CS Executive · Tax Laws and Practice

Capital Gains for CS Executive Paper 7: Study Guide

Capital gains is the profit from transferring a capital asset. You find the asset and the transfer, classify the gain as short-term or long-term, deduct cost and expenses from the full value of consideration, then apply special rules and exemptions. Under the Income-tax Act, 2025, gains not charged are exempted from section 67.

What this chapter covers

This chapter covers the tax on profit from selling or otherwise transferring a capital asset such as land, shares or a business undertaking. It runs in a fixed chain: is it a capital asset, has a transfer happened, is the gain short-term or long-term, what is the gain after deductions, and is any part not charged to tax.

The later topics are built on the early ones. Special cases such as depreciable assets (section 74) and slump sale (section 77) change how the usual formula works. Exemption sections such as section 85 (specified bonds), section 86 (residential house) and section 215 (non-resident Indian and foreign exchange assets) each remove part or all of a gain from charge under section 67, but only if you meet their conditions.

In Paper 7 Part I (Direct Tax), this chapter connects to the heads of income, set-off and carry forward of losses, and total income computation. A capital gain computed here flows into the total income of the assessee. Practise it with the other heads, not alone.

Capital gains is a numerical chapter with exact conditions, and it suits a written paper where you show steps. Each step in a computation earns credit even if a later step goes wrong. The exemption sections test whether you remember time limits, caps and withdrawal rules. Students who learn the conditions precisely can score in both theory and problem questions, and the chapter feeds into total income questions elsewhere in the paper.

Capital Gains: topics in the order to study them

1Capital Asset and Meaning of TransferEverything starts here: no capital asset or no transfer means no capital gain, so you must be able to test both.
2Short-term and Long-term Capital AssetsThe holding period decides the nature of the gain, and the nature decides which later rules apply.
3Computation of Capital GainsLearn the basic formula with full value of consideration, cost of acquisition, cost of improvement and transfer expenses before any exceptions.
4Special Cases of Capital Gains ComputationSection 74 (depreciable assets) and section 77 (slump sale) modify the basic formula, so study them once the normal method is firm.
5Exemptions and Capital Gains Not ChargedSections 86 and 215 reduce or remove the gain you have computed, so they come after computation. Learn proportion formulas, time limits and clawback conditions.
6Investment in Specified Bonds (Section 85)This is a narrow exemption for long-term gains on land or building. Study it last, using the structure of the other exemptions as a template.

How to prepare Capital Gains

Prepare this chapter as a set of conditions and formulas that you practise on paper, not as text to read.

Read the six topics in the order above and write a one-page flow: asset, transfer, holding period, computation, exemption.
Make a table for yourself of each exemption section: who can claim, which asset is sold, what must be bought, time limit, cap, and what happens if the new asset is sold early.
Learn the formulas in plain form, for example the proportion in section 86(1)(i): exempt gain = capital gains × cost of new asset ÷ net consideration, when net consideration exceeds cost of the new asset.
Solve at least two numerical problems on each special case. For section 77, remember net worth is treated as the cost of acquisition and cost of improvement, and the fair market value as the full value of consideration.
Practise writing answers in ICSI style: state the provision, apply it to the facts, then give a clear conclusion with the section number.
Do a mixed problem where a gain is computed, then partly exempted, then the new asset is transferred within the lock-in period and the exemption is withdrawn.
Revise by testing yourself on time limits and caps, and recheck them against the Income-tax Act, 2025 text.

Common mistakes in Capital Gains

Applying an exemption without checking who can claim it.
Fix: Note the assessee for each section: individual or HUF for section 86, a non-resident Indian for section 215, and any assessee for section 85.
Mixing up what must be invested: capital gain versus net consideration.
Fix: Section 85 refers to investing capital gains; sections 86 and 215 are tested against net consideration. Write this in your own table.
Forgetting the clawback when the new asset is sold early.
Fix: Always check the lock-in: five years under section 85, three years under sections 86 and 215. State the year in which the gain becomes chargeable.
Treating a slump sale like an ordinary sale of assets.
Fix: Use net worth as cost, fair market value as consideration, and apply the thirty-six month test to decide short-term or long-term.
Using the old Income-tax Act, 1961 section numbers.
Fix: For June 2027, use the Income-tax Act, 2025 and cite its section numbers only. Check each section against the current text.
Giving only a number in answers.
Fix: Write the provision, the working in steps and a one-line conclusion naming the head and nature of the gain.

Last-day revision: Capital Gains

Capital gains are charged only when a capital asset is transferred; section 67 is the charging provision referred to in the exemption sections.
Section 85: only long-term gains on land or building, invested within six months of transfer in specified bonds.
Section 85 investment cap is fifty lakh rupees, either in any tax year or across the year of transfer and the next tax year.
Section 85: if the bond is transferred or converted into money within five years, the exempted gain becomes long-term capital gain of that year.
Section 85(4): a loan or advance against the bond is treated as converting it into money on that date.
Section 86: individual or HUF, long-term asset that is not a residential house; buy one house within one year before or two years after transfer, or construct within three years.
Section 86 limit: cost of new house and net consideration above ten crore rupees are not taken into account as set out in sub-sections (8) and (9).
Section 86(7): if the new house is transferred within three years of purchase or construction, the exempted gain is charged.
Section 215: non-resident Indian, long-term gain on a foreign exchange asset, reinvestment of net consideration within six months, three-year lock-in.
Section 77: slump sale gain is long-term, but short-term if the undertaking is held for thirty-six months or less.
Section 77: an accountant's report on net worth must be furnished; revaluation of assets is ignored when computing net worth.
Section 74: the excess of consideration over expenses, opening WDV and additions in the year is short-term capital gain; if the block ceases to exist, the whole result is short-term.

Capital Gains practice questions

Capital Gains in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Capital Gains: frequently asked questions

Which paper has the Capital Gains chapter in CS Executive?

It is in Paper 7, Tax Laws and Practice, under Part I Direct Tax. Part I carries 60 marks out of 100. Paper 7 is a written paper of 3 hours.

Which Act should I study for Capital Gains in June 2027?

Study the Income-tax Act, 2025 as amended by the Finance Act, 2026, for tax year 2026-27. The December 2026 session uses the Income-tax Act, 1961. Do not mix section numbers between the two.

How do I study the exemption sections without confusing them?

Build one comparison table with columns for assessee, original asset, new asset, time limit, cap and lock-in. Fill it from the Act text. Then solve a problem for each section.

Do I need to remember exact time limits and amounts?

Yes. Answers depend on them, such as six months and fifty lakh rupees in section 85, or ten crore rupees in section 86. Learn them with the section they belong to.