Chargeability of capital gains
Introduction
Section 67 of the Income-tax Act is the charging provision which provides the conditions for taxability of income under the head capital gains. Profits or gains arising from transfer of a capital asset is taxable in the tax year in which the transfer takes place. However, in some cases capital gain is taxable in a year other than the year in which capital asset is transferred.
1. About
Section 67 is the charging provision to tax the capital gains. It contains provision for computation of capital gains under different circumstances.
1.1. In general [Section 67(1)]
Any profit or gain arising from transfer of a capital asset is deemed to be the income of the tax year in which such transfer took place. The capital gain is computed as per provisions of Section 72which is further reduced by the exemptions provided for reinvestment of capital gains or sale consideration.
1.2. In case of receipt of insurance compensation [Section 67(2), (3) & (4)]
Main article: Computation of capital gains in case of insurance receipts
Any profits or gains arising from receipt of any compensation from an insurer due to damage or destruction of any capital asset shall be chargeable to tax under the head capital gains in the tax year in which such compensation is received.
1.3. In case of receipt from ULIP [Section 67(5)]
Main article: Taxation of Unit Linked Insurance Policies (ULIPs)
Where any person receives any amount under a unit linked insurance policy (ULIP), to which exemption under Schedule II [Table S. No. 2] does not apply, including the amount allocated by way of bonus on such policy, then, any profits or gains arising from receipt of such amount shall be chargeable to tax under the head capital gains in the tax year in which such amount was received. Further, the income in this case shall be computed as per Rule 49.
1.4. In case of conversion of capital asset into stock in trade [Section 67(6)]
Main article: Capital gains on conversion of capital asset into stock-in-trade
Any profits or gains arising from conversion of a capital asset by the owner into stock-in-trade of a business carried on by him shall be chargeable to tax under the head Capital gains in the tax year in which stock-in trade is sold or otherwise transferred.
1.5. In case of transfer of securities in Demat form [Section 67(7) & (8)]
Main article: Capital gains on transfer of securities in Demat form
Any profits or gains arising from transfer of beneficial interest in securities by the depository or its agent shall be chargeable to tax under the head capital gains as the income of the beneficial owner (investor) in the tax year in which such transfer took place. It shall not be regarded as income of the depository who is deemed to be the registered owner of securities as per Depositories Act, 1996
1.6. In case of contribution of capital asset by a partner or member [Section 67(9)]
Main article: Capital gains on contribution of capital asset by partner or member to firm or AOP or BOI
Any profits or gains arising from the transfer of a capital asset by a person to a firm or association of persons or body of individuals (not being a company or a co-operative society) in which he is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the tax year in which such transfer takes place. For the purposes of computing capital gain in such cases, amount recorded in the books of firm in respect of such capital asset is deemed to be the full value of the consideration
1.7. In case of distribution of capital asset on reconstitution of Firm/AOP/BOI [Section 67(10) & (11)]
Main article: Computation of income on reconstitution of Firm, AOP or BOI
Where a partner receives any capital asset or money or both from a firm in connection with the reconstitution, then any profit and gains arising from such receipt by partner shall be deemed to be the income of the firm under the head capital gains. It shall be charged to tax in the tax year in which such capital asset or money or both are received by the partner. This provision shall also apply .
The taxability of a firm under Section 8 arises if a partner receives any capital asset or stock-in-trade or both from a firm in connection with the dissolution of such firm. In such a situation, the firm shall be deemed to have transferred such capital asset or stock-in-trade or both to the partner in the year in which such capital asset or stock in trade or both are received by that partner.
In case of the reconstitution of a firm, it has been clarified
1.8. In case of transfer of capital asset by way of compulsory acquisition [Section 67(12) & (13)]
Main article: Capital gains on compulsory acquisition of immovable property
Any profits or gains arising from the transfer of a capital asset, by way of compulsory acquisition under any law or where the consideration is approved or determined by the Central Government or the RBI, shall be chargeable to tax under the head capital gains in the tax year in which initial compensation (or part thereof) is first received or enhanced compensation is received by the assessee.
1.9. In case of joint development agreements [Section 67(14), (15) & (16)]
Main article: Capital gains in case of Joint Development Agreements (JDA)
Any capital gains arising to an assessee, being an individual or a Hindu Undivided Family, from the transfer of a capital asset, being land or building or both, under a Joint development agreement for the development of a project shall be chargeable to tax as income of the tax year in which the certificate of completion for the whole or part of the project is issued by the competent authority.
1.10. In case of repurchase of units issued under Equity Linked Savings Scheme [Section 67(17) & (18)]
Where an individual or an HUF had purchased units of UTI or Mutual Fund under equity linked savings scheme, any capital gains arising on repurchase of units by the issuing authority or on termination of plan shall be chargeable to tax in the tax year in which such repurchase takes place or the plan is terminated, as the case may be. Capital gain on such repurchase of the units or termination of plan would be the difference between the repurchase price and the amount invested in such units.
References
Circular No. 14 of 2021, dated 02-07-2021
This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.