Taxability of Capital Gain under the Income tax Act, 1961

Introduction

Profits or gains arising from the transfer of a capital asset made in a previous year are taxable as
capital gains under the head “Capital Gains”. The important ingredients for capital gains are,
therefore, existence of a capital asset, transfer of such capital asset and profits or gains that arise
from such transfer. The provisions for computation of Income from Capital Gains are applicable
for incomes from transfer of Capital Asset.

CAPITAL ASSET [SECTION 2(14)]

Capital Asset means:

(a) Property of any kind held by assessee, whether or not connected with his business or profession.
(b) Any securities held by Foreign Institutional Investor (FII) which has invested in such securities as per
SEBI regulations but does not include:
1. Any stock-in-trade
2. Personal Effects {Movable property (including wearing apparel & furniture) for personal use of
assessee or for dependent family member.
Personal effects excludes the following
a. Jewellery
b. Archaeological collections
c. Drawings
d. Paintings
e. Sculptures
f. Any work of art

TRANSFER [SECTION 2(47)]

Transfer means :-

(a) Sale, Exchange or Relinquishment of Capital Asset.

(b) Extinguishment of any right in a Capital Asset.

(c) Compulsory Acquisition of Capital Asset under Any law
. (d) Conversion of Capital Asset into Stock in trade of Business.
(e) Any transaction in which possession of Immovable Property is taken u/s 53A of Transfer of Property
Act.
(f) Any transaction, which has effect of transferring or enabling enjoyment of Immovable Property. (g)
Maturity or Redemption of a zero coupon bond.

TYPES OF CAPITAL GAINS

There are two types of Capital Gains:
1. Short Term Capital Gain (STCG): It arises on transfer of Short Term Capital Assets
2. Long Term Capital Gain (LTCG) : It arises on transfer of Long Term Capital Assets

Different assets have different periods of holding to be called short term and long term. Here is a
table that defines period of holding for different classes of asset in order to be classified as short
term or long term.
Asset Period of holding Short Term / Long Term

Immovable property < 24 months Short Term

>24 months Long Term

Listed equity shares <12 months Short Term

>12 Months Long Term

Unlisted shares <24 months Short Term

>24 months Long Term

Other assets <36 months Short Term

>36 months Long Term

EXEMPTIONS FROM CAPITAL GAINS [SECTION 54 to 54H]

Under Sections 54, 54B, 54D, 54EC, 54F, 54G and 54H of the Act, capital gains arising from the

transfer of certain capital assets are exempt from tax under certain circumstances.