Capital Gains on Transfer of Capital Assets under Income-tax Act 2025

Understand Transfer of Capital Assets and Capital Gains Treatment

Key rules to remember

Basic capital gain

Capital gain = Full value of consideration − Transfer expenses − Cost of acquisition − Cost of improvement

Classify as short term or long term by holding period before applying the rate. Use the holding period for the specific asset.

Block of assets, asset remains (section 74(2))

Deemed STCG = Full value of consideration − [Transfer expenses + Opening WDV of block + Actual cost of assets acquired in the year]

Applies only if the result is a positive excess. If no excess, there is no capital gain under this rule.

Block ceases to exist (section 74(3))

Cost of acquisition = Opening WDV + Actual cost of assets acquired in the year; gain is deemed short term

The block ceases to exist when all assets in it are transferred in the tax year.

Net consideration (section 215(2)(b))

Net consideration = Full value of consideration − Expenditure wholly and exclusively for the transfer

This is the base for testing how much of the NRI reinvestment qualifies.

NRI reinvestment, full exemption (section 215(1)(i))

If cost of new asset ≥ net consideration, whole long-term capital gain is not charged

The new asset must be a specified asset acquired within six months after the transfer.

NRI reinvestment, proportionate exemption (section 215(1)(ii))

A = B × C ÷ D

A = gain not charged; B = whole capital gain; C = cost of the new asset; D = net consideration of the original asset. Used when C < D.

Withdrawal of relief (section 215(3))

If new asset is transferred or converted into money within 3 years of acquisition, the gain not charged is deemed long-term capital gain of that tax year

The three years run from the date of acquisition of the new asset.

How to solve Transfer of Capital Assets and Capital Gains Treatment questions

1. 1Identify the asset: ordinary capital asset, depreciable asset in a block, or a foreign exchange asset held by an NRI.
2. 2Confirm there is a transfer in the tax year in question and note the date.
3. 3For an ordinary asset, find the full value of consideration and deduct transfer expenses, cost of acquisition and improvement.
4. 4Find the holding period and classify the gain as short term or long term.
5. 5For a depreciable block, apply section 74(2) or 74(3) and state whether the block still exists.
6. 6For an NRI with a long-term gain on a foreign exchange asset, check reinvestment within six months, compute net consideration, and apply section 215(1)(i) or (ii).
7. 7Check for later events, such as transfer of the new asset within three years, which triggers section 215(3).
8. 8Write the provision, apply it to the facts, and give a clear conclusion with the amount.

Quickest way: Three-question triage

Common mistakes in Transfer of Capital Assets and Capital Gains Treatment

• Computing gain asset by asset for depreciable assets in a block.

  Students apply the ordinary formula by habit.

  Fix: Use section 74. Work at block level with opening WDV and additions, and treat any excess as short-term gain.

• Forgetting to add assets acquired during the year when testing the block excess.

  Students compare consideration only with opening WDV.

  Fix: Deduct transfer expenses, opening WDV and the actual cost of assets acquired in the year before finding the excess.

• Using full value of consideration instead of net consideration for the NRI exemption.

  Students ignore transfer expenses.

  Fix: Deduct expenditure wholly and exclusively for the transfer to get net consideration (D), then compare it with the cost of the new asset.

• Applying the section 215 relief to short-term gains.

  Students remember the reinvestment idea but not the condition.

  Fix: State the conditions: NRI, long-term gain, foreign exchange asset and reinvestment within six months.

• Ignoring the three-year lock-in on the new asset.

  The question stops at the year of reinvestment.

  Fix: Check whether the new asset is transferred or converted into money within three years. If so, the exempt gain is deemed long-term gain of that year.

• Answering with only a number and no provision or conclusion.

  Students rush through a computation.

  Fix: Use the three-part answer: provision, analysis of the facts, conclusion.

Worked examples