Overview of Section 45 of the Income Tax Act, 1961
Under Section 45 of the Income Tax Act, 1961, any profit or gain arising from the transfer of a capital asset is taxable as a capital gain. It is crucial to determine whether the capital gain is categorized as a short-term or long-term capital gain, as this classification influences the applicable income tax rate.
Definition of Capital Asset
A capital asset includes:
- Property of any kind
- Any securities held by Foreign Institutional Investors (FII)
- Unit-linked insurance policies
Exclusions from the definition of capital asset include:
- Stock in trade
- Personal effects (movable property for personal use), except:
- Jewellery
- Archaeological collections
- Drawings
- Paintings
- Sculptures
- Any work of art
- Rural agricultural land in India
- 5% Gold Bonds
- Special Bearer bonds
- Gold Deposit Bonds
Classification of Capital Gains: Long-term vs. Short-term
Capital gains are classified as either short-term or long-term based on the holding period of a capital asset. The criteria are as follows:
- A capital asset held for more than 36 months prior to the transfer date qualifies as a long-term capital asset.
- All other assets are considered short-term capital gains, except for the following categories with specific holding periods:
| Sr No. | Particulars | Period of Holding |
|---|
| 1 | Shares listed on a recognized stock exchange | 12 Months |
| 2 | Units of equity-oriented mutual funds | 12 Months |
| 3 | Listed securities such as debentures and bonds | 12 Months |
| 4 | Units of UTI | 12 Months |
| 5 | Zero Coupon Bonds | 12 Months |
| 6 | Unlisted shares of public companies | 24 Months |
| 7 | Land or building (or both) | 24 Months |
Exemptions from Capital Gains Tax
Several exemptions are provided under the Income Tax Act concerning capital gains, subject to specific conditions. Below are key sections and their stipulations:
Section 54
- Assessee: Individual or HUF
- Type of Gain: Long-term capital gain (LTCG)
- Asset Transferred: Residential house property
- Asset to be Procured:
- 1 residential house; or
- 2 residential houses if the capital gain exceeds ₹2 crores
- Conditions:
- Procurement must occur within 1 year before or 2 years after the transfer date, or construction within 3 years post-transfer.
- The option for two residential units is permitted only once in a lifetime.
Section 54B
- Assessee: Individual or HUF
- Type of Gain: LTCG
- Asset Transferred: Agricultural land
- Asset to be Procured: Agricultural land
- Conditions:
- The land must have been used for agricultural purposes for at least 2 years before the transfer.
- Procured within 2 years from the transfer date.
Section 54D
- Assessee: Any
- Type of Gain: LTCG
- Asset Transferred: Compulsory acquisition of land or building
- Asset Procured: Land or building for business
- Conditions:
- The asset must have been used for business for a minimum of 2 years before the transfer.
- Procurement deadline is 3 years from the transfer date.
Section 54EC
- Assessee: Any
- Type of Gain: LTCG
- Asset Transferred: Land or building
- Asset Procured: Long-term specified assets (e.g., bonds of NHAI or RECL)
- Conditions:
- Investment must occur within 6 months of the transfer.
- Maximum investment is ₹50 lakhs for the financial year of the asset transfer and the subsequent year.
- Lock-in period of 5 years.
Section 54EE
- Assessee: Any
- Type of Gain: LTCG
- Asset Transferred: Any asset
- Asset Procured: Long-term specified asset (currently not notified)
- Conditions:
- Investment must occur within 6 months of the transfer.
- The same investment limits and lock-in conditions apply as in Section 54EC.
Section 54F
- Assessee: Individual or HUF
- Type of Gain: LTCG
- Asset Transferred: Any asset other than residential house property
- Asset Procured: 1 residential house
- Conditions:
- Procurement must occur within 1 year before or 2 years after the transfer date, or construction within 3 years.
- Exemption conditions apply if the assessee holds more than one residential house or purchases a new residential house within specified periods.
Section 54G and 54GA
- Assessee: Any
- Type of Gain: LTCG
- Assets Transferred: Land, building, plant, or machinery for business use
- Conditions:
- Relates to shifting an undertaking from urban areas or to a Special Economic Zone (SEZ).
- The time limits for procurement are consistent with prior sections.
Important Note on Investment of Capital Gains
For Sections 54, 54B, 54D, 54F, 54G, and 54GA, if the capital gains or net sales consideration are not reinvested in the specified assets by the due date for filing the return under Section 139(1), the assessee must deposit the amount in a Capital Gains Deposit Account Scheme with designated banks or institutions. If the amount remains unutilized within the prescribed time frame, it will be treated as a capital gain and will be liable to tax under Section 45 in the assessment year following the expiration of the relevant time period.