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Income-tax Act, 1961 · Chapter IV: Computation of Total Income · E.—Capital gains

Section 45: Capital gains

The Income-tax Act, 1961 was repealed by the Income-tax Act, 2025 from 1 April 2026. The text is kept here because the judgments below apply it.

In plain words

Profits or gains from the transfer of a capital asset in the previous year are taxed under the head capital gains, as income of the year in which the transfer took place, unless one of the listed exemptions applies.

  • There must be a capital asset, a transfer, and a gain arising from that transfer.
  • Insurance money received for damage to or destruction of a capital asset by flood, riot, fire or enemy action is taxed as capital gains in the year it is received, under sub-section (1A).
  • When an owner converts a capital asset into stock in trade, the gain is taxed in the year the stock is sold, using the market value on the date of conversion, under sub-section (2).
  • Gains on securities held through a depository are taxed in the hands of the beneficial owner.
  • Other sub-sections deal with special cases such as compulsory acquisition and transfers by a partner to a firm.
  • If the cost of acquisition cannot be worked out at all, courts have held that the charge under this section fails.

A simplified explanation, prepared with AI assistance from the official text below and checked automatically against it for numbers and cross-references. The official text is the law and prevails over this summary. Not legal advice.

Read the in-depth explanation, with key Supreme Court rulings ↓

Official text

[(1)] Any profits or gains arising from the transfer of a capital asset effected in previous year shall, save as otherwise provided in [sections *** 54, *** [54B, [54D, [54E, [54EA, 54EB,] 54F, [54G and 54H]]]]], be chargeable to income-tax under the head —Capital gains‖, and shall be deemed to be the income of the previous year in which the transfer took place. [(1A) Notwithstanding anything contained in sub-section (1), where any person receives at any time during any previous year any money or other assets under an insurance from an insurer on account of damage to, or destruction of, any capital asset, as a result of—

(i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or

(ii) riot or civil disturbance; or

(iii) accidental fire or explosion; or

(iv) action by an enemy or action taken in combating an enemy (whether with or without a declaration of war), then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the head —Capital gains‖ and shall be deemed to be the income of such person of the previous year in which such money or other asset was received and for the purposes of section 48, value of any money or the fair market value of other assets on the date of such receipt shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset.

Explanation.—For the purposes of this sub-section, the expression —insurer‖ shall have the meaning assigned to it in clause (9) of section 2 of the Insurance Act, 1938 (4 of 1938).] [(2) Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.] [(2A) Where any person has had at any time during previous year any beneficial interest in any securities, then, any profits or gains arising from transfer made by the depository or participant of such beneficial interest in respect of securities shall be chargeable to income-tax as the income of the beneficial owner of the previous year in which such transfer took place and shall not be regarded as

income of the depository who is deemed to be the registered owner of securities by virtue of sub-section (1) of section 10 of the Depositories Act, 1996, and for the purposes of—

(i) section 48; and

(ii) proviso to clause (42A) of section 2, the cost of acquisition and the period of holding of any securities shall be determined on the basis of the first-in-first-out method.

Explanation.—For the purposes of this sub-section, the expressions —beneficial owner‖, —depository‖ and —security‖ shall have the meanings respectively assigned to them in clauses (a), (e) and (l) of sub-section (1) of section 2 of the Depositories Act, 1996.] [(3) The profits or gains arising from the transfer of a capital asset by a person to a firm or other 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 previous year in which such transfer takes place and, for the purposes of section 48, the amount recorded in the books of account of the firm, association or body as the value of the capital asset shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.

(4) The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.]

(5) Notwithstanding anything contained in sub-section (1), where the capital gain arises from the transfer of a capital asset, being a transfer by way of compulsory acquisition under any law, or a transfer the consideration for which was determined or approved by the Central Government or the Reserve Bank of India, and the compensation or the consideration for such transfer is enhanced or further enhanced by any court, Tribunal or other authority, the capital gain shall be dealt with in the following manner, namely:—

(a) the capital gain computed with reference to the compensation awarded in the first instance or, as the case may be, the consideration determined or approved in the first instance by the Central Government or the Reserve Bank of India shall be chargeable as [income under the head —Capital gains‖ of the previous year in which such compensation or part thereof, or such consideration or part thereof, was first received]; and

(b) the amount by which the compensation or consideration is enhanced or further enhanced by the court, Tribunal or other authority shall be deemed to be income chargeable under the head —Capital gains‖ of the previous year in which such amount is received by the assessee: [Provided that any amount of compensation received in pursuance of an interim order of a court, Tribunal or other authority shall be deemed to be income chargeable under the head —Capital gains‖ of the previous year in which the final order of such court, Tribunal or other authority is made;]

[(c) where in the assessment for any year, the capital gain arising from the transfer of a capital asset is computed by taking the compensation or consideration referred to in clause (a) or, as the case may be, enhanced compensation or consideration referred to in clause (b), and subsequently such compensation or consideration is reduced by any court, Tribunal or other authority, such assessed capital gain of that year shall be recomputed by taking the compensation or consideration as so reduced by such court, Tribunal or other authority to be the full value of the consideration.]

Explanation.—For the purposes of this sub-section,—

(i) in relation to the amount referred to in clause (b), the cost of acquisition and the cost of improvement shall be taken to be nil;

(ii) the provisions of this sub-section shall apply also in a case where the transfer took place prior to the 1st day of April, 1988;

(iii) where by reason of the death of the person who made the transfer, or for any other reason, the enhanced compensation or consideration is received by any other person, the amount referred to in clause (b) shall be deemed to be the income, chargeable to tax under the head —Capital gains‖, of such other person.] [(5A) Notwithstanding anything contained in sub-section (1), where the capital gain arises 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 specified agreement, the capital gains shall be chargeable to income-tax as income of the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority; and for the purposes of section 48, the stamp duty value, on the date of issue of the said certificate, of his share, being land or building or both in the project, as increased by the consideration received in cash, if any, shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset:

Provided that the provisions of this sub-section shall not apply where the assessee transfers his share in the project on or before the date of issue of the said certificate of completion, and the capital gains shall be deemed to be the income of the previous year in which such transfer takes place and the provisions of this Act, other than the provisions of this sub-section, shall apply for the purpose of determination of full value of consideration received or accruing as a result of such transfer.

Explanation.—For the purposes of this sub-section, the expression—

(i) —competent authority‖ means the authority empowered to approve the building plan by or under any law for the time being in force;

(ii) —specified agreement‖ means a registered agreement in which a person owning land or building or both, agrees to allow another person to develop a real estate project on such land or building or both, in consideration of a share, being land or building or both in such project, whether with or without payment of part of the consideration in cash;

(iii) —stamp duty value‖ means the value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of an immovable property being land or building or both.‘.] [(6) Notwithstanding anything contained in sub-section (1), the difference between the repurchase price of the units referred to in sub-section (2) of section 80CCB and the capital value of such units shall be deemed to be the capital gains arising to the assessee in the previous year in which such repurchase takes place or the plan referred to in that section is terminated and shall be taxed accordingly.

Explanation.—For the purposes of this sub-section, —capital value of such units‖ means any amount invested by the assessee in the units referred to in sub-section (2) of section 80CCB.] 2. Ins. by Act 7 of 2017, s. 22 (w.e.f 1-4-2018).

Source: India Code (Legislative Department), the text of the Act as it stood before its repeal. Words in square brackets [ ] were inserted or substituted by later amending Acts, and *** marks words omitted by an amendment. The amendment footnotes are not reproduced here. Official text on India Code.

Understanding this section

Section 45 charges to tax the profits or gains from the transfer of a capital asset, as income of the year in which the transfer takes place. Its sub-sections deal with special cases such as insurance money for destroyed assets, conversion into stock in trade, compulsory acquisition, and distribution of assets by firms.

Charge and computation go together

The charge in section 45 works together with the computation rules in section 48. If an element of the computation, such as the cost of acquisition, cannot be worked out at all for a particular asset, the charge fails. This was the reason self generated goodwill escaped tax until Parliament specifically provided a cost of nil.

Transfer and accrual

Transfer is defined widely in section 2(47) and includes handing over possession under a contract of the kind in section 53A of the Transfer of Property Act. But tax is on gains that have actually accrued. Where a development agreement was never carried out and no consideration accrued, there was no capital gain to tax.

Firms and partners

Contributing a capital asset to a firm and distributing assets on dissolution were once outside the charge. Sub-sections (3) and (4) now tax them. Sub-section (4), in its earlier form, also covered revaluation of firm assets credited to retiring partners.

Key Supreme Court rulings

Common mistakes

  • Taxing a transaction where no gain has actually accrued.
  • Forgetting that section 45 depends on the section 48 computation working.

Read with: Section 48 Income-tax Act, 1961, Section 2 Income-tax Act, 1961, Section 53A Transfer of Property Act, 1882

Prepared with AI assistance as a study aid. Every ruling listed was checked against the Supreme Court's own judgments on this site, and quoted words appear in those judgments; linked names open the full judgment. Read the judgments themselves before relying on them. Not legal advice.

Supreme Court judgments citing the section 45