Income tax law / Capital gains
Section 47A of Income-tax Act, 1961: Withdrawal of Capital Gains Exemption
Section 47A explains when an earlier capital gains non-recognition benefit under Section 47 is withdrawn because prescribed conditions are breached. This guide covers the eight-year rule, corporate succession, firm-to-company conversion, company-to-LLP conversion and the corresponding provision in the Income-tax Act, 2025.
What is withdrawal of exemption under Section 47A?
Section 47 identifies specified transactions that are not treated as transfers for purposes of the capital gains charge under Section 45. Some exclusions are conditional. Section 47A provides the consequences when specified conditions cease to be satisfied, including cases where the breach occurs years after the original transaction.
Capital asset broadly refers to property of any kind held by an assessee, subject to statutory exclusions under Section 2(14). Stock-in-trade is property held for sale in the ordinary course of business rather than as an investment capital asset. Successor company means the company that takes over the predecessor business in a qualifying succession. A limited liability partnership (LLP) is a separate legal entity formed under the Limited Liability Partnership Act, 2008.
Section 47A of the Income-tax Act, 1961: Subsection-wise explanation
Section 47A(1): Transfers between holding and subsidiary companies
Where a capital asset was transferred under Section 47(iv) or 47(v), the non-recognition benefit may be withdrawn if, within eight years of the original transfer, either (a) the transferee converts the asset into stock-in-trade or treats it as such, or (b) the required 100% holding of the subsidiary share capital ceases.
The earlier untaxed gain is deemed to be capital gains of the previous year in which the original transfer took place, not simply the year of breach. The assessment may therefore require appropriate statutory recomputation or amendment procedures; Section 155(7B) is relevant under the 1961 Act.
Section 47A(2): Historical stock-exchange membership conversion
The historical provision concerns shares allotted in exchange for membership of a recognised stock exchange under Section 47(xi). If those shares were transferred within three years of the qualifying transfer, the previously untaxed gain was deemed taxable in the year in which the shares were transferred. This is a legacy, date-specific provision; it should not be treated as a general rule for present-day share transfers. The 2025 Act reorganises the operative withdrawal provisions and does not reproduce this subsection as a separate equivalent in Section 71.
Section 47A(3): Firm or proprietary concern succeeded by a company
Where a firm-to-company conversion under Section 47(xiii), or a sole-proprietor-to-company succession under Section 47(xiv), fails the applicable conditions, the gain previously excluded from capital gains taxation is deemed chargeable to the successor company in the year of non-compliance. Conditions may include transfer of all business assets and liabilities, restrictions on consideration, and continuity of prescribed voting power for five years.
Section 47A(4): Company converted into an LLP
Where the conditions attached to Section 47(xiiib) are not met, the previously excluded gains on assets, intangible assets or shares may become chargeable in the hands of the successor LLP or the shareholders of the predecessor company, as applicable, in the year the conditions fail.
Relevant conditions include continuity of assets and liabilities, the conversion of all shareholders into LLP partners, prescribed ownership and profit-sharing continuity, restrictions on other consideration, turnover and asset-value tests, and limits on distributions from accumulated profits. The conditions must be assessed against the law applicable to the transaction.
Section 47A versus Section 71 of the Income-tax Act, 2025
| Subject | 1961 Act | 2025 Act |
|---|---|---|
| Capital gains charging provision | Section 45 | Section 67 |
| Transactions not regarded as transfer | Section 47 | Section 70 |
| Withdrawal of non-recognition benefit | Section 47A | Section 71 |
| Holding/subsidiary eight-year condition | Section 47A(1) | Section 71(1), with Section 70(1)(c) and (d) |
| Firm or proprietary business succession | Section 47A(3) | Section 71(2), referencing Section 70(zd) and (zf) |
| Company-to-LLP conversion | Section 47A(4) | Section 71(3), referencing Section 70(ze) |
The corresponding 2025 Act provision retains the broad clawback concept but uses different numbering and a reorganised structure. The legal treatment of a particular transfer depends on the relevant tax year, transaction date, statutory conditions and savings provisions.
Illustrative examples of exemption withdrawal
Example 1: Subsidiary ceases to be wholly owned
Company A transfers a capital asset to its wholly owned Indian subsidiary Company B under an otherwise qualifying Section 47(iv) transaction. The asset has an illustrative tax cost of Rs. 20 lakh and an illustrative value of Rs. 50 lakh. Four years later, Company A sells enough shares in B that B is no longer wholly owned. Section 47A(1) may withdraw the earlier benefit. Assuming the taxable gain under the applicable capital gains computation rules is Rs. 30 lakh, the gain is attributed to the year of the original asset transfer, subject to the applicable law and reassessment or amendment procedure.
Example 2: LLP profit-sharing requirement breached
A qualifying company converts to an LLP. Two years later, the original shareholders' aggregate profit-sharing ratio falls below the prescribed minimum. The previously exempt gains may be taxable in the hands of the successor LLP or relevant former shareholders, depending on the asset or share transferred and the specific breach.
Practical compliance checklist
- Identify the original Section 47 clause and the corresponding withdrawal provision.
- Keep the original transfer deed, valuation, cost records and tax computations.
- Track ownership and voting-power continuity for the entire required period.
- Record any conversion of transferred capital assets into stock-in-trade.
- For firm/company/LLP conversions, retain financial statements, share allotments, partner capital accounts and profit-sharing records.
- Identify the correct year of taxability: under Section 47A(1) the original transfer year is relevant; under subsections (3) and (4) the year of breach is generally relevant.
- Check whether the 1961 or 2025 Act and applicable transitional provisions govern the event.
Frequently asked questions
Is every transfer under Section 47 permanently exempt?
No. Some non-transfer treatments depend on continuing statutory conditions. Section 47A may withdraw the benefit when those conditions are breached.
What is the eight-year rule under Section 47A(1)?
For specified holding-subsidiary transfers, conversion of the transferred capital asset into stock-in-trade or loss of wholly owned status within eight years can trigger withdrawal.
Which law applies from 1 April 2026?
Section 71 of the Income-tax Act, 2025 is the corresponding provision for the new regime. Earlier years and saved proceedings may continue to be governed by the 1961 Act.
Who pays tax if a company-to-LLP conversion fails its conditions?
Depending on the transfer and the breach, the successor LLP or a shareholder of the predecessor company can be liable under the relevant provision.
Official law and further reading
- Income-tax Act, 1961, as amended by the Finance Act, 2025 (official consolidated PDF)
- Income Tax Department: Section 47A statutory text
- Income Tax Department: Income-tax Act, 2025 portal
- Official section correspondence: 1961 Act to 2025 Act
- Income Tax Department: Capital gains guidance
Editorial update: 25 October 2026. This article is general legal information, not transaction-specific tax advice. Verify the applicable statutory text, notifications and assessment-year rules before filing or implementing a restructuring.