Section 45 of the Income-tax Act, 1961: Capital Gains Explained
Section 45 governs when profits or gains arising from a transfer of capital assets are chargeable to income tax. It also provides special timing and valuation rules for particular transactions.
Meaning of capital gains and taxable transfer
A capital asset is defined under section 2(14), subject to statutory exclusions. Transfer is defined broadly by section 2(47), including sale, exchange, relinquishment and specified other transactions. Section 47 excludes certain transfers from capital-gains chargeability. Section 48 prescribes the general computation method.
Section 45: Subsection-wise explanation
Section 45(1): General charge
Capital gains arising on transfer of a capital asset are ordinarily taxable in the year of transfer, subject to exclusions and reliefs. Section 2(14) defines capital asset and section 2(47) defines transfer.
Section 45(1A): Insurance for damaged or destroyed assets
Insurance proceeds or assets received for destruction or damage caused by specified natural events, riots, fire, explosion or enemy action may trigger capital gains in the year of receipt. The money received or fair market value of assets received is treated as consideration.
Section 45(1B): Specified unit-linked insurance policies
Amounts received under certain unit-linked insurance policies that do not qualify for exemption under section 10(10D) may be taxed as capital gains, with computation governed by prescribed rules. The Finance Act, 2025 amended the wording of this subsection with effect from 1 April 2026.
Section 45(2): Conversion into stock-in-trade
When a capital asset is converted into or treated as business stock, the capital gain is taxed in the year that stock is sold or otherwise transferred. Fair market value on the conversion date is deemed consideration for the capital gains calculation.
Section 45(2A): Depository securities
Where beneficial interests in dematerialised securities are transferred, the beneficial owner is taxable. First-in-first-out (FIFO) applies for determining cost and holding period.
Section 45(3): Capital contributed to a firm or association
When a partner or member transfers a capital asset to a firm, AOP or BOI as capital contribution or otherwise, the value recorded in the entity's books is deemed consideration for computing that transferor's capital gain.
Section 45(4): Reconstitution of firm, AOP or BOI
The current provision deals with money or capital assets received by a partner or member from a specified entity on reconstitution. The specified entity may incur capital gains under the statutory formula; section 9B can also apply independently. This replaces the older dissolution/distribution description in the uploaded page.
Section 45(5): Compulsory acquisition and enhanced compensation
Initial compensation for compulsory acquisition or certain government/RBI-approved transfers is generally taxed on receipt. Enhanced compensation is taxed when received, subject to the rule for interim court orders and later reductions.
Section 45(5A): Registered joint development agreements
For an individual or HUF transferring land or building under a qualifying registered development agreement, capital gains are generally taxed when a completion certificate is issued. An earlier transfer of the owner's project share disapplies this special timing rule.
Section 45(6): Repurchase of specified units
The difference between repurchase price and capital value of units covered by section 80CCB is deemed capital gains in the relevant year.
How capital gains are calculated
| Component | General treatment |
|---|---|
| Full value of consideration | Actual or deemed consideration under the applicable provision |
| Less transfer expenses | Expenses incurred wholly and exclusively in connection with transfer, where allowable |
| Less acquisition and improvement costs | Deduct as permitted under section 48 and applicable special rules |
| Result | Capital gain before applicable exemptions, set-offs and special adjustments |
For example, if taxable consideration is Rs. 20,00,000, eligible transfer expenses Rs. 50,000 and allowable acquisition cost Rs. 12,00,000, the illustrative gain is Rs. 7,50,000 before any other adjustments. This is not a tax-liability calculation.
Short-term and long-term capital gains
Classification depends on the asset and applicable holding-period rules under section 2(42A). Tax rates differ by asset, transaction date and taxpayer status. Following changes effective from 23 July 2024, many long-term gains are taxed at 12.5% without indexation, subject to specific exceptions and transitional protection for qualifying land or buildings of resident individuals and HUFs. Always check sections 112, 112A and other applicable provisions.
Exemptions and related provisions
Depending on eligibility, relief may be available under sections 54, 54B, 54D, 54EC, 54F, 54G and 54H. Related provisions include section 50C (stamp-duty valuation), section 50CA (certain unquoted shares), section 9B (specified entities) and section 194-IA (TDS on certain immovable-property transactions).
Frequently asked questions
Is every sale of property taxable under section 45?
No. The asset must be a capital asset and the transaction a taxable transfer. Exclusions, exemptions and special valuation rules may change the result.
When are capital gains taxed on a joint development agreement?
For qualifying registered agreements involving an individual or HUF, section 45(5A) generally defers taxation to the completion-certificate year, unless the owner transfers the project share earlier.
Does section 45(4) still deal with dissolution distributions?
The current provision addresses specified receipts on reconstitution. Section 9B separately addresses deemed transfers on dissolution or reconstitution.
Official law and guidance
Refer to the Income Tax Department's Section 45 page, the Income-tax Act, 1961 as amended by the Finance Act, 2025, and the official capital gains guidance. The Finance Act, 2025 amendment is relevant to section 45(1B).
This article explains the statutory framework for general information. The applicable tax year, legislation, notifications, treaty provisions and facts of each transaction must be checked separately.