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Deemed Transfer – Transactions Covered under Law

No sale, but still capital gains tax? Convert property to stock-in-trade → Deemed transfer! HUF partition → Deemed transfer! Even zero consideration transactions can trigger tax. Let's decode these 7 special scenarios.

What is Deemed Transfer?

Transfer without actual sale

Section 2(47): Certain transactions treated as transfer even though not sold

Result: Capital gains tax payable (even if no cash received!)

7 Types of Deemed Transfer

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1. Conversion of Capital Asset to Stock-in-Trade

Most important deemed transfer!

Scenario: Asset held as investment converted to business stock

Example:

Mr. Sharma:

  • Bought plot: ₹50 lakh (2018) - held as investment
  • FY 2024: Started real estate business
  • Converted plot to stock-in-trade

Tax Impact:

  • Deemed transfer at Fair Market Value (FMV) on conversion date
  • FMV: ₹1.2 crore

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Even though NOT sold! Tax payable in year of conversion.

For business: Stock value = ₹1.2 cr (FMV becomes new cost)

Why tax?: Prevent abuse (hold as investment, convert to stock, sell without capital gains tax)

2. Partition of HUF Property

HUF (Hindu Undivided Family) property distributed to members

Tax on HUF: No capital gain on partition (exempt)

Tax on individual members receiving property: Also no capital gain (specific exemption)

BUT: When member later sells the property:

Cost: HUF's original cost (carry-forward)

Example:

HUF property:

  • HUF purchased: ₹30L (2010)
  • Partitioned in 2020 (3 members)
  • Mr. Kumar got 1/3rd share → ₹10L cost (1/3rd of ₹30L)

No tax in 2020 (partition exempt)

If Kumar sells in 2024 for ₹60L:

  • Cost: ₹10L (indexed from 2010)
  • Sale: ₹60L
  • Capital gain taxable

3. Joint Development Agreement (JDA)

Developer agreement: Landowner gives land, developer builds, shares flats

Example:

Mrs. Verma:

  • Owns land: ₹50 lakh (FY 2015-16)
  • JDA with builder (FY 2024-25)
  • Gets 3 flats worth ₹2 crore
  • Builder gets remaining flats

Tax Treatment:

Year of JDA (FY 2024-25):

  • Deemed transfer of land
  • Consideration: FMV of 3 flats received (₹2 cr)

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Tax payable in JDA year (even though flats not yet sold!)

Section 45(5A): Tax can be deferred till flats are sold (if conditions met)

4. Compulsory Acquisition by Government

Government takes property for public purpose (highway, metro)

Deemed transfer on compensation receipt

Example:

Land acquired for Metro:

  • Original cost: ₹40L
  • Compensation: ₹1.5 cr (FY 2024-25)

Taxable in FY 2024-25 as capital gain

Enhanced compensation received later (FY 2026-27):

  • Taxable in year received (FY 2026-27)

Exemption: Can invest in Section 54EC bonds (₹50L), Section 54D (new land/building for business)

5. Extinguishment of Rights

Rights in asset cease to exist

Example:

Tenancy rights extinguished:

  • Tenant had tenancy rights worth ₹20L
  • Landlord pays ₹50L to extinguish rights
  • Deemed transfer for tenant
  • Taxable gain: ₹50L - ₹20L = ₹30L

Another example:

Trademark rights surrendered for ₹10L

  • Original cost: ₹2L
  • Gain: ₹8L (capital gain)

6. Maturity/Redemption of Zero-Coupon Bonds

Zero-coupon bonds mature

Issue price: ₹80 Maturity value: ₹100

Difference (₹20): Capital gain on maturity

(Less common, mostly corporate bonds)

7. Relinquishment of Rights in Immovable Property

Give up your share in property

Example:

Two brothers co-own flat (50-50):

  • Brother A pays Brother B ₹60L
  • Brother B relinquishes his 50% share

For Brother B:

  • Deemed transfer of his 50% share
  • Consideration: ₹60L
  • Cost: 50% of original flat cost
  • Capital gain taxable

Not Deemed Transfer (Exempt)

Following are NOT deemed transfer:

1. Gift to relative: No capital gain (but recipient gets same cost)

2. Inheritance (death transfer): No capital gain for deceased

3. Distribution on liquidation: Company liquidation (different provisions)

4. Transfer to 100% subsidiary: Special exemption (conditions apply)

Tax Planning for Deemed Transfer

JDA - Section 45(5A) Deferral

Option: Defer tax till flats are sold

Conditions:

  • Individual/HUF landowner
  • Residential/commercial building constructed
  • JDA registered

Example:

  • JDA in 2024 → Defer tax
  • Flat-1 sold in 2026 → Pay proportionate tax
  • Flat-2 sold in 2028 → Pay proportionate tax

Benefit: Pay tax when you have cash (from flat sale), not at JDA time!

Conversion - Timing

Plan conversion in lower tax bracket year

Example: Convert in year when you have business loss (to set off capital gain)

Comparison Table

TransactionDeemed Transfer?Tax Event
Conversion to stockYesAt FMV, capital gain in conversion year
HUF partitionNoExempt (but later sale taxed)
JDAYesAt FMV of flats, can defer under 45(5A)
Compulsory acquisitionYesOn compensation receipt
Gift to relativeNoExempt
ExtinguishmentYesCompensation received

Summary

  • Deemed transfer: Transactions treated as transfer even without actual sale (Section 2(47))
  • Conversion to stock-in-trade: Capital asset → business stock = deemed transfer at FMV (taxed as capital gain)
  • HUF partition: NOT deemed transfer (exempt), but subsequent sale by member taxed using HUF's original cost
  • JDA (Joint Development Agreement): Land given to builder for flats = deemed transfer at FMV of flats received
  • Section 45(5A): JDA tax can be deferred till flats are sold (if conditions met)
  • Compulsory acquisition: Govt compensation = deemed transfer, taxed when compensation received
  • Extinguishment of rights: Tenant rights, trademark surrender = deemed transfer
  • Not deemed transfer: Gift to relative, inheritance, liquidation distribution
  • Tax trigger: Even with zero cash receipt, deemed transfer creates capital gains tax liability!

Quiz Time! 🎯

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Next Chapter: Cost of Acquisition - Detailed Rules! 📐

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