applicability

• Applies to electricity generation or distribution companiesthat own depreciable assets like power plants, transmission lines, or transformers.
• Covers assets depreciated under Section 32(1)(i)(specific to power sector assets).

2.  Tax Treatment

• Gains are always treated as short-term capital gains (STCG), regardless of the holding period.
• No indexation benefitis allowed (unlike Section 50 for other depreciable assets).
• Tax rate: Normal slab rates apply (not flat 15%/20%).

3.  Calculation of Capital Gains

The Written Down Value (WDV) of the asset is considered the cost of acquisition for tax purposes:

Capital Gain = Sale Price − WDV at the time of sale

Example:

• A power plant (WDV: ₹5 crore) is sold for ₹7 crore.
• Taxable STCG= ₹7 crore – ₹5 crore = ₹2 crore (taxed at slab rates).

Comparison with Section 50 (General Depreciable Assets)

ASPECT	SECTION 50A (POWER SECTOR ASSETS)	SECTION 50 (OTHER DEPRECIABLE ASSETS)
Nature of Gain	Always STCG	Always STCG
Indexation Benefit	Not allowed	Not allowed
Depreciation Method	SLM or WDV (optional)	Only WDV
Tax Rate	Slab rates	Slab rates

Exceptions & Judicial Precedents

1. Balancing Charge (Section 41(2)):

• • If the sale price exceeds WDV but is less than the original cost, the excess is taxed as business income.
  • If the sale price exceeds both WDV and original cost, the surplus is taxed as capital gainsunder Section 50A.

2.  Supreme Court Ruling:

• • In Urmila Ramesh vs. CIT, the SC held that Section 50A and Section 41(2) cannot apply simultaneouslyto the same gain.

Practical Implications

✔ Power companies must maintain detailed depreciation records for WDV calculations.

✔ Losses can be set off against other income under normal STCG rules.

✔ No reinvestment exemptions (e.g., Section 54) are available since gains are short-term

15. Special Provisions for Capital Gains in Slump Sale [Section 50B]

Section 50B of the Income Tax Act, 1961, provides a unique framework for computing capital gains when an entire business undertaking is sold as a going concern for a lump sum consideration without assigning individual values to assets/liabilities. Below is a detailed breakdown of its provisions, tax implications, and compliance requirements.

1. Definition of Slump Sale [Section 2(42C)]

A slump sale involves:

• Transfer of one or more undertakings(e.g., a division, unit, or entire business).
• Lump sum considerationwithout valuing individual assets/liabilities.
• Exclusions:
  • Itemized asset sales (individual asset valuations).
  • Transactions where consideration is paid in shares/debentures(treated as “exchange”).

2. Tax Treatment Under Section 50B

(A) Computation of Capital Gains

Capital Gain = Full Value of Consideration  (FVC) − Net Worth of the Undertaking

Key Components:

1.   Full Value of Consideration (FVC):

• Higher of:
  • FMV1: Book value of assets (excluding jewelry, shares, immovable property) + FMV of excluded assets (as per Rule 11UAE).
  • FMV2: Actual monetary/non-monetary consideration received.

2.  Net Worth:

• Assets:
  • Depreciable assets → Written Down Value (WDV).
  • Non-depreciable assets → Book value (revaluation ignored).
  • Self-generated goodwill → Ni.
• Liabilities: Deduct book value of liabilities (excluding contingent liabilities).
• Negative Net Worth: Treated as zero.

(B) Nature of Capital Gains

HOLDING PERIOD	TAX TREATMENT
>36 months	Long-Term Capital Gain (LTCG) → 20% tax (no indexation).
≤36 months	Short-Term Capital Gain (STCG) → Normal slab rates 3.

Example:

• Undertaking held for 4 years(Net worth: ₹50L, FVC: ₹1Cr).
• Taxable LTCG= ₹1Cr – ₹50L = ₹50L (20% tax = ₹10L).

3. Key Exceptions & Conditions

• No Indexation: Even for LTCG, indexation benefit is not allowed.
• Depreciable Assets: WDV is used (not market value).
• Exemptions:
• Section 54GA/54GB: Reinvestment in specified assets/businesses may defer tax.
• Section 47(xiv): Transfer by sole proprietor to company (conditions apply).

4. Compliance Requirements

1. CA Report (Form 3CEA): Must be filed with ITR, certifying net worth computation.
2. Documentation:

• • Sale agreement (must exclude individual asset valuations).
  • Valuation reports for FMV calculation.

3. GST Implications: Nil-rated if transferred as a “going concern”

16. Computation of Capital Gains in Real Estate Transactions [Section 50C]

Section 50C of the Income Tax Act, 1961, is a special provision to prevent undervaluation of immovable property (land/building) in sale transactions. It mandates that the stamp duty value (SDV) be treated as the sale consideration for capital gains tax if the actual sale price is lower than the SDV.

Key Provisions of Section 50C

1.  Applicability

• Applies to transfer of land/buildingheld as a capital asset (not stock-in-trade).
• Triggered when:
  • Actual sale consideration < Stamp Duty Value (SDV).
  • Exception: If the difference is ≤ 10%, the actual sale price is accepted.

2.  Calculation of Capital Gains

Capital Gain = Higher of (Sale Price or SDV) − Indexed Cost of Acquisition − Cost of Improvement

Example:

• Sale Price: ₹50 lakh
• SDV: ₹60 lakh
• Taxable Consideration: ₹60 lakh (since SDV > sale price).

3.  Safe Harbour Rule

• If SDV ≤ 110% of sale price, the actual sale price is used.

Example:

• Sale Price: ₹90 lakh | SDV: ₹99 lakh (110% of ₹90 lakh).
• Taxable Value: ₹90 lakh (since SDV ≤ 110%).

4.  Valuation Date (Agreement vs. Registration)

• If agreement date ≠ registration date, SDV is taken on:
  • Agreement date: If part payment is made via account payee cheque/ECSbefore registration.
  • Registration date: If no payment is made before registration.

5.  Disputing SDV

• If SDV is higher than fair market value (FMV), the seller can:
  1. Request the Assessing Officerto refer the case to a Valuation Officer.
  2. The lower of SDV or Valuation Officer’s reportwill be used.

Exceptions to Section 50C

• Not applicableto:
  • Gifts or compulsory acquisitions (e.g., government land acquisition).
  • Stock-in-trade (covered under Section 43CA).
  • Transactions under amalgamation/demerger.

Tax Planning Tips

✔ Check SDV before sale: Avoid surprises by verifying local circle rates.

✔ Use safe harbour: Keep sale price within 10% of SDV to avoid higher taxation.

✔ Document payments: Ensure payments are via bank channels to use agreement-date SDV

17.  Fair Market Value (FMV) as Full Consideration for Unquoted Shares [Section 50CA]

Section 50CA of the Income Tax Act, 1961, mandates that if unquoted shares (shares not listed on a recognized stock exchange) are transferred below Fair Market Value (FMV), the FMV will be deemed as the sale consideration for computing capital gains. This prevents tax evasion through undervaluation of shares.

Key Provisions of Section 50CA

1.  Applicability

• Applies to transfer of unquoted shares(private company shares, LLP interests, etc.).
• Triggered when:
  • Actual sale price < FMV(as per Rule 11UA).
  • Exception: Transactions covered under Section 47(e.g., gifts to relatives, amalgamations).

2.  Calculation of Capital Gains

Capital Gain = Higher of (Actual Sale Price or FMV) − Cost of Acquisition

• FMV Determination: As per Rule 11UA(based on NAV, DCF, or prescribed method).
• No indexation benefitfor short-term capital gains (STCG).

Example:

• Sale Price: ₹5 lakh
• FMV (as per Rule 11UA): ₹10 lakh
• Taxable Consideration: ₹10 lakh (since FMV > sale price).

3.  Exceptions

• Not applicableto:
  • Shares listed on a recognized stock exchange.
  • Transactions under Section 47(e.g., gifts, inheritance, mergers).
  • ESOPs (covered under Section 17(2)(vi)).

4.  Penalty for Undervaluation

• If FMV is not reported correctly, the Assessing Officer may impose:
  • Tax on higher value+ penalty under Section 271(1)(c) (50%-200% of tax evaded).

How to Determine FMV? (Rule 11UA)

1. Net Asset Value (NAV) Method
2. Discounted Cash Flow (DCF) Method(for profitable companies).
3. Other Prescribed Methods(if justified with a valuation report).

Example:

• Company’s net assets: ₹1 crore
• Shares outstanding: 10,000
• FMV per share: ₹1,000

Tax Planning Tips

✔ Get a valuation report from a registered valuer to justify FMV.

✔ Use bank channels for transactions to avoid scrutiny.

✔ Check exemptions (e.g., gifts to relatives under Section 47).

Comparison with Section 50C (Real Estate)

ASPECT	SECTION 50CA (UNQUOTED SHARES)	SECTION 50C (REAL ESTATE)
Applicability	Unquoted shares	Land/building
FMV Rule	Higher of sale price or FMV	Higher of sale price or SDV
Penalty	50%-200% of tax evaded	Similar penalties
Exceptions	Gifts, mergers	Gifts, compulsory acquisition

18.  Fair Market Value (FMV) as Full Consideration in Certain Cases [Section 50D]

Section 50D of the Income Tax Act, 1961, is an anti-avoidance provision that applies when:

1. A capital asset is transferred, and
2. The actual consideration cannot be reliably determined(e.g., in barter transactions, sham deals, or non-monetary exchanges)

Key Features of Section 50D

1.   Deemed Consideration Rule

• If the actual consideration cannot be determined, the Fair Market Value (FMV)on the transfer date is treated as the full value of consideration.
• Applies even if no consideration is received (e.g., sham transactions, undisclosed deals).

2.  Applicability

• Covers all capital assets(land, shares, goodwill, etc.).
• Exclusions:
  • Transactions covered under Section 47(e.g., gifts, mergers).
  • Cases where consideration is already determined under Sections 50C (real estate) or 50CA (unquoted shares).

3.  FMV Determination

• Immovable property: Higher of stamp duty value or valuation officer’s report.
• Shares: As per Rule 11UA (NAV/DCF method for unquoted shares).
• Other assets: Certified by a registered valuer.

4.  Tax Impact

• Capital gains are computed as:

Capital Gain = FMV − Indexed Cost of Acquisition (if LTCG)

• LTCG: 20% with indexation (if held >36/24/12 months, depending on asset).
• STCG: Normal slab rates.

5.  Penalties for Non-Compliance

• If FMV is underreported, penalty under Section 271(1)(c)(50%-200% of tax evaded).

Example

• A property is “sold” for ₹1(sham transaction).
• FMV: ₹50 lakh.
• Taxable Capital Gain: ₹50 lakh (even if no real payment was made).

Comparison with Similar Sections

SECTION	APPLIES TO	WHEN TRIGGERED	FMV RULE
50C	Land/building	Sale price < Stamp Duty Value	Higher of SDV or sale price
50CA	Unquoted shares	Sale price < FMV	Higher of FMV or sale price
50D	Any capital asset	No consideration or unreliable value	Full FMV deemed as consideration

19.  Capital Gains on Buyback of Shares [Section 46A]

Section 46A of the Income Tax Act, 1961, governs the tax treatment of buybacks where a company purchases its own shares or specified securities from shareholders. This provision was introduced to prevent tax avoidance through buyback schemes.

Key Provisions of Section 46A

1.  Taxability of Buyback Transactions

• For Shareholders:
  • The difference between the buyback priceand the issue price of shares is treated as capital gains.
  • Tax Rate:
    • 20% with indexation (LTCG)if shares were held for >12 months (listed) or >24 months (unlisted).
    • Slab rates (STCG)if held for a shorter period.
  • For the Company:
    • The company must pay additional tax @20%(plus surcharge & cess) on the distributed income under Section 115QA (this is separate from shareholder taxation).

2.  Calculation of Capital Gains for Shareholders

Capital Gain=Buyback Price−Cost of Acquisition (Issue Price)Capital Gain=Buyback Price−Cost of Acquisition (Issue Price)

Example:

• You bought shares at ₹100(issue price).
• Company buys back at ₹300.
• Taxable Gain: ₹300 – ₹100 = ₹200 per share(20% LTCG if held long-term).

3.  Exemptions & Special Cases

• Section 10(34A): If tax is paid by the company under Section 115QA, shareholders are exemptfrom capital gains tax (only for domestic companies).
• Unlisted Companies: Shareholders must pay capital gains tax even if the company pays buyback tax.
• Listed Companies: Shareholders are exemptif the buyback is through the stock exchange (SEBI-compliant).

4.  Compliance Requirements

• Company’s Obligation:
  • Deduct TDS @10%if buyback consideration exceeds ₹1 lakh (Section 194).
  • Pay 20% buyback taxunder Section 115QA.
• Shareholder’s Obligation:
  • Report gains in ITR-2/ITR-3under “Capital Gains”.
  • Claim exemption if applicable (Section 10(34A)).

Comparison with Dividend Taxation

ASPECT	BUYBACK (SECTION 46A)	DIVIDEND (SECTION 10(34))
Tax on Company	20% (Section 115QA)	Dividend Distribution Tax (DDT) abolished (now taxable in hands of shareholders)
Tax on Shareholder	Capital gains (20% LTCG or slab rate)	Taxable as “Income from Other Sources” (slab rate)
Exemption	Yes (if buyback tax paid)	No exemption

Tax Planning Tips

✔ For Companies:

• Opt for SEBI-compliant buybacks(shareholders exempt).
• Avoid buybacks if dividend payout is more tax-efficient.

✔ For Shareholders:

• Hold shares long-term(20% tax vs. slab rate).
• Check exemptions(Section 10(34A) for domestic company buybacks.

20.  Separate Computation of Capital Gains for Land vs. Self-Constructed Building

When an assessee sells a property comprising both land and a self-constructed building, capital gains must be calculated separately for each component due to differing:

• Cost of acquisition(land: purchase price; building: construction cost)
• Holding periods(may differ if construction occurred later)
• Tax rates(LTCG/STCG treatment varies)

1. Legal Basis for Separate Computation

• Section 50C: Stamp duty value applies to land + buildingcollectively, but cost must be split.
• Section 55(2)(a): Self-constructed building has no cost of acquisition(only improvement costs apply).
• Judicial Precedent:

2. Step-by-Step Calculation

(A) For Land

1. Cost of Acquisition: Original purchase price (indexed if held >24 months).
2. Capital Gain:

Gain=Sale Price (land portion) −Indexed Cost

• LTCG (>24 months): 20% with indexation.
• STCG (≤24 months): Slab rate.

(B) For Self-Constructed Building

1. Cost of Acquisition: Nil(unless purchased).
2. Cost of Improvement: Construction expenses (indexed if held >24 months).
3. Capital Gain:

Gain = Sale Price (building portion) −Indexed Construction Cost

• LTCG (>24 months): 20% with indexation.
• STCG (≤24 months): Slab rate.

3. Allocation of Sale Price

• If sale agreement does not specifyseparate values for land/building:
  • Proportionate allocationbased on:
    1. Stamp duty valuation(if available), or
    2. Fair market value(registered valuer’s report).

Example:

• Total Sale Price: ₹1.2 crore
• Stamp Duty Value: Land (₹80L) + Building (₹40L)
• Taxable Gain:
  • Land: ₹80L – ₹50L (indexed) = ₹30L (20% tax = ₹6L).
  • Building: ₹40L – ₹20L (construction cost) = ₹20L (20% tax = ₹4L).

4. Key Considerations

✔ Documentation: Maintain construction bills, land purchase deed, and valuation reports.

✔ Holding Period: Building’s holding period starts from construction completion (not land purchase).

✔ Exemptions:

• • Section 54: Reinvestment in residential property (for building gains only).
  • Section 54EC: Bonds (for land gains).

5. Comparison: Purchased vs. Self-Constructed Property

ASPECT	LAND (PURCHASED)	BUILDING (SELF-CONSTRUCTED)
Cost of Acquisition	Purchase price	Nil (only improvement costs)
Indexation	From purchase year	From construction completion
Tax Rate (LTCG)	20% with indexation	20% with indexation

21.  Capital Gains on Transfer of Mutual Fund Units in a Consolidation Scheme [Sections 47(xviii), 47(2AD), and Explanation 1 to Section 2(42A)]

The Income Tax Act provides tax-neutral treatment for the transfer of mutual fund units during consolidation or merger of mutual fund schemes. Below is a detailed breakdown of the provisions and their implications.

1. Key Provisions

(A) Section 47(xviii) – Non-Taxable Transfer

• Exemption: Transfer of units from one mutual fund scheme to another under a consolidation/mergeris not treated as a “transfer” for capital gains tax.
• Conditions:
  • The transfer must be solely due to the consolidation/mergerof schemes.
  • The unit holder does not receive any consideration other than unitsin the new scheme.

(B) Section 47(2AD) – Tax Neutrality for Unit Holders

• No capital gains taxif the unit holder receives new units in lieu of old units during consolidation.
• Cost of New Units: Same as the original cost of old units.
• Holding Period: Includes the holding period of the original units(Explanation 1 to Section 2(42A)).

(C) Explanation 1 to Section 2(42A) – Holding Period Carry Forward

• The holding period of the original unitsis added to the new units for determining LTCG/STCG.
  • Listed equity-oriented funds: >12 months = LTCG (10%).
  • Debt/other funds: >36 months = LTCG (20% with indexation).

2. Practical Example

• You hold 1000 units of Scheme A (purchased in Jan 2020 for ₹10/unit).
• In 2024, Scheme A merges into Scheme B, and you receive 1000 units of Scheme B (FMV: ₹20/unit).
• Tax Implications:
  • No capital gains taxat the time of merger (Section 47(xviii)).
  • Cost of Scheme B units= ₹10/unit (original cost).
  • Holding period= From Jan 2020 (eligible for LTCG benefits).
  • If sold in 2025 for ₹25/unit:
    • LTCG= (₹25 – ₹10) × 1000 = ₹15,000 (tax @10% if equity-oriented).

3. Exceptions & Compliance

• Not Applicable If:
  • The unit holder receives cash or other assets(taxable as capital gains).
  • The transfer is not part of a SEBI-approved consolidation.
• Reporting:
  • Disclose in ITRunder “Exempt Income” (Schedule EI).
  • Maintain recordsof consolidation notices and unit statements.

4. Comparison with Other Provisions

SCENARIO	SECTION 47(XVIII)	NORMAL TRANSFER
Tax Trigger	No tax on consolidation	Taxable as capital gains
Cost Basis	Original cost retained	FMV considered if not exempt
Holding Period	Carried forward	Fresh calculation

22.  Tax Treatment of Mutual Fund Plan Consolidation [Section 47(xix)]

Section 47(xix) of the Income Tax Act, 1961, provides tax-neutral treatment for the consolidation or merger of different plans within the same mutual fund scheme. This provision ensures that unit holders are not taxed when their units are transferred from a consolidating plan to a consolidated plan under a SEBI-approved restructuring.

Key Provisions

1.  Tax Exemption on Transfer

• No capital gains taxis triggered when units are transferred from a consolidating plan to a consolidated plan within the same mutual fund scheme 18.
• Applies only if the transaction is solely in exchange for new units(no cash or other consideration) 8.

2.  Cost and Holding Period Carryforward

• Cost of Acquisition: The cost of the new units is deemed to be the same as the original unitsin the consolidating plan 12.
• Holding Period: The holding period of the original units is includedfor determining LTCG/STCG eligibility 18.

Example:

• You hold 1000 units in Plan A(bought in 2020 for ₹10/unit).
• Plan A merges into Plan Bin 2024, and you receive 1000 new units.
• Tax Impact:
  • No taxat the time of consolidation.
  • If sold in 2025, the holding period is 5 years (LTCG).

3.  Applicability

• Covers SEBI-approved consolidations(e.g., merging dividend/growth plans or direct/regular plans) 8.
• Does not applyto cross-scheme mergers (e.g., Scheme X of Fund A merging into Scheme Y of Fund B) 4.

Conditions & Compliance

1. SEBI Approval: The consolidation must comply with SEBI’s mutual fund regulations 8.
2. No Cash Consideration: If cash is received, the exemption is void 8.
3. Reporting: Unit holders must disclose the transaction in ITR under “Exempt Income” 4.

Comparison with Other Provisions

SCENARIO	SECTION 47(XIX)	NORMAL REDEMPTION
Tax Trigger	No tax	Capital gains tax
Cost Basis	Original cost retained	FMV applies
Holding Period	Carried forward	Fresh calculation