Hi,

In the current framework of the Indian Income Tax Act, there isn’t a broad exemption for capital gains under Section 10. In the past, there was an exemption for certain long-term capital gains on the sale of listed equity shares (under what was formerly known as Section 10(38)), but that benefit was withdrawn a few years back with subsequent amendments.

Today, capital gains—whether short-term or long-term—are generally taxed according to the provisions specific to capital gains (such as under Sections 112A for equity and the rules applicable to real estate, debt funds, gold, etc.). However, there are specific reliefs available when you reinvest your gains in a new asset (like under Sections 54, 54EC, or 54F), but these are separate from any exemptions that might have been provided under Section 10.

In short, under the current law, you won’t find a provision in Section 10 that exempts capital gains outright.

When an asset is transferred by way of gift, through a will, or by inheritance, the provisions for computing capital gains follow a “carry-forward” principle. This means:

• Cost of Acquisition:
  The cost that was originally incurred by the previous owner is carried forward. In other words, you will use the original purchase cost (plus any improvement costs, if applicable) paid by the previous owner rather than a market value or zero-cost.

• Holding Period:
  The holding period of the asset is also inherited from the previous owner. This is important because if the asset had already been held for a long period (thus qualifying as a long-term asset), it will continue to be treated as such in your hands. This can have a significant impact on the applicable tax rate and the availability of indexation benefits.

• Tax Implication:
  When you eventually sell the asset, the capital gain is computed by subtracting the inherited cost (adjusted for inflation, if applicable) from the sale proceeds. Even though you did not pay anything for the asset at the time of receiving it, the earlier cost and holding period remain in effect for tax purposes.

This approach ensures that the tax benefits achieved by holding an asset over the long term (such as lower long-term capital gains tax rates) are not lost when the asset is transferred by gift or inheritance.

According to Section 49(5) of the Income Tax Act, 1961, as inserted through the Income Declaration Scheme, 2016, the cost of acquisition of a capital asset declared under the scheme shall be deemed to be the fair market value (FMV) as on 1st June 2016.

Section 49(5) – Cost of Acquisition in case of Declaration under IDS, 2016:
“Where any capital asset has been declared under the Income Declaration Scheme, 2016, and the fair market value of such asset as on 1st June 2016 has been taken into account for the purposes of that Scheme, then, notwithstanding anything contained in this Act, the cost of acquisition of the asset shall be deemed to be such fair market value.”

If a person had any undisclosed income and used it to acquire a capital asset (such as land, property, or shares), they had an option to disclose it under the Income Declaration Scheme (IDS), 2016. This scheme allowed people to pay tax on undisclosed income and make their assets legally recognized.

1. Cost of Acquisition: The purchase price of the asset is ignored, and instead, the FMV as on 1st June 2016 is considered as its cost for capital gains purposes.

2. Impact on Capital Gains Calculation:

   • When the declared asset is later sold, capital gains will be calculated using FMV as of 1st June 2016 as the acquisition cost.

   • If the sale price is higher than this FMV, capital gains tax applies.

   • If the sale price is lower than the FMV, a capital loss may be claimed.

3. Benefit to Taxpayers: This provision ensures that individuals who declared their undisclosed assets under IDS, 2016, do not face double taxation when they sell the asset.

As per Section 55(2)(b) of the Income Tax Act, 1961, for a capital asset acquired before 1st April 2001, the taxpayer has a special option to calculate the cost of acquisition.

Section 55(2)(b) – Cost of Acquisition for Assets Acquired Before 1st April 2001:

“Where the capital asset became the property of the assessee before the 1st day of April, 2001, the cost of acquisition shall be deemed to be—
(i) the actual cost of acquisition of the asset; or
(ii) the fair market value (FMV) of the asset as on 1st April, 2001,
whichever is higher.”

Explanation in Simple Terms:

If you acquired a capital asset (such as land, a building, or unlisted shares) before 1st April 2001, you don’t have to stick to the original purchase price. Instead, you can choose to take the Fair Market Value (FMV) as on 1st April 2001, which could help reduce your capital gains tax liability.

How to Determine FMV (Fair Market Value) as on 1st April 2001?

1. For Land or Property: FMV can be determined through a registered valuer who assesses the asset’s value as of 1st April 2001.

2. For Listed Shares: FMV is generally taken as the highest price quoted on a recognized stock exchange on 1st April 2001.

3. For Other Assets: FMV can be determined based on market trends, valuation reports, or any government-approved reference rates.

The computation of Short-Term Capital Gain (STCG) is specified under Section 48 of the Income Tax Act, 1961. The key factor in determining whether a capital gain is short-term is the holding period of the asset.

Section 48 – Computation of Capital Gains:
“The income chargeable under the head ‘Capital Gains’ shall be the difference between the full value of consideration received or accruing from the transfer of a capital asset and the cost of acquisition of the asset and the cost of any improvement to the asset, as reduced by the expenditure incurred in connection with the transfer.”

Explanation:

1. Short-Term Capital Asset (STCA):

   • A capital asset held for 3 years or less is classified as a short-term asset.

   • For assets like immovable property (land or buildings), the holding period is 36 months.

   • For listed securities, shares, mutual funds, etc., the holding period is 12 months.

   • Other assets (e.g., jewelry, bonds, etc.) typically have a holding period of 36 months.

2. Computation of Short-Term Capital Gain (STCG):
   The capital gain is calculated as the difference between the sale consideration and the cost of acquisition of the asset. Unlike long-term capital gains, indexation is not applicable to short-term capital assets. However, the following factors must be considered:

   • Sale Consideration: This is the price you sold the asset for.

   • Cost of Acquisition: This is the original price you paid for the asset, including any additional costs incurred like brokerage fees, registration charges, etc.

   • Cost of Improvement: If you have made any improvements to the asset (like renovation, upgrades, etc.), these costs can also be included.

   • Expenditure on Transfer: This includes any expenses directly related to the sale, like brokerage fees, legal charges, etc.

3. Formula for STCG:

   STCG=Sale Consideration – (Cost of Acquisition+Cost of Improvement+Expenditure on Transfer)

4. Tax Rate:

   • The tax on Short-Term Capital Gains (STCG) depends on the type of asset. For listed securities or equity mutual funds, the tax rate is 15% (as per Budget 2025 changes).

   • For other assets (e.g., land, buildings), STCG is taxed at the applicable tax slab rates.