CruxIncome Tax Law and Practice

Business includes trade, commerce and manufacture, and any venture or concern of that nature, even a one-off one (s. 2(20)). Profession includes a vocation (s. 2(86)). The head covers (s. 26(2)):

• the profits of every business or profession carried on at any time during the tax year;
• compensation for ending or changing a management, agency or business contract;
• the value of any benefit or perquisite arising from the business or profession, in cash or in kind;
• a partner's interest, salary, bonus or commission from his firm, to the extent the firm was allowed to deduct it under s. 35(e);
• money for agreeing not to carry on an activity, or not to share know-how or similar rights;
• export incentives, sums under a Keyman insurance policy, and the market value of stock on the day it is turned into a capital asset;
• any sum received when an asset (other than land, goodwill or a financial instrument) whose whole cost was deducted under s. 46 is demolished, destroyed, discarded or transferred (s. 26(2)(k)).

Rent from letting a residential house is house property income, not business income (s. 26(4)). The income is worked out under ss. 28 to 60, except s. 58 (s. 27). Expenses incurred in relation to income that does not form part of total income are not deductible, even in a year in which no such income arises; where the Assessing Officer does not accept the assessee's figure, he works it out by the prescribed method (s. 14).

Speculation business. A speculative transaction is a contract to buy or sell a commodity, shares included, that is settled otherwise than by actual delivery (s. 66(31)). These are not speculative: a manufacturer's or merchant's hedge against price changes on his own delivery contracts; a dealer's or investor's hedge against a fall in his shareholdings; jobbing or arbitrage by a member of an exchange; and specified derivative trades. A speculation business is a separate business (s. 26(3)). Its loss is set off only against speculation profit and is carried forward for at most four tax years (s. 113).

Deemed profit (s. 38(1)(a)). If a loss, expense or trading liability was allowed in an earlier year and the assessee later recovers the amount, or the liability ends (writing it back in his own books counts), the benefit is business income of the year it arises, even if the business has closed.

Income is computed on the cash or the mercantile system, whichever the assessee regularly follows, subject to the income computation and disclosure standards (ICDS) that the Central Government notifies (s. 276(1)-(2)).

• Cash system: a receipt is income when received and an expense is allowed when paid. Fees of an earlier year received this year are this year's income; fees billed but not received are not.
• Mercantile system: income counts when it accrues and an expense when the liability is incurred, paid or not, except the sums in sub-topic 7.
• The Assessing Officer may assess to the best of his judgment (s. 271) if he is not satisfied that the accounts are correct or complete, or the method has not been followed regularly, or the ICDS have not been followed (s. 276(3)).

Stock (s. 277).

• Inventory is valued at actual cost or net realisable value, whichever is lower, worked out under the ICDS (s. 277(1)(i)).
• Purchases, sales and inventory include every tax, duty, cess or fee the assessee actually paid or incurred in bringing the goods to their present place and condition (s. 277(1)(ii)), even where the payment earns a credit (s. 277(4)).
• Securities held as stock: unlisted ones, and listed ones not quoted regularly, at the actual cost first recognised; others at cost or net realisable value, whichever is lower, compared category by category (s. 277(1)(iii)-(iv), (3)).

A closing stock shown too low, or an opening stock shown too high, understates the profit. Correct both ends.

Land or building held as stock-in-trade (s. 53). If a dealer sells it for less than its stamp duty value, the stamp duty value is taken as the sale price. The price stands if the stamp duty value is not more than 110% of it. If the agreement came before registration and some of the price was received by a specified banking or online mode on or before the agreement date, the value on that date may be used. A Valuation Officer reference is available as under s. 78(2)-(3).

The Act allows these expenses by name:

A contribution to any other fund, trust or body for employees is not deductible unless the Act provides for it or another law requires it (s. 29(3)).

Any other expense is allowed under the general deduction (s. 34(1)) if all four tests are met:

1. it is not of a kind dealt with by the specific sections (ss. 28 to 33, 44 to 49, 51 and 52);
2. it is not capital expenditure;
3. it is not a personal expense of the assessee;
4. it is spent “wholly and exclusively” for the business or profession.

Even when spent in the course of business, these are never treated as spent for it (s. 34(2)-(3)):

• spending for a purpose that is an offence or is prohibited by any law in India or abroad, including the cost of compounding an offence or of settling proceedings for breaking a notified law;
• a benefit or perquisite given to a person whose acceptance of it breaks the law, rules or guidelines that govern his conduct;
• corporate social responsibility spending required by section 135 of the Companies Act, 2013;
• an advertisement placed in a political party's souvenir, brochure, tract or pamphlet.

Depreciation is allowed on (s. 33(1)):

• tangible assets: buildings, machinery, plant and furniture;
• intangible assets acquired on or after 1 April 1998: know-how, patents, copyrights, trademarks, licences, franchises and like commercial rights, but never the goodwill of a business or profession.

Conditions:

• the assessee owns the asset, wholly or partly; capital work by a tenant on a rented building used for his business counts as a building he owns (s. 33(6));
• the asset is used for the business or profession; with part private use, only the fair business share fixed by the Assessing Officer is allowed (s. 33(3)(b));
• it is allowed whether or not the assessee claims it (s. 33(7)).

Method. Depreciation is a prescribed percentage of the written down value of each block of assets (s. 33(3)(a)). A block is a group of tangible, or of intangible, assets that carry the same prescribed rate (s. 2(17)). The rates are prescribed by rules, not by the Act; a question gives them. A power undertaking may instead take a prescribed percentage of actual cost (s. 33(2)).

Actual cost is the cost to the assessee less any part met by someone else, GST input credit claimed and allowed, and any subsidy for the asset (s. 39(1)). A payment above ₹10,000 in a day to one person for the asset, made otherwise than by a specified banking or online mode, is left out of its cost (s. 39(2)). Special cases (s. 39(4), Table):

If an asset already used in another person's business is bought mainly to claim depreciation on a higher cost, the Assessing Officer fixes its actual cost, with the Joint Commissioner's approval (s. 39(5)-(6)).

Half rate (s. 33(4)). An asset acquired during the tax year and put to use for less than 180 days in it gets half the prescribed rate.

Sale and the block. Sale proceeds only reduce the block. A short-term capital gain arises only when they exceed the opening value, the additions and the transfer expenses together (s. 74(2)). When every asset in the block is transferred and the block ends, the opening value plus the additions is the cost, and the result is a short-term capital gain or loss (s. 74(3)).

Change of owner during the year. On a succession, amalgamation or demerger, the depreciation of both parties together cannot exceed what the prescribed rates give, and it is shared by the number of days each used the assets (s. 33(5)).

Additional depreciation (s. 33(8)-(9)).

• Who: an assessee manufacturing or producing an article or thing, or generating, transmitting or distributing power.
• On what: new plant or machinery that it acquires, installs and first puts to use for the business.
• Not on: a ship or aircraft; machinery used by anyone before, in India or abroad; machinery put up in an office or in living quarters, guest houses included; office appliances; road transport vehicles; an asset whose whole cost is deducted in a single year.
• How much: 20% of actual cost; if used for less than 180 days in the year, 10% now and 10% next year.
• Under the default regime of s. 202, which applies to an individual, HUF, association of persons, body of individuals or artificial juridical person unless it opts out, it is not allowed (s. 202(2)(a)(vi)); normal depreciation still is.

Unabsorbed depreciation. Depreciation is allowed only up to the profit computed before it, and not at all if that figure is a loss. The part not allowed is added to next year's depreciation, and so on with no time limit; a brought-forward business loss is set off first (s. 33(11), s. 112(3)).

Scientific research (s. 45).

• Revenue spending, and capital spending other than on land, on scientific research related to the business is deducted in full in the year (s. 45(1)(a)).
• Before the business starts: salaries of research staff and research materials in the three years before commencement, to the extent the prescribed authority certifies, and capital spending in those three years, count as spent in the year the business starts (s. 45(1)(b)-(c)).
• A company in biotechnology, or manufacturing an article not listed in Schedule XIII, deducts its spending (other than on land or building) on an approved in-house research facility (s. 45(2)).
• Sums paid to an approved research association, university, college or institution for scientific, social science or statistical research, to an approved Indian research company, or to a national laboratory, a university, an IIT or an approved person for an approved programme, are deductible (s. 45(3)-(4)); not under the default regime (s. 202(2)(a)(ix)).
• No depreciation is allowed on an asset whose cost was deducted here (s. 45(6)); an unabsorbed capital deduction is carried forward like depreciation (s. 45(7)).
• If a research asset is sold without having been used for other purposes, the sale price plus the deductions allowed, less its cost, is business income, but not more than the deductions allowed (s. 38(1)(c)).

Specified business (s. 46). The assessee may choose to deduct the whole capital expenditure of the year on a specified business, such as a cold chain facility, a warehouse for farm produce or sugar, a natural gas or oil pipeline network, a hotel of two-star category or above, a hospital of at least 100 beds, a notified slum-redevelopment or affordable-housing project, fertiliser production, an inland container depot, bee-keeping, an iron-ore slurry pipeline, a notified semiconductor wafer unit or a new infrastructure facility (s. 46(1), (11)(d)).

• Land, goodwill and financial instruments are left out, and so are payments above ₹10,000 a day to a person not made by a specified banking or online mode (s. 46(11)(g)).
• Spending before operations begin, if capitalised by then, is allowed in the year they begin (s. 46(2)).
• The business must not be formed by splitting up or reconstructing an existing business, or with machinery used before; used machinery up to 20% of the total value, and imported machinery never used in India and never depreciated, are permitted (s. 46(3), (11)(e)-(f)).
• The business must begin operations on or after the date the Table in s. 46(6) fixes for its kind (1 April 2009 where no other date is given).
• No Chapter VIII-C deduction is then allowed for that business (s. 46(4)). An asset so deducted must be used only for that business for eight years, or the deduction, less the depreciation that would have been allowed, becomes business income of the year of other use (s. 46(9)).
• Not available under the default regime (s. 202(2)(a)(x)).

Notified projects (s. 47). Spending, other than on land or building, on a notified agricultural extension project, or by a company on a notified skill development project, is deducted in the year; the agricultural one is not allowed under the default regime (s. 202(2)(a)(xi)).

Preliminary expenses (s. 44). An Indian company, or a resident person other than a company, deducts one-fifth of these expenses in each of five years, starting with the year the business starts (or, for an extension or a new unit, the year the extension is completed or the unit starts production):

• feasibility reports, project reports, market and other surveys, and engineering services for the business;
• legal charges for drafting agreements for setting up or running the business;
• for a company, also drafting and printing its memorandum and articles, registration fees, and public issue costs (underwriting commission, brokerage, prospectus);
• the total counted cannot exceed 5% of the cost of the project or, for an Indian company at its option, 5% of the capital employed (s. 44(4));
• a person other than a company or co-operative society must have the accounts of the year of spending audited (s. 44(6)).

Voluntary retirement and amalgamation (s. 52, Table). Payments to an employee under a voluntary retirement scheme are deducted in five equal yearly instalments from the year of payment (Sl. No. 2). An Indian company's expenses on an amalgamation or demerger are deducted in five equal instalments from the year it takes place (Sl. No. 1).

Tax on income (s. 35(a)). Income-tax, advance tax and any surcharge or cess on them are never deductible. Other taxes, such as GST, customs duty and municipal tax on business premises, are deductible, but only when paid (s. 37).

Tax not deducted at source (s. 35(b)-(c)). Where tax had to be deducted at source under Chapter XIX-B but was not, or was deducted and not paid by the due date of the return under s. 263(1):

If the payee has filed his return, included the sum in his income and paid the tax on it, and the payer furnishes an accountant's certificate to that effect, the payer is not in default (s. 398(2)) and the tax counts as deducted and paid on the date of the payee's return (s. 35(b)).

Payments to relatives and associates (s. 36(2)-(3)). Where the Assessing Officer finds a payment to a specified person excessive or unreasonable, judged by the market value of the goods, services or facilities, the legitimate needs of the business or the benefit it gets, he disallows the part he considers excessive. For an individual, specified persons are his relatives (husband or wife, brother, sister, and any lineal ascendant or descendant: s. 2(94)), anyone with a substantial interest in his business (at least 20% of its profits, or of the voting power where a company runs it), and concerns in which he or his relatives hold such an interest (s. 36(3)).

Cash payments (s. 36(4)-(7)).

• If a payment, or all payments to one person in one day taken together, exceed ₹10,000 and are not made by a specified banking or online mode (account payee cheque or draft, electronic clearing through a bank account, or another prescribed electronic mode: s. 66(32)), the whole expense is disallowed (s. 36(4)).
• The limit is ₹35,000 for payments for plying, hiring or leasing goods carriages (s. 36(6)).
• If an expense allowed in an earlier year on accrual is paid this year in cash beyond the limit, the payment is business income of this year (s. 36(5)).
• The rule does not apply in the cases the Rules prescribe, having regard to banking facilities, business expediency and other relevant factors (s. 36(7)).

Firms (s. 35(e)). A firm assessed as such cannot deduct:

• remuneration to a partner who is not a working partner (an individual actively engaged in conducting its business);
• remuneration to a working partner, or interest to any partner, that the partnership deed does not authorise, or that relates to a period before the deed;
• authorised remuneration to working partners above this ceiling, worked on the book profit (net profit computed under these rules, plus partners' remuneration debited): on the first ₹6,00,000 of book profit, or where there is a loss, ₹3,00,000 or 90% of book profit, whichever is higher; on the rest, 60%;
• authorised interest to partners above 12% simple a year.

These sums, though otherwise deductible, are allowed only for the tax year of actual payment, whatever the method of accounting and whichever year the liability arose in (s. 37(1)-(2)):

1. any tax, duty, cess, surcharge or fee under any law (GST, customs duty, municipal tax);
2. contributions the employer makes to a provident, superannuation or gratuity fund, or to any other fund for employees' welfare;
3. leave encashment payable by an employer;
4. bonus or commission to employees (s. 32(a));
5. interest on loans or borrowings from specified financial entities: public financial institutions, State Financial Corporations, State Industrial Investment Corporations, notified classes of non-banking financial companies, scheduled banks, and co-operative banks, except primary agricultural credit societies or primary co-operative agricultural and rural development banks (s. 37(7));
6. sums payable to the Indian Railways for using its assets;
7. a sum owed to a micro or small enterprise and paid later than section 15 of the MSMED Act, 2006 allows.

Grace to the due date (s. 37(3)). Items 1 to 6, paid after the year ends but on or before the due date for that year's return under s. 263(1), are allowed in that year. A late payment to a micro or small enterprise (item 7) is allowed only in the year of payment. The due dates (s. 263(1)(c), as substituted by Finance Act, 2026, s. 66) are 31 October for companies and those whose accounts must be audited, 31 August for other business or professional income, and 31 July for everyone else.

Further rules:

• Interest turned into a fresh loan, debenture or other instrument that postpones payment is not actually paid (s. 37(4)).
• A sum already allowed in the year of liability is not allowed again on payment (s. 37(5)).
• For a tax, duty, cess or fee, the sum payable is the liability incurred in the tax year, even if the law levying it makes it payable only later (s. 37(8)).
• Contributions recovered from employees fall outside s. 37 (s. 37(6)); they are allowed only if credited to the fund by the return's due date (s. 29(1)(e)).
• Item 2 covers payments to a fund. Gratuity paid straight to a retiring employee is not in it; a provision for gratuity that has become payable during the year is allowed (s. 29(1)(d)).

A bad debt, or part of one, written off as irrecoverable in the accounts of the tax year is deductible in that year (s. 31(2)) if:

• it was included in computing income of that year or an earlier year (a credit sale, for instance), or it is a loan made in the normal course of a banking or money-lending business that the assessee carries on (s. 31(2)(a)); and
• it is actually written off in that year's books.

Further rules:

• If part of a debt was allowed and the final recovery falls short of the rest, the shortfall is allowed in the year of final recovery (s. 31(2)(b)).
• A provision for bad and doubtful debts is not a write-off (s. 31(3)(a)), so an ordinary business adds it back. Only listed lenders (banks, co-operative banks other than the two kinds of primary society named in sub-topic 7, public financial institutions, State Financial and State Industrial Investment Corporations, non-banking financial companies) may deduct a provision, within the limits in s. 31(1), and they must set later write-offs against it first (s. 31(2)(c)).
• A debt taken into income under the ICDS but never entered in the accounts is allowed in the year it becomes irrecoverable (s. 31(3)(b)).
• A loan to a friend, or an advance paid for an asset, was never taken into income, so it fails the first condition unless it was lent in the course of a money-lending business.
• Recovery. If more is later recovered than the debt minus the amount allowed, the excess is business income of the year of recovery (s. 38(1)(d)), even if the business has closed (s. 38(5)).

Books (s. 62). These persons must keep the books and documents that let the Assessing Officer compute their income:

• every person carrying on a specified profession (s. 62(4)), whatever his income;
• any other business or profession whose income exceeded ₹1,20,000, or whose sales, turnover or gross receipts exceeded ₹10 lakh, in any one of the three preceding years (for a new business, if likely to in its first year); for an individual or HUF the figures are ₹2,50,000 and ₹25 lakh (s. 62(2)(a), (b), (d));
• an assessee under s. 58 who claims a profit lower than the deemed profit (s. 62(2)(c)).

Audit (s. 63). The accounts must be audited by an accountant, and his report furnished, before the specified date, one month before the due date of the return under s. 263(1), where:

• business turnover exceeds ₹1 crore; the limit is ₹10 crore if cash receipts and cash payments are each not more than 5% of the totals (cash here includes a cheque or draft that is not account payee: s. 63(5)(b));
• professional gross receipts exceed ₹50 lakh;
• an assessee under s. 58 claims a profit lower than the deemed profit.

No audit is needed where the profit declared follows s. 58(2) (s. 63(2)).

Section 58 deems a fixed income for three kinds of business, and the normal rules of ss. 26 to 54 give way to it where they conflict (s. 58(1)). In each, the income is the deemed figure or the higher profit the assessee claims to have actually earned.

Eligible assessee (s. 58(11)(a), as amended by Finance Act, 2026, s. 40): a resident individual, HUF or firm (not an LLP) that has claimed no deduction under Chapter VIII-C for the year and does not carry on a specified profession, earn commission or brokerage, or run an agency business.

Specified profession (s. 62(4)): law, medicine, engineering, architecture, accountancy, technical consultancy, interior decoration, information technology, company secretaryship, and any other profession the Board notifies.

Rules common to the schemes:

• No further deduction, allowance or loss, depreciation included, is set against the deemed income (s. 58(4)); the written down value of assets is worked out as if depreciation had been allowed every year (s. 58(6)).
• For Sl. Nos. 1 and 3, cash includes a cheque or bank draft that is not account payee (s. 58(9)).
• Claiming a profit below the deemed figure, with total income above the exemption limit, means keeping books (s. 62) and an audit (s. 63) (s. 58(3)).
• Under Sl. Nos. 1 and 3 the whole advance tax for the year is paid in one instalment, on or before 15 March (s. 408(2)).

Rules for one scheme:

• Sl. No. 1 has a lock-in: an assessee who uses it and then, in any of the next five years, declares profit outside it is barred for the five years after that year, and must keep books and be audited if his income exceeds the exemption limit (s. 58(7)-(8)).
• Sl. No. 2: a heavy goods vehicle has a gross vehicle weight above 12,000 kg (s. 58(11)(e)); a vehicle held on hire purchase or instalments counts as owned (s. 58(11)(f)); a firm may deduct partners' salary and interest within s. 35(e) (s. 58(5)); the books and audit sections do not apply to this business (s. 58(10)).

The schemes spare the assessee detailed books and an audit, give a simple and certain income figure, and in Sl. No. 1 reward digital receipts with the lower 6% rate.

1. Start with the net profit or loss shown by the profit and loss account.
2. Add back debits the Act does not allow: personal and capital spending, income-tax, provisions and reserves, book depreciation, amounts disallowed by ss. 35 to 37, and expenses of other heads (municipal tax on a let house).
3. Deduct credits that are not business income: income of other heads (rent of a let house, interest, dividends, capital gains) and receipts that are not income at all (an income-tax refund, a gift from a relative).
4. Deduct allowances not yet debited: depreciation under s. 33, the other allowances of sub-topic 5, and any s. 37 sum of an earlier year paid this year.
5. Correct the opening and closing stock.

A professional on the cash system starts instead from receipts: fees received for any year and presents from clients, less allowable payments. Leave out the opening balance, loans received, capital purchases (allow depreciation instead) and personal payments.

A business loss may be set off against income under any other head except salaries (s. 109(1)(a)); what remains is carried forward for up to eight tax years against business income only (s. 112).

The regime. Under the default regime (s. 202) an individual's business income gets no additional depreciation and none of the allowances of s. 45(3), s. 46 and s. 47(1)(a) (s. 202(2)(a)(vi), (ix)-(xi)); a loss or depreciation brought forward that came from those deductions cannot be set off (s. 202(2)(b)(i)); and most deductions from gross total income are lost (s. 202(2)(a)(xii)). A person with business income who wants the old regime must opt out by the due date of the return under s. 263(1); the choice then holds for later years, may be withdrawn only once, and after that cannot be made again unless he ceases to have business or professional income (s. 202(4)(a)).

Profits or gains on the transfer of a capital asset in a tax year are taxed under this head as income of that year, unless ss. 82 to 89 provide otherwise (s. 67(1)).

A capital asset is property of any kind held by the assessee, connected with his business or not (s. 2(22)). It does not include:

• stock-in-trade, consumable stores or raw materials held for business or profession;
• personal effects: movable property, clothes and furniture included, held for personal use by the assessee or a dependent family member; jewellery, archaeological collections, drawings, paintings, sculptures and other works of art are not personal effects, so they are capital assets;
• agricultural land in India outside an urban area (below);
• gold deposit bonds and gold monetisation deposit certificates notified by the Central Government.

Urban agricultural land is a capital asset: land inside a municipality or cantonment board with a population of 10,000 or more, or within the distance below, measured aerially from its limits. Population is taken from the last census published before the tax year began.

Transfer (s. 2(109)) includes a sale, exchange or relinquishment; the extinguishment of a right; compulsory acquisition under law; the owner's conversion of an asset into stock-in-trade of his business; the maturity or redemption of a zero coupon bond; and letting a buyer take possession of immovable property under a contract of the kind in section 53A of the Transfer of Property Act, 1882, or any arrangement that gives the enjoyment of immovable property.

Not transfers (s. 70(1)), the main cases:

• distribution of assets on a total or partial partition of a Hindu undivided family;
• a transfer by an individual or HUF under a will, a gift or an irrevocable trust;
• a transfer of a capital asset (not stock-in-trade) by a company to its wholly owned Indian subsidiary, or by a wholly owned subsidiary to its Indian holding company; the gain is taxed after all, as income of the year of transfer, if within eight years the transferee makes the asset stock-in-trade or the parent stops holding the whole share capital (s. 71(1));
• transfers in an amalgamation or demerger to an Indian company, and a shareholder's exchange of shares in one;
• conversion of a company's bonds, debentures or deposit certificates into its shares or debentures, and of its preference shares into equity shares;
• redemption of a Sovereign Gold Bond of the Reserve Bank of India (2015 scheme or later) held by an individual from the original issue to maturity (s. 70(1)(x), as substituted by Finance Act, 2026, s. 43);
• a work of art, an archaeological or scientific collection, a book, manuscript, drawing, painting, photograph or print given to the Government, a university, the National Museum, National Art Gallery or National Archives, or a notified public museum or institution;
• the takeover of a firm or a sole proprietorship by a company, or the conversion of a private or unlisted public company into an LLP, if all its business assets and liabilities pass over, the owners take nothing but shares (or, in the LLP, capital and profit shares) in proportion, and they keep at least 50% for five years; an LLP conversion also needs turnover of not more than ₹60 lakh and assets of not more than ₹5 crore in each of the three preceding years, and no payout of the accumulated profits for three years (s. 70(1)(zd)-(zf));
• a transfer under a notified reverse mortgage scheme, and lending of securities under SEBI or RBI guidelines.

A short-term capital asset is one held for not more than 24 months immediately before its transfer; for the assets in the first row below the period is 12 months (s. 2(101)(a)-(b)). Every other capital asset is a long-term capital asset (s. 2(67)).

Counting the period (s. 2(101)(c)):

• an asset received by gift, will, inheritance or partition includes the previous owner's holding;
• bonus shares and rights shares count from allotment; a right renounced counts from the date it was offered;
• a share in a company in liquidation stops counting when the liquidation begins;
• for securities held in a depository, cost and holding period follow the first-in first-out method (s. 67(7)(c)).

Short-term, however long held:

• an asset in a block of depreciable assets (s. 74(2)-(3));
• an unlisted bond or unlisted debenture transferred, redeemed or maturing on or after 23 July 2024, a market linked debenture, and a unit of a specified mutual fund (one investing more than 65% of its proceeds in debt and money market instruments) acquired on or after 1 April 2023 (s. 76).

No indexation is allowed here; indexed cost is used only for the tax ceiling in s. 197(3) (s. 72(2)). Securities transaction tax, and interest already claimed under house property or Chapter VIII, are not deductible (s. 72(3)).

The full value of consideration is normally the price received or receivable. Special cases:

• Land or building sold below its stamp duty value (s. 78). The stamp duty value is the value a Central or State Government authority adopts, assesses or would assess for stamp duty on the property (s. 2(105)). If the price is lower, the stamp duty value is taken instead, but:
  • if the stamp duty value does not exceed 110% of the price, the price stands (s. 78(1)(b));
  • if the agreement fixing the price was made before registration, the stamp duty value on the agreement date may be taken, provided some or all of the price was received by a specified banking or online mode on or before that date (s. 78(1)(a));
  • if the assessee claims the stamp duty value is above the market value on the date of transfer, and that value has not been disputed in appeal or revision or referred to another authority or court, the Assessing Officer may refer the valuation to a Valuation Officer; a valuation above the stamp duty value is ignored (s. 78(2)-(3)).
• Unquoted shares sold below their fair market value worked out by the prescribed method: that value (s. 79). A quoted share is one quoted regularly on a recognised stock exchange on current transactions.
• Price not ascertainable: the market value on the date of transfer (s. 80).

Where a fair market value is needed in this head (the 1 April 2001 value, for instance), the Assessing Officer may refer it to a Valuation Officer if a registered valuer's figure seems at variance with the market, or, in other cases, if the claimed figure falls short of market value by more than a prescribed margin or the nature of the asset makes a reference necessary (s. 91).

Cost of improvement (s. 90(1)-(2)) is capital spending on additions or alterations after the asset became the assessee's, or, for a gifted or inherited asset, the previous owner's. For an asset held since before 1 April 2001, only spending on or after that date counts. Spending deductible under another head is left out; for goodwill and similar rights it is nil.

Advance forfeited (s. 81). An advance received and kept by the assessee when an earlier deal for the asset fell through is deducted from its cost, unless it was taxed as income. Now an advance forfeited when the deal fails falls under income from other sources for the year it is forfeited (s. 92(2)(h)), so it is not deducted again. An advance kept by a previous owner is never deducted.

Indexation (s. 72(8)). Indexed cost of acquisition = cost × CII of the year of transfer ÷ CII of the first year the assessee held the asset, or of 2001-02 if that is later. Indexed cost of improvement = cost × CII of the year of transfer ÷ CII of the year of improvement. The Central Government notifies the cost inflation index (CII). The 2025 Act uses indexed cost only for the comparison in s. 197(3).

Conversion into stock-in-trade (s. 67(6)). The capital gain is taxed in the year the stock is sold, taking the market value on the date of conversion as the full value of consideration. The sale price above that value is business income.

Insurance money (s. 67(2)-(3)). Money or assets received from an insurer for damage to, or destruction of, a capital asset by flood, cyclone, earthquake or other natural calamity, riot or civil disturbance, accidental fire or explosion, or enemy action, are taxed in the year of receipt; the money and the market value of the assets on that date are the full value of consideration.

Unit linked insurance policy (s. 67(5)). A sum received, bonus included, under a ULIP that does not qualify for exemption under Schedule II, Sl. No. 2 is a capital gain of the year of receipt, computed in the prescribed manner.

Capital contribution to a firm (s. 67(9)). An asset brought into a firm, association of persons or body of individuals (not a company or co-operative society) in which the person is or becomes a partner or member is transferred in that year; the value recorded in the firm's books is the full value of consideration.

Dissolution or reconstitution of a firm (s. 8, s. 67(10)-(11)). The rules cover a firm, an AOP or a BOI, but not a company or a co-operative society. Reconstitution means a partner leaves, a partner joins while at least one old partner stays, or the partners' shares change (s. 8(6)).

• A capital asset or stock that a partner receives from the firm on its dissolution or reconstitution is treated as transferred by the firm in the year of receipt, at its market value on that day; the profit is the firm's business income or capital gain (s. 8(1)-(3)).
• On a reconstitution, money or assets the firm gives a partner are also the firm's capital gains to the extent they exceed his capital account: A = B + C − D, where B is the money, C the market value of the assets, and D his capital account balance, ignoring increases from revaluation or self-generated goodwill. A negative A is taken as nil (s. 67(10)).

Compulsory acquisition (s. 67(12)-(13)). These rules also cover a transfer whose price the Central Government or the Reserve Bank of India fixed or approved. The gain on the original compensation is taxed in the year it, or part of it, is first received. Enhanced compensation is taxed in the year it is received, with nil cost; an enhancement paid under an interim order is taxed in the year of the final order; a later reduction leads to recomputation. If the enhancement reaches another person (an heir, for instance), it is taxed in his hands.

Joint development (s. 67(14)-(16)). An individual or HUF who, by a registered agreement, allows a developer to build on his land or building in exchange for a share in the project is taxed in the year the completion certificate for the project, or part of it, is issued. The full value of consideration is the stamp duty value of his share on that date plus any money received. If he transfers his share on or before that date, the gain is taxed in the year of that transfer under the normal rules.

Liquidation (s. 68). A company's distribution of assets on liquidation is not a transfer by it. The shareholder is taxed on the money and the market value of other assets received, less the part assessed as dividend under s. 2(40)(c).

Buy-back of shares (s. 69, as amended by Finance Act, 2026, s. 42). What a company pays to buy back its own shares or other specified securities, less their cost, is the holder's capital gain of the year of the buy-back; the clause that treated buy-back payments as dividend, s. 2(40)(f), is omitted by Finance Act, 2026, s. 35. A promoter pays additional income-tax on such a gain: 2% (promoter a domestic company) or 10% (any other promoter) on a short-term gain within s. 196, and 9.5% or 17.5% on a long-term gain within s. 197 or s. 198. For a listed company, a promoter is one under the SEBI buy-back regulations; for any other company, a promoter under the Companies Act, 2013 or anyone holding, directly or indirectly, more than 10% of its shares (s. 69(3)).

Slump sale (s. 77). A slump sale is the transfer of one or more undertakings for a lump sum, with no values assigned to the individual assets and liabilities (s. 2(103)). The gain is long-term, but short-term if the undertaking was owned and held for 36 months or less. Its net worth (assets less book liabilities, ignoring revaluation; depreciable assets at the written down value of their block, self-generated goodwill at nil, others at book value) is the cost of acquisition and improvement; the market value of its capital assets, worked out as prescribed, is the full value of consideration. An accountant's report on the net worth is required.

Conditions (s. 82(1)):

• the assessee is an individual or HUF;
• the gain is long-term and arises on a residential house (buildings or the land appurtenant to them) whose income is taxable under "Income from house property";
• one residential house in India is bought within one year before or two years after the transfer, or built within three years after it.

The gain is exempt up to the cost of the new house; any excess is taxed (s. 82(1)(i)-(ii)).

• Two houses: if the gain does not exceed ₹2 crore, the assessee may choose two houses in India instead of one, but only once ever (s. 82(5)-(6)).
• Caps: cost of the new asset above ₹10 crore is ignored (s. 82(7)); for the deposit, gain above ₹10 crore is ignored (s. 82(8)).
• Gain not yet used: deposit it under the scheme (sub-topic 11).
• New house sold within three years of its purchase or construction: its cost for that sale is nil if the original gain exceeded its cost, and otherwise is reduced by the gain (s. 82(1)(i)-(ii)). The exemption is not reversed; the larger gain on the new house does the work.

Conditions (s. 83(1)):

• the assessee is an individual or HUF;
• the land transferred was used for agricultural purposes by him or a parent, or by the HUF, in the two years just before the transfer; short-term and long-term gains both qualify;
• other land for agricultural purposes is bought within two years after the transfer.

The gain is exempt up to the cost of the new land. If the new land is transferred within three years of purchase, its cost is nil or reduced, as under s. 82. A gain not used before the return is filed goes into the deposit scheme, and any part still unused when the two years end is taxed in that year (s. 83(2)-(4)). Only urban agricultural land gives a gain to exempt in the first place.

Conditions (s. 85):

• any assessee;
• a long-term capital gain on land or building or both;
• invested within six months after the transfer in a long-term specified asset, that is, a bond issued from 1 April 2018, redeemable after five years, and issued by the National Highways Authority of India, by the Rural Electrification Corporation Limited, or as any other bond the Central Government notifies (s. 85(6)).

The gain is exempt up to the amount invested (s. 85(1)). The investment counted, from one or more transfers, cannot exceed ₹50 lakh in a tax year, nor ₹50 lakh across the year of transfer and the next tax year together (s. 85(2)).

• Lock-in: a sale of the bonds, or their conversion into money, within five years of acquisition makes the exempt gain long-term capital gain of that year; borrowing against them counts as conversion on the date of the loan or advance (s. 85(3)-(4)).
• No deduction under s. 123 is allowed for the same investment (s. 85(5)).
• There is no deposit scheme: the bonds themselves must be bought within six months.

Conditions (s. 86(1), (5)):

• the assessee is an individual or HUF;
• the asset transferred is long-term and is not a residential house (land, shares, gold, a shop);
• one residential house in India is bought within one year before or two years after the transfer, or built within three years after it;
• there is no exemption if, on the date of transfer, he owns more than one residential house besides the new one, or within one year after the transfer buys, or within three years builds, another house, where the income from that other house (not the one he owned on the transfer date) is taxable under house property.

Net consideration is the full value of consideration less transfer expenses (s. 86(10)).

• Caps: cost above ₹10 crore is ignored (s. 86(8)); net consideration above ₹10 crore is ignored for the deposit (s. 86(9)).
• Withdrawal: if he buys another house within two years, or builds one within three years, after the transfer (its income taxable under house property), the exempt gain is long-term gain of that year (s. 86(6)). A transfer of the new house within three years of buying or building it makes the exempt gain long-term gain of the year of that transfer (s. 86(7)), on top of the gain on the new house itself.

For ss. 84, 87 and 88 the deposit scheme applies, and the cost of the new asset is cut if it is transferred within three years. An urban area for ss. 87 and 88 is one within a municipal corporation or municipality that the Central Government declares urban (s. 87(5)).

The reinvestment exemptions (ss. 82, 83, 84, 86, 87 and 88) allow for money not yet spent. Whatever has not been used for the new asset before the return is filed must be:

• deposited in a specified bank or institution and used as the scheme notified by the Central Government requires;
• deposited before the return is filed and not later than the due date of the return under s. 263(1); and
• shown by attaching the proof of deposit to the return (s. 82(2), s. 83(2), s. 86(2)).

The amount spent plus the amount deposited is treated as the cost of the new asset, so the exemption is given at once (s. 82(3), s. 83(3), s. 86(3)). If the deposit is not fully used in time:

The unused amount may then be withdrawn under the scheme (s. 82(4), s. 83(4), s. 84(4), s. 86(4), s. 87(4), s. 88(4)). Where the transfer is a compulsory acquisition and the compensation arrives later, the periods in ss. 82 to 86 run from the date it is received (s. 89). The bond exemption (s. 85) has no deposit facility.

Health and education cess at 4% is added to the tax (Finance Act, 2026, s. 3(15)).

• Exemption limit. For a resident individual or HUF whose other income is below the basic exemption limit, the shortfall is first taken off the gains taxed at the rates of ss. 196 to 198 (s. 196(2), s. 197(2), s. 198(3)). These rates apply in both regimes; the limit is that of the regime used: ₹4,00,000 under s. 202; under the old regime ₹2,50,000, or ₹3,00,000 for a resident aged 60 to 79 and ₹5,00,000 for one aged 80 or more (Finance Act, 2026, First Schedule, Part I-B).
• Indexation ceiling (s. 197(3)). For a resident individual or HUF transferring land or a building acquired before 23 July 2024, work out the tax both ways: 12.5% on the gain without indexation (A), and 20% on the gain with indexed cost (B). If A exceeds B, the excess is ignored.
• The condition of securities transaction tax paid on purchase may be waived by notification for some kinds of acquisition (s. 198(5)).
• No Chapter VIII deduction (s. 123 included) is allowed against long-term gains or s. 196 short-term gains (s. 196(4), s. 197(5), s. 198(6)); it is allowed against other short-term gains.
• The rebate under s. 156 cannot reduce the tax on s. 198 gains (s. 198(7)).
• Losses. Short-term capital losses can absorb any capital gain, long-term ones only long-term gains (s. 108(2)); neither can be set against another head (s. 109(2)); the balance is carried forward for eight tax years on the same terms (s. 111).

Do this for each asset, then group the results by rate: s. 196 short-term, other short-term, s. 198 long-term and other long-term. Show each taxpayer separately.