What is not a capital asset (as set, 1961 Act, AY 2017-18)

The general rule

Section 2(14) defines a capital asset very widely: property of any kind held by the assessee, whether or not it is connected with his business or profession, and certain securities held by a Foreign Institutional Investor. Property includes any rights in or relating to an Indian company (section 2(14), Explanation). Anything not expressly excluded is therefore a capital asset.

Assets left out of the definition

The same clause excludes the following (section 2(14)(i) to (vi)):

1. Stock-in-trade, consumable stores and raw materials held for the assessee's business or profession (other than the Foreign Institutional Investor's securities). Gains on them are business income, not capital gains.
2. Personal effects: movable property, including wearing apparel and furniture, held for the personal use of the assessee or a dependent member of his family. This exclusion does not cover jewellery, archaeological collections, drawings, paintings, sculptures or any work of art, which remain capital assets. Jewellery includes ornaments of gold, silver, platinum or another precious metal or an alloy of one, and precious or semi-precious stones, even when set in furniture or sewn into clothing (Explanation 1).
3. Rural agricultural land in India: agricultural land is excluded unless it lies within a municipality or cantonment board with a population of 10,000 or more, or within an aerial distance of its limits of up to 2 km (population above 10,000 up to 1 lakh), 6 km (above 1 lakh up to 10 lakh) or 8 km (above 10 lakh); population is taken from the last census published before the previous year began (section 2(14)(iii)(a) and (b)). Agricultural land outside India is a capital asset.
4. Gold bonds: the 6½ per cent Gold Bonds, 1977, the 7 per cent Gold Bonds, 1980 and the National Defence Gold Bonds, 1980, issued by the Central Government (section 2(14)(iv)).
5. Special Bearer Bonds, 1991, issued by the Central Government (section 2(14)(v)).
6. Gold Deposit Bonds under the Gold Deposit Scheme, 1999, and deposit certificates under the Gold Monetisation Scheme, 2015, notified by the Central Government (section 2(14)(vi)); the Gold Monetisation certificates were added with effect from 1 April 2016, so they are excluded for assessment year 2017-18.

Why it matters

Capital gains arise only on the transfer of a capital asset (section 45(1)). So a gain on selling a personal car, household furniture or rural agricultural land in India is not taxed as a capital gain, while a gain on selling jewellery or a painting, even if held for personal use, is.