What is transfer in Capital Gains

In income tax act, capital gains are taxed upon transfer of capital assets. Capital assets are defined in Section 2(14) of Income Tax Act, 1961. The concept of transfer is discussed in definition of transfer under section 2(47). Capital gains arises where a capital asset is transferred for a consideration. However, there are certain transactions which are not regarded as transfer.

In this article, we will discuss in detail the meaning of transfer for the purpose of income tax.

Transfer:
In simple terms, transfer in the context of capital gains means exchange of ownership or authority of a particular asset for consideration. Section 2(47) defines transfer as, transfer in relation to a capital asset, includes:

• the sale, exchange or relinquishment of the asset
• the extinguishment of any rights therein
• the compulsory acquisition thereof under any law
• the asset is converted into stock-in-trade of a business carried on by him, then such conversion
• the maturity or redemption of a zero coupon bond
• any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract
• any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.

Transfer includes disposing of or parting with an asset or any interest therein, or creating any interest in any asset by way of an agreement (whether entered into in India or outside India) or otherwise.

Transfer of a capital asset coupled with a valid form of consideration will amount to the capital gain income. 

To arrive at capital gains, various costs and expenses are deducted from the sale value or from the full value of consideration. These include cost of indexation, cost of improvement and other expenses of capital nature.

Cost of acquisition is the value for which the capital asset was acquired by the seller. Cost of improvement is expenses of a capital nature incurred in making any additions or alterations to the capital asset by the seller.

Transactions which are not considered as transfer are exclusively mentioned in section 47 of Income Tax Act, 1961.

Capital assets based on their holding period are identified as Short term or Long term capital assets.

Any gains or losses arising on transfer of such assets will be accordingly identified as STCL/STCG or LTCL/LTCG. Rates of taxes upon such transfers also varies based on nature of assets that whether it is a Short term or Long term capital asset.

Conclusion:
Selling, gifting, or transferring assets through inheritance, requires a detailed understanding of these provisions which can help in effective tax planning and compliance. Knowing which transactions are transfers and which are not is an important aspect to determine taxability of such transactions.

About Author:
CA Chinmay Shirish Agate
Chinmay Agate is a Practicing Chartered Accountant having 4+ years of experience and expertise in the field of Direct Taxation and Auditing compliances. In the past, he worked in various CA firms and comes with wide industry experience from services, retail to manufacturing to trading where he has handled various complex assignments. He has keen interest in Forex and Derivative knowledge as well as fundamental analysis.