Question 4 (b)
Capital gains on land, gold and debentures with the exemption for a new house
12 marks
- Time to write
- About 24 minutes
- Topic
- Capital gains
- Notes
- Crux notes
Question
Question 4 (b) · 12 marksMr. X gave these details of capital assets he transferred during the tax year 2026-27.
| Item | Urban Land | Gold | Debentures |
|---|---|---|---|
| Purchase date | 20/02/1998 | 10/10/2024 | 13/07/2021 |
| Acquisition cost | 600000 | 400000 | 200000 |
| Fair Market Value on 01/04/2001 | 1050000 | - | |
| Improvement cost (Feb. 2001) | 100000 | - | |
| Consideration on sale | 4000000 | 900000 | 450000 |
| Transfer date | 05/06/2026 | 07/09/2026 | 01/02/2027 |
| Urban Land: stamp value | 4450000 | - | - |
| Transfer expense | 50000 | 5000 | 10000 |
A new house was bought by Mr. X on 01/01/2027 for Rs. 3500000, and he bought REC bonds (redeemable after 5 years) of Rs. 500000 in special capital gain account on 03/08/2027. For the tax year 2026-27, compute taxable capital gains.
| Year | 2001-02 | 2021-22 | 2024-25 | 2026-27 |
|---|---|---|---|---|
| Index (CII) | 100 | 280 | 317 | 348 |
Paper note: Set under the Income-tax Act, 1961 for assessment year 2024-25 (previous year 2023-24); answered under the Income-tax Act, 2025 for tax year 2026-27, so the year term moves forward by 3 years and every date in the question moves forward by the same 3 years, so that intervals, holding periods and ages are as printed. Every figure and name is as printed. Dates on or before a date fixed by the law (20/02/1998; Feb. 2001) stay as printed, so that their relation to it is as printed; a holding period that starts on such a date is 3 years longer than printed. "Bought REC bonds... in special capital gain account" is as printed; the bonds are read as bought on the date given, more than six months after the transfer of the land. The debentures are read as unlisted. The fair market value date (01/04/2001) and the index base year (2001-02 = 100) are fixed by the law and are not moved. The other index years move with the dates; their figures are the paper's own, not the published index for the moved years.
Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- computeHead by head: each income under its head, exempt items marked exempt, then the deductions and the tax.
Write it in this order
- Read the data; note exactly what is asked 2 min
- 1 Nature of each gain including section 76 for unlisted debentures 3 marks 5 min
- 2 Gain on land: stamp duty value, fair market value, improvement 3 marks 5 min
- 3 Section 86 exemption and the REC bonds 3 marks 5 min
- 4 Gold, debentures and total 3 marks 5 min
- Check: arithmetic, units (₹, %), final answer underlined 2 min
Try it first. About 24 minutes for 12 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
- The fair market value row is read as the land's fair market value on 1 April 2001, the date the law fixes as the base (section 90(9)); it is not above the land's stamp duty value on that date.
- The land was bought on 20/02/1998 and improved in February 2001, both before 1 April 2001; these dates are kept as printed. For an asset held before that date, only capital expenditure incurred on or after 1 April 2001 is a cost of improvement (section 90(1)(b)(i)), so the February 2001 improvement is ignored: the value on 1 April 2001 already includes it.
- Mr. X is a resident individual, the land is not a residential house, and on the date of transfer he owned no more than one residential house other than the new one, so section 86 (formerly section 54F) is available.
- The debentures are unlisted.
| Asset | Held from – to | Nature |
|---|---|---|
| Urban land | 20/02/1998 – 05/06/2026 (28 years) | Long-term |
| Gold | 10/10/2024 – 07/09/2026 (22 months, not more than 24) | Short-term |
| Debentures (unlisted) | 13/07/2021 – 01/02/2027 | Short-term whatever the period: an unlisted debenture transferred on or after 23 July 2024 (section 76(2)(b)) |
The stamp duty value (₹44,50,000) exceeds 110% of the consideration (₹44,00,000), so it is the full value of consideration (section 78(1); the 110% tolerance in section 78(1)(b) does not apply).
| Particulars | Rs. |
|---|---|
| Full value of consideration (stamp duty value) | 44,50,000 |
| Less: Expenses on transfer | 50,000 |
| Net | 44,00,000 |
| Less: Cost of acquisition: higher of cost ₹6,00,000 and fair market value on 1 April 2001 ₹10,50,000 | 10,50,000 |
| Less: Cost of improvement (February 2001, before 1 April 2001: ignored) | — |
| Long-term capital gain | 33,50,000 |
The land was acquired before 23 July 2024, so when the tax is computed, any excess of tax at 12.5% on this gain over tax at 20% on the gain computed with indexation is ignored (section 197(3)); that affects the tax, not the gain.
Exemption for the new house (section 86)
The new house (₹35,00,000, bought on 01/01/2027) is bought within two years after the transfer. Its cost is less than the net consideration, which is the consideration actually received less transfer expenses: ₹40,00,000 − ₹50,000 = ₹39,50,000 (the stamp duty value is deemed only for computing the gain: section 78(1)). So a proportion of the gain is exempt:
Exempt = ₹33,50,000 × ₹35,00,000 ÷ ₹39,50,000 = ₹29,68,354; taxable long-term gain = ₹33,50,000 − ₹29,68,354 = ₹3,81,646.
The bonds were bought on 03/08/2027, more than six months after the land was transferred on 05/06/2026 (the last date was 05/12/2026), so no exemption is available under section 85 (formerly section 54EC).
| Particulars | Gold Rs. | Debentures Rs. |
|---|---|---|
| Sale consideration | 9,00,000 | 4,50,000 |
| Less: Expenses on transfer | 5,000 | 10,000 |
| Less: Cost of acquisition | 4,00,000 | 2,00,000 |
| Short-term capital gain | 4,95,000 | 2,40,000 |
Taxable capital gains for tax year 2026-27
| Particulars | Rs. |
|---|---|
| Long-term capital gain on urban land after the section 86 exemption | 3,81,646 |
| Short-term capital gain on gold | 4,95,000 |
| Short-term capital gain on debentures (section 76) | 2,40,000 |
| Taxable capital gains | 11,16,646 |
The long-term gain is taxed at 12.5% (section 197, subject to section 197(3)); the short-term gains are taxed at the slab rates.
Where the 12 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Nature of each gain (including section 76 for unlisted debentures) | 3 |
| 2 | Gain on land: stamp duty value, fair market value, improvement | 3 |
| 3 | Section 86 exemption and the REC bonds | 3 |
| 4 | Gold, debentures and total | 3 |
| Total | 12 |
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