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Capital Asset & Transfer – Definition & Exclusions

Sold your car for ₹6 lakh - capital gain? Sold jewellery - taxable? Sold agricultural land in village - exempt? Understanding what is a capital asset and what is transfer determines your tax liability!

What is Capital Asset?

Section 2(14): Property of any kind held by assessee

Simple definition: Any asset you own = Capital Asset (with exceptions)

Includes:

  • House, flat, land
  • Shares, mutual funds, bonds
  • Jewellery, gold, paintings
  • Vehicles (car, bike)
  • Patents, trademarks
  • Business goodwill

Key phrase: "Property of ANY kind" - Very wide!

Exclusions from Capital Asset

NOT capital assets (Section 2(14) exceptions):

1. Stock-in-Trade

Assets held for business sale (not personal use)

Example:

  • Car dealer's cars in showroom → NOT capital asset (stock)
  • Your personal car → Capital asset ✅

Jeweler:

  • Gold in shop for sale → Stock (NOT capital asset)
  • Personal gold worn by jeweler → Capital asset

2. Personal Effects

Personal movable property (excluding jewellery, art, archaeological collections)

Examples of personal effects (NOT capital asset):

  • Clothes, furniture
  • Kitchen utensils
  • Books, personal computers
  • Spectacles, watches (non-gold)

Excluded from "personal effects" (ARE capital assets):

  • Jewellery (gold, silver, diamond) → Capital asset ✅
  • Artistic works, paintings → Capital asset ✅
  • Archaeological collections → Capital asset ✅

Why jewellery excluded?: High value, investment nature

3. Agricultural Land in Rural Area

Agricultural land in India (outside specified urban limits)

Conditions:

  • Must be agricultural land
  • NOT within: Municipal corporation limits, municipality limits (population > 10,000), specified areas

Example:

  • Farmland in village (20 km from city) → NOT capital asset (exempt!)
  • Plot in Bangalore city limits → Capital asset (taxable)

Urban area definition:

  • Municipal corporation area
  • Municipality with > 10,000 population
  • Within 2-8 km of municipality (depending on population)

4. 6.35% Gold Bonds 1977 / 7% Gold Bonds 1980

Specific government bonds issued (now mostly redeemed)

Reason: Government wanted to exclude from capital gains to encourage investment

5. Special Deposit Scheme 1981

Specific deposit scheme (historical)

6. Gold Deposit Bonds under Gold Deposit Scheme

Exemption for specified gold bonds

What is Transfer?

Section 2(47): Transfer includes:

7 modes of transfer:

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Types of Transfer (Detailed)

1. Sale

Most common transfer

Example:

  • Sell house for ₹80 lakh
  • Sell shares for ₹2 lakh
  • Transfer = Sale

2. Exchange/Barter

Asset given in exchange for another asset

Example:

  • Exchange your flat in Mumbai for flat in Pune
  • Both are transfers (both taxed!)

3. Relinquishment

Giving up rights in asset

Example:

  • You and brother jointly own plot
  • Brother pays you ₹50 lakh, you relinquish your share
  • Transfer (capital gain on ₹50L)

4. Extinguishment of Rights

Rights in asset cease to exist

Example:

  • Company shuts down, shares become worthless
  • Transfer (capital loss)

5. Compulsory Acquisition

Government acquires your property (for public use)

Example:

  • Highway project, government takes your land
  • Compensation: ₹1 crore
  • Transfer (capital gain taxable)

Enhanced compensation: Taxable in year RECEIVED

6. Conversion of Capital Asset into Stock-in-Trade

Asset held for investment → Converted to business stock

Example:

  • You buy plot for ₹50 lakh (investment)
  • Later, start real estate business
  • Convert plot to stock-in-trade
  • Transfer at Fair Market Value (deemed capital gain!)

7. Maturity/Redemption of Zero-Coupon Bonds

Bond matures, you receive payment

Transfer at maturity

Practical Examples

Example 1: Car Sale (Capital Asset)

Personal car purchased: ₹8 lakh (2020)

  • Sold: ₹4 lakh (2024)
  • Capital asset: Yes ✅
  • Transfer: Yes (sale)
  • Capital loss: ₹4 lakh (but can't set off against other income - personal use asset)

Example 2: Stock-in-Trade (NOT Capital Asset)

Cloth merchant sells 100 sarees:

  • Purchase: ₹2,000/saree
  • Sold: ₹3,000/saree
  • Profit: ₹1 lakh

Capital asset: NO (stock-in-trade) Income head: Business income (not capital gains)

Example 3: Gold Jewellery (Capital Asset)

Inherited gold from grandmother:

  • Fair value when inherited: ₹5 lakh
  • Sold: ₹8 lakh
  • Capital asset: Yes ✅ (jewellery excluded from "personal effects")
  • Capital gain: ₹3 lakh (taxable)

Example 4: Agricultural Land (Rural - NOT Capital Asset)

Agricultural land in village (50 km from city):

  • Purchased: ₹30 lakh
  • Sold: ₹60 lakh
  • Capital asset: NO (agricultural land in rural area)
  • Profit: ₹30 lakh EXEMPT (no capital gains tax!)

Example 5: Agricultural Land (Urban - Capital Asset)

Agricultural land inside Mumbai city limits:

  • Purchased: ₹2 crore
  • Sold: ₹5 crore
  • Capital asset: YES (within municipal corporation)
  • LTCG: ₹3 crore (taxable @ 20% with indexation)

What is NOT Transfer?

Following are NOT transfer (no capital gains tax):

1. Gift (to relative): No consideration → Not transfer for capital gains

  • But recipient gets same cost (carry-forward basis)

2. Distribution on liquidation: Company liquidation, assets distributed

3. Transfer by way of will: Inheritance (death transfer) → NOT taxable for deceased

4. Transfer to wholly-owned Indian subsidiary: Special exemption under conditions

Comparison Table

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Key Judicial Principles

Intention Test: If asset purchased with intention to resell → Stock-in-trade (business)

Example:

  • Bought 10 flats in 2 years, sold 8 within 1 year → Business (not capital gain)
  • Bought 1 flat, lived 5 years, sold → Capital asset (capital gain)

Number of transactions: Multiple frequent transactions → Business activity

Summary Table

Asset TypeCapital Asset?On Sale
Personal houseYesCapital Gains
Shares, MFYesCapital Gains
Jewellery, goldYesCapital Gains
Paintings, artYesCapital Gains
Personal carYesCapital Gains (loss not set-off)
Stock-in-tradeNoBusiness Income
Clothes, furnitureNoNot taxable (personal effects)
Agricultural land (rural)NoEXEMPT
Agricultural land (urban)YesCapital Gains

Summary

  • Capital Asset: Property of any kind held by assessee (Section 2(14)) - very wide definition
  • Exclusions: Stock-in-trade, personal effects (except jewellery/art), agricultural land (rural), specific govt bonds
  • Jewellery IS capital asset: Sale creates capital gain (exceptions to personal effects exclusion)
  • Agricultural land: Rural area NOT capital asset (exempt), urban area capital asset (taxable)
  • Transfer (Section 2(47)): Sale, exchange, relinquishment, extinguishment, compulsory acquisition, conversion to stock, bond maturity
  • Not transfer: Gift to relative, inheritance (will), certain liquidations
  • Stock-in-trade: Held for business sale, NOT capital asset, profit = business income
  • Intention test: Frequent transactions/resale intention = business, not capital gain

Quiz Time! 🎯

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Next Chapter: Deemed Transfer Provisions! 📜

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