Category: Income Tax

Deferred Tax Asset and Deferred Tax Liability

Posted on by CA Meet Dhrangadhariya

Last updated: 11 July 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Deferred tax is the tax effect of timing differences between book profit and taxable profit. It is an accounting item, not a separate tax.
  • Book profit higher than taxable profit creates a deferred tax liability (DTL). Taxable profit higher than book profit creates a deferred tax asset (DTA).
  • Permanent differences, such as penalties, create no deferred tax.
  • DTA on losses and unabsorbed depreciation needs virtual certainty; the note also covers MAT, tax holidays, presentation and worked examples.

How deferred tax arises

1. Compute book profit from the financial statements
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2. Compute taxable profit under the Income Tax Act
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3. Compare the two and separate reversible timing differences from permanent differences
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4. Ignore permanent differences, they create no deferred tax
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5. Book profit higher than taxable profit: create a deferred tax liability
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6. Taxable profit higher than book profit: create a deferred tax asset (for losses and unabsorbed depreciation only with virtual certainty)
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7. Reassess the balances at every balance sheet date

Deferred tax is an accounting item, covered under IND AS 12 - Income Taxes. It is the tax benefit that can be availed in the future years or the additional liability needing to be paid in the future years, depending on the various factors. Deferred tax arises as a result of temporary differences between income as per books of accounts and income as per income tax computation.

When the income computed as per income tax act is greater than profits calculated as per accounting standards, the difference between those two result in Deferred Tax Asset (DTA). Else, the difference is treated as Deferred Tax Liability (DTL).

Note: from 1 April 2026 the Income-tax Act, 2025 replaces the Income-tax Act, 1961 and section numbers have changed. Section numbers quoted below are those of the 1961 Act.

What is Deferred Tax?

The tax effect due to the temporary timing differences is termed as deferred tax which literally refers to the taxes postponed. Deferred tax is recognized only on temporary timing differences.

Timing Difference

  • Company derives its book profits from the financial statements prepared in accordance with the rules of the Companies Act and calculates its taxable profit based on provision of the Income Tax Act.
  • There is a difference between the book profit and taxable profit, because of certain items which are specifically allowed or disallowed for tax purposes each year.
  • This difference between the book and the taxable income or expense arises from items that are treated differently for book and tax purposes. It can be of two kinds:
  • Timing (temporary) difference: arises in one period and reverses in a later period, for example depreciation charged at different rates in books and for tax.
  • Permanent difference: never reverses, for example a penalty that is never allowed as a deduction. It creates no deferred tax.

Types of Deferred Tax

Deferred tax are classified into two:

  • Deferred Tax Liability
  • Deferred Tax Asset

Deferred Tax Liability

When the accounting income is more than the taxable income, the tax payable now is lower than the tax on the book profit. The company pays less tax now and more tax in future, so the difference is a liability.

For example, higher depreciation claimed for tax than in the books, or income recognised in the books that becomes taxable only in a later year.

Deferred Tax Asset

When the taxable income is more than the accounting income, the company pays more tax now than the book profit suggests. It expects to pay less tax in future, so the difference is an asset.

For example, higher depreciation in the books than for tax, provision for doubtful debts, gratuity and leave encashment (allowed for tax only when paid or written off), advance income that is taxed on receipt but recognised in the books later, and notional losses disallowed under the Income Tax Act.

A tabular explanation of the above concepts is provided below for easy reference:

S No Entity Profit Status Entity - Current Entity - Future Effect
1 Book profit higher than the Taxable profit Pay less tax now Pay more tax in future Creates Deferred Tax Liability (DTL)
2 Book profit is less than the Taxable profit Pay more tax now Pay less tax in future Creates Deferred Tax Asset (DTA)

Example of Deferred Tax Asset and Liability

DTA - Suppose, book profit of an entity before taxes is Rs 1,000 and this includes provision for bad debts of Rs.200.

For the purpose of tax profit, bad debts will be allowed in future when it’s actually written off. Hence taxable income after this disallowance will be Rs. 1200 and let’s say income tax rate is 20% then the entity will pay taxes on Rs. 1200 i.e (1200*20%) Rs. 240.

If bad debts were not disallowed, entity would have paid tax on Rs. 1000 amounting Rs 200 i.e 1000*20%. For the additional Rs. 40 which is already paid now, we have to create DTA. Entry for recording the DTA is as under:

  • Deferred Tax Asset Dr                    40
  • To Deferred Tax Expense Cr        40

(Being DTA of Rs. 40 accounted in the books)

DTL - Common example of DTL would be depreciation. When the depreciation rate as per the Income tax act is higher than the depreciation rate as per the Companies act (generally in the initial years), entity will end up paying less tax for the current period. This will create deferred tax liability in the books:

There are no DTA or DTL provisions made for permanent differences. E.g. Fines and penalties which are part of book profits but are not allowed for tax purposes.

Deferred tax implications on Unabsorbed Depreciation and Carry Forward of Losses

  • With respect to timing differences related to unabsorbed depreciation or carry forward losses, DTA is recognized only when the company reliably estimates sufficient future taxable income.
  • This test for virtual certainty has to be done every year on balance sheet date and if the condition is not fulfilled, such DTA/DTL should be written off.

While computing future taxable income, only profits pertaining to business and profession should be considered and not the income from other sources.

Example for Virtual Certainty

  • A projection of future profits prepared by an entity based on the future restructuring, sales estimation, future capital expenditure past experience etc., which are submitted to banks for loan is concrete evidence for virtual certainty.
  • But virtual certainty cannot be convincing if it’s only based on some binding export order which has the risk of cancellation anytime.
  • Virtual certainty must be based on projections that are more likely in future.

Presentation in Financial Statements

DTA is presented under non-current assets and DTL under the head non-current liability. Both DTA and DTL can be adjusted with each other provided they are legally enforceable by law and there is an intention to settle the asset and liability on a net basis.

Illustration on DTA/DTL Calculation

Let’s understand how DTA/DTL is created in books with a simple example (amount in lacs):

Particulars For Book For Tax Difference (DTA)/DTL @30%
Income 1000 800 200
Opening Balance of (DTA)/DTL - - - -
Depreciation 100 200 100 30
Sales Tax payable 50 0 (50) (15)
Leave encashment 200 100 (100) (30)
Closing balance of (DTA)/DTL - - - (15)

Current tax on Taxable income is 800*30% = 240

Deferred tax as per above = (15)

Net tax effect = 225

*The 30% rate is used only for illustration. Use the rate that actually applies to the entity for the year, for example the lower rates under sections 115BAA and 115BAB for companies, or the slab rates for individuals.

Effect on Tax Holiday With Respect To DTA/ DTL

A tax holiday is a benefit that exempts the profits of certain undertakings for a fixed period. A current example is section 10AA for units in Special Economic Zones, which is available only to units that began activity on or before 31 March 2020. The older holidays under sections 10A and 10B have been phased out.

Deferred tax (DT) from the timing difference that reverses during the tax holiday period should not be recognised during the enterprise’s tax holiday period. DT related to the timing difference that reverses after the tax holiday has to be recognised in the year of origination.

Illustration for Tax Holiday

A Ltd. is an undertaking whose profits are exempt for a tax holiday period that ends after Year 5. It has a timing difference on account of depreciation as follows: (Assume tax rate is 30%)

Year Timing Difference - Depreciation
1 2 lakhs
2 3 lakhs

In the case of tax-free companies, deferred tax liability is not recognised, for the timing differences that originate and reverse in the tax holiday period. Deferred tax liability is created only when the timing differences originate in the tax holiday period and reverse after the tax holiday. Adjustments are done on the basis of the FIFO method.

Suppose in the above example of the Rs 200,000, Rs 80,000 reverses within the tax holiday period, so DTL is created only on the balance. DTL will be created as given below:

Year Timing difference DTL @ 30%
1 120,000 (200,000-80,000) 36,000
2 300,000* 90,000

*Fully reversed after the tax holiday period. The total DTL balance at the end of the second year will be 126,000.

Effect of DTA/DTL on MAT

MAT is Minimum Alternate Tax which a company is required to pay if its tax payable as per normal provision of the income tax act is less than the tax computed at 15% of the book profit (plus surcharge and cess; the rate was 18.5% before AY 2020-21). MAT is levied under section 115JB of the income tax act; companies that opt for the concessional regimes under sections 115BAA and 115BAB do not pay MAT and it is calculated using the entity’s book profit as under: Book profit is increased by the following:

  • Income tax paid or provision
  • An amount carried to any reserve
  • Provisions made for unascertained liabilities
  • Deferred tax provision etc

And it is decreased by the following:

  • Amount withdrawn from any reserve or provision
  • Depreciation debited to P&L (except revaluation depreciation)
  • Lower of Loss brought forward or unabsorbed depreciation
  • Deferred tax credited to P&L etc.

There are controversies if deferred tax liability debited to P&L should be added to the book income for the purpose of MAT calculation. Kolkata Tribunal in Balrampur Chini’s case has held that the deferred tax liability should not be added back whereas the Chennai Tribunal in Prime Textiles Ltd case has held otherwise.

“Deferred tax charge is not a provision for tax but is a provision for tax effect for difference between taxable income and accounting income and further that deferred tax charge cannot be termed as income-tax paid or payable, which has to be paid out of the profit earned. Reserves mentioned in Section 115JB are different, it can be unilaterally transferred back to P&L account or can be utilised for issuing bonus shares etc. However, amounts created towards deferred tax charge cannot be so transferred or utilized”

“The Chennai Tribunal observed that AS-22 is mandatory as per Section 211(3) of the Companies Act, 1956, however, the same is not notified by the Central Government under Section 145(2) of the IT Act. Moreover, the deferred tax liability cannot be considered as ascertained liability and therefore, assessing officer has every power to make adjustment on this account as it cannot be termed as tinkering of audited accounts prepared in accordance with the provisions of the Companies Act.”

These rulings show that tribunals have taken different views. Check the current wording of Explanation 1 to section 115JB, and the equivalent provision of the Income-tax Act, 2025, before relying on either view.

Whether MAT credit can be considered as a Deferred Tax Asset per AS 22?

  • As per AS 22, deferred tax assets and liability arise due to the difference between book income & taxable income and do not rise on account of tax expense itself.
  • MAT does not give rise to any difference between book income and taxable income.
  • It is not appropriate to consider MAT credit as a deferred tax asset in accordance with AS 22.
  • MAT credit is separately recognized as an asset (MAT credit entitlement) in the books, not as a Deferred Tax Asset.
  • Under Ind AS 12, unused tax credits, which include MAT credit, can be recognised as a deferred tax asset to the extent it is probable they will be used. The answer therefore differs between AS 22 and Ind AS 12.

Key takeaways

  1. Deferred tax is an accounting concept and not a direct tax provision, this might arise because of difference in the accounting profit and taxable profits.
  2. Deferred tax liability would arise when a company would pay less tax at present but expected to pay higher taxes in future.
  3. Timing (temporary) differences between book income and taxable income create deferred taxes, whereas permanent differences do not result in a DTA or DTL.

Final Word

Deferred tax is often mistaken for a tax concept, but it is actually an accounting concept that reflects the tax impact arising from differences in the treatment of items under financial statements and tax records.

Frequently asked questions

What is the difference between DTA and DTL?

A deferred tax liability arises when book profit is higher than taxable profit, so less tax is paid now and more later. A deferred tax asset arises when taxable profit is higher than book profit, so more tax is paid now and less later.

Is deferred tax created on permanent differences?

No. Only timing (temporary) differences that reverse in later periods create deferred tax. Items such as penalties that are never allowed for tax create no DTA or DTL.

Can a company recognise a deferred tax asset on carried forward losses?

Under AS 22 only when there is virtual certainty, supported by convincing evidence, of sufficient future taxable income. The test is repeated at every balance sheet date.

Is MAT credit a deferred tax asset?

Under AS 22 it is shown separately as MAT credit entitlement and not as a deferred tax asset. Under Ind AS 12 unused tax credits can be recognised as a deferred tax asset if their use is probable.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Home Loan Interest Deduction: Section 22 Rules, Limits and How to Claim (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 08 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Interest on a loan taken to buy, build, repair or renew a house is deductible under section 22(1)(b) of the Income-tax Act, 2025 (earlier section 24(b)); on a let-out house the whole interest is allowed.
  • For a self-occupied house the limit is ₹2,00,000 a year if the house is completed within five years from the end of the tax year in which the loan was taken and the lender gives a certificate; otherwise it is ₹30,000.
  • Interest paid before the year of completion (pre-construction interest) is claimed in five equal instalments from the year of completion, inside the same cap.
  • Under the new regime, interest on a self-occupied house is not allowed, but interest on a let-out house is.

For most people, interest on a home loan is the biggest tax deduction they have. Under the Income-tax Act, 2025 the rule sits in section 22 (it was section 24(b) in the 1961 Act). This post covers who can claim how much, how pre-construction interest works, and what to give your employer and put in your return.

What qualifies

Under section 22(1)(b), interest payable on capital borrowed for acquiring, constructing, repairing, renewing or reconstructing a property is deducted from the property’s annual value. The deduction is for interest payable, whether or not you have paid it. Interest payable outside India is not allowed if tax has not been paid or deducted on it and there is no agent in India (section 22(6)).

Principal repayment is not part of this deduction. It is a separate old regime deduction (see our post on home loan tax benefits).

The limits

Property Limit on interest in a year
Let-out house No limit; the whole interest payable
Self-occupied house (section 21(6)), acquired or constructed with a loan and completed within five years from the end of the tax year in which the loan was taken, with the lender’s certificate ₹2,00,000
Self-occupied house in any other case (for example, delayed completion, or a loan for repairs, renewal or reconstruction) ₹30,000
Total for all self-occupied houses ₹2,00,000 (section 22(5))

The five years: count from the end of the tax year in which you borrowed. A loan taken on 30/04/2026 falls in tax year 2026-27, which ends on 31/03/2027, so the house must be completed by 31/03/2032. Some articles count only four years, so check your own dates.

Certificate: to claim ₹2,00,000 you must furnish a certificate from the lender (section 22(2)(a)(ii)). It must show the interest payable on the capital borrowed and the interest on any new loan taken to repay the whole or part of the original loan (section 22(4)).

Pre-construction interest

While the house is under construction you cannot claim the interest. Interest payable for the period before the tax year in which the property is acquired or completed is claimed later (section 22(1)(c)):

  • in five equal instalments, one in the tax year of acquisition or completion and one in each of the next four tax years;
  • after reducing it by any amount already allowed under another provision of the Act (section 22(3)).

For a self-occupied house, the interest under clauses (b) and (c) together is subject to the ₹2,00,000 cap (section 22(2), as amended by the Finance Act, 2026).

Example. You take a loan to build a house you will let out. The interest payable is ₹90,000 in the first year and ₹1,20,000 in the second year. The house is completed in the third year, when the interest is ₹1,20,000.

  • Pre-construction interest: 90,000 + 1,20,000 = ₹2,10,000, so ₹42,000 a year for five years.
  • Deduction in the third year: 1,20,000 + 42,000 = ₹1,62,000.
  • In the fourth to seventh years: the interest of that year plus ₹42,000.

If the house is self-occupied and the interest of the year is ₹2,10,000, plus ₹42,000 of pre-construction interest, the total of ₹2,52,000 is capped at ₹2,00,000.

Let-out house: no limit, but a loss may arise

On a let-out house the whole interest is deducted after the 30% deduction. If the interest is large, the result is a loss from house property. In the old regime up to ₹2,00,000 of that loss can be set off against income such as salary; the rest carries forward for eight years against house property income. In the new regime the loss cannot be set off against other heads and is not carried forward (sections 109, 110 and 202). See our post on income from house property.

Old and new regime

Point Old regime New regime
Self-occupied house, interest under section 22(1)(b) Up to ₹2,00,000 Not allowed (section 202(2)(a)(v))
Let-out house Whole interest Whole interest
Loss set off against other heads Up to ₹2,00,000 Not allowed
Pre-construction instalment on a self-occupied house Allowed, within the ₹2,00,000 cap Unclear; see below

Section 202(2)(a)(v) names only section 22(1)(b), not the pre-construction clause 22(1)(c). The prudent position is that the self-occupied interest claim is closed in the new regime, but the text does not say so for clause (c). Take advice before claiming pre-construction interest on a self-occupied house in the new regime.

Joint loans and co-owners

Co-owners with definite shares are taxed separately on their own shares of the property, and the relief for a self-occupied house is available to each of them individually (section 24). So each co-owner who is also a borrower and pays interest can claim up to ₹2,00,000 on his or her share, which can give a larger total deduction than a single owner would get. You must be an owner, and the interest you claim should be what you are liable to pay.

How to claim

  1. Get the lender’s interest certificate for the year, showing interest and principal, the loan sanction details and each borrower.
  2. Tell your employer. Give Form 124 with the lender’s name, address and PAN (Rule 205) so TDS is calculated correctly. The employer may reduce TDS only for a loss from house property (section 392(4)(b)), not for other claims.
  3. Keep the possession or completion certificate, to show the date the house was acquired or completed.
  4. Report in the return: in the house property schedule, enter the property details, rent if any, taxes paid, 30% deduction and interest. Enter the pre-construction instalment together with the interest of the year.

Frequently asked questions

How much home loan interest can I claim?

On a let-out house, all the interest payable in the year. On a self-occupied house, up to ₹2,00,000 in a year if the house is acquired or constructed with borrowed capital and completed within five years from the end of the tax year in which the loan was taken, and you hold the lender’s certificate; in any other case, ₹30,000.

When does the five year period start?

From the end of the tax year in which the loan was taken. For a loan taken on 30/04/2026 (tax year 2026-27), the house must be completed by 31/03/2032.

What is pre-construction interest?

Interest payable for the period before the tax year in which the house was acquired or completed. It is claimed in five equal instalments, one in the tax year of completion and one in each of the next four years (section 22(1)(c)).

Is the pre-construction interest over and above the ₹2,00,000?

No. For a self-occupied house the total of the current interest and the pre-construction instalment in a year is capped at ₹2,00,000 (section 22(2), as amended by the Finance Act, 2026).

Can I claim interest on a self-occupied house in the new regime?

No. Section 202(2) disallows the section 22(1)(b) interest on houses covered by section 21(6) in the new regime. Interest on a let-out house is allowed.

What if the loan is refinanced?

Interest on a new loan taken to repay the earlier loan is also deductible, and the lender’s certificate should show it separately (section 22(4)).

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Crypto and Virtual Digital Assets: 30% Tax, 1% TDS and No Loss Set-Off (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 18 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Income from the transfer of a virtual digital asset (crypto-assets, NFTs and similar tokens) is taxed at a flat 30% under section 194 of the Income-tax Act, 2025, whatever the holding period and whether it is a capital asset or not.
  • Only the cost of acquisition is deducted; no other expense or allowance is allowed, and a loss on one VDA cannot be set off against any other income, including a gain on another VDA, or carried forward.
  • The person paying the consideration for a VDA deducts 1% TDS with no threshold (section 393(1), Table serial 8(vi)).
  • A gift of a VDA above ₹50,000 from a non-relative is taxable in the hands of the receiver.

India taxes cryptocurrency and similar assets under a special regime that is harsher than the rules for shares or property. It is in section 194 of the Income-tax Act, 2025 (earlier section 115BBH), with TDS in section 393. This post sets out how it works for tax year 2026-27.

What is a virtual digital asset

Section 2(111) covers:

  • any information, code, number or token (not Indian or foreign currency), generated through cryptographic means or otherwise, which gives a digital representation of value, with the promise of inherent value or functioning as a store of value or unit of account, and which can be transferred, stored or traded electronically;
  • a non-fungible token (NFT) or any other token of similar nature;
  • any other digital asset notified by the Central Government; and
  • any crypto-asset that is a digital representation of value relying on a cryptographically secured distributed ledger or similar technology to validate and secure transactions.

The Central Government may notify a digital asset to be excluded from the definition.

The tax: section 194(1), Table serial 4

Point Rule
Income covered Any income from the transfer of a virtual digital asset
Who Any person
Rate 30%
Deduction No deduction for expenditure other than the cost of acquisition, if any; no allowance; no set-off of any loss in computing this income
Loss The loss on transfer of a virtual digital asset cannot be set off against income computed under any other provision of the Act, and cannot be carried forward
Transfer The meaning of “transfer” in section 2(109) applies to a virtual digital asset whether or not it is a capital asset

This means:

  • There is no distinction between short-term and long-term, and no benefit of the lower rate or the ₹1,25,000 exemption that applies to shares.
  • Expenses such as exchange fees, brokerage, internet and electricity cannot be deducted.
  • Losses are ring-fenced: a loss on one coin cannot reduce the gain on another coin in the same year, and cannot reduce salary, business or other income.
  • The tax is 30% plus surcharge and 4% cess.

TDS: 1% on payment (section 393(1), Table serial 8(vi))

Any person paying a sum as consideration for the transfer of a virtual digital asset deducts tax at 1%, with no threshold limit. The seller takes credit for the TDS in the return.

Gifts of crypto

A virtual digital asset is “property” for the gift rule in section 92(2)(m). If you receive it from a non-relative without consideration, with an aggregate fair market value above ₹50,000 in a year, or for less than its fair market value by more than ₹50,000, the value is taxed as income from other sources. Gifts from relatives, on marriage, by will or inheritance, and the other cases in section 92(3) are not taxed.

Examples

1. Gain. You buy a token for ₹1,00,000 and sell it for ₹1,80,000.

  • Income from transfer: 1,80,000 - 1,00,000 = ₹80,000
  • Tax: 30% = ₹24,000, plus 4% cess ₹960 = ₹24,960
  • TDS at 1% of ₹1,80,000 = ₹1,800 is credited against this.

2. Loss and gain in the same year. You make a gain of ₹80,000 on one token and a loss of ₹20,000 on another. The tax is on the full ₹80,000, because the loss cannot be set off: 80,000 × 30% = ₹24,000 plus cess. The ₹20,000 loss is lost.

3. Fees. You paid ₹2,000 in exchange fees on example 1. They are not deductible. The income remains ₹80,000.

Reporting

  • Report income from the transfer of virtual digital assets in the return, in the schedule provided for it, even if you made a loss, with the cost, date and sale value of each transfer.
  • Use the return form you are eligible for (see our post on which ITR form to file); this income is normally reported in ITR-2 or ITR-3.
  • Pay advance tax on the gains as they arise.
  • Keep exchange statements, wallet records and bank proofs. If you hold the VDA as a business (a trader), the 30% regime still applies to the transfer income; the cost of acquisition is the only deduction.

Practical advice

  1. Do not plan on losses to reduce tax: they are not usable, so avoid churning to book losses.
  2. Check that the exchange has deducted 1% TDS and that it appears in your TDS statement.

Frequently asked questions

How is crypto taxed in India?

Income from the transfer of a virtual digital asset is taxed at 30% (section 194(1), Table serial 4), with cess. No deduction is allowed for any expense other than the cost of acquisition, and there is no benefit of a lower rate for long holding.

Can I set off a crypto loss?

No. A loss on transfer of a virtual digital asset cannot be set off against income from any other source, including a gain on another virtual digital asset, and cannot be carried forward to later years.

Is there TDS on crypto?

Yes, 1% of the consideration, with no threshold, deducted by the person paying for the transfer of a virtual digital asset (section 393(1), Table serial 8(vi)).

Are NFTs covered?

Yes. A non-fungible token or any other token of similar nature is a virtual digital asset (section 2(111)(b)).

Does it matter whether the asset is a capital asset?

No. For this provision, “transfer” in section 2(109) applies to a virtual digital asset whether or not it is a capital asset (section 194(1)).

What if I receive crypto as a gift?

If you receive a virtual digital asset without consideration, or for a price less than its fair market value, from a person who is not a relative, and the value exceeds ₹50,000 in a year, the value is taxed as income from other sources (section 92(2)(m)). Gifts from relatives, on marriage or by inheritance are not taxed.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Slump Sale: Capital Gains Under Section 77 (Earlier 50B), Net Worth and Form 28 (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 23 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • A slump sale is the transfer of one or more undertakings for a lump sum without values for the individual assets and liabilities (section 2(103)). The profit is a long-term capital gain if the undertaking was held for more than 36 months, and a short-term gain otherwise (section 77).
  • The cost of acquisition and of improvement is the net worth of the undertaking, which is its total assets less liabilities as in the books, ignoring revaluation; the sale price is the fair market value of the capital assets worked out under Rule 53.
  • An accountant’s report in Form 28 must be furnished before the specified date in section 63 (section 77(4) and Rule 54).
  • The long-term gain is taxed at 12.5% without indexation.

When a business is sold as a whole, the tax follows special rules. Instead of valuing every asset, the law taxes the profit on the sale of the undertaking as a slump sale. The rules are in section 77 of the Income-tax Act, 2025 (earlier section 50B), with the details of valuation in Rule 53 and the accountant’s report in Rule 54.

What is a slump sale

Section 2(103): the transfer of one or more undertakings, by any means, for a lump sum consideration without values being assigned to the individual assets and liabilities. Fixing a value of an asset or liability only for stamp duty, registration fees or similar taxes is not assigning values.

An undertaking includes any part of an undertaking, or a unit or division, or a business activity taken as a whole, but not individual assets or liabilities or any combination of them that is not a business activity (section 2(35)).

Two points follow:

  • A sale of individual assets, even many of them, is not a slump sale.
  • A sale of a business with a price allocated to each asset is also not a slump sale. That is an itemised sale, taxed asset by asset.

Long-term or short-term (section 77(1) and (2))

  • The profit or gain is chargeable as long-term capital gain in the year of the transfer.
  • If the undertaking or division was owned and held for 36 months or less before the transfer, the gain is short-term.

Computing the gain (section 77(3) and (5))

  • Full value of consideration: the fair market value of the capital assets on the date of transfer, calculated as prescribed (Rule 53).
  • Cost of acquisition and cost of improvement: the net worth of the undertaking or division.

Net worth = the aggregate value of total assets of the undertaking, less the value of its liabilities as appearing in the books, with any revaluation of assets ignored. In the aggregate value of total assets:

  • depreciable assets are taken at the written down value of the block of assets (as in section 41(1)(c));
  • goodwill not acquired by purchase from a previous owner is nil;
  • assets whose entire expenditure has been or can be deducted under section 46 are nil; and
  • other assets are at their book value.

There is no indexation. Because the cost is the net worth, which is based on the books, the gain is largely the amount by which the price exceeds the book value of the net assets.

Rule 53: fair market value

Rule 53 gives the fair market value as the higher of two figures:

  • FMV1, the asset-based value: A + B + C + D - L, where A is the book value of assets other than jewellery, artistic work, shares, securities and immovable property (less income-tax paid net of refunds and unamortised deferred expenditure), B the open market price of jewellery and artistic work on a registered valuer’s report, C the fair market value of shares and securities as determined under Rule 57, D the stamp duty value of immovable property, and L the book value of liabilities excluding paid-up capital, proposed dividends, reserves and surplus, provisions for tax beyond tax paid and other provisions and contingent liabilities (as listed in the Rule); or
  • FMV2, the consideration-based value: the monetary consideration received plus the fair market value of non-monetary consideration, determined in the manner in the Rule.

Report of an accountant (section 77(4); Rule 54)

Every assessee must furnish, before the specified date referred to in section 63, a report of an accountant in Form 28. It must include the computation of the net worth of the undertaking or division and certify that the net worth has been correctly arrived at. The specified date in section 63 is the date by which the tax audit report must be filed, so the report is due before that.

Tax rate

A long-term slump sale gain is taxed at 12.5% without indexation (section 197), because the undertaking is not listed equity. A short-term gain is taxed at the rates for the assessee. The surcharge on the long-term gain is capped at 15% (Finance Act, 2026).

Example

A company sells its manufacturing division, held for five years, for a lump sum of ₹5 crore. The aggregate value of total assets of the division, taking depreciable assets at the written down value and other assets at book value, is ₹3 crore, and its liabilities are ₹1 crore.

  • Net worth = 3,00,00,000 - 1,00,00,000 = ₹2,00,00,000
  • Full value of consideration = the higher of FMV1 and FMV2 under Rule 53; suppose it is ₹5,00,00,000 (the consideration)
  • Long-term capital gain = 5,00,00,000 - 2,00,00,000 = ₹3,00,00,000
  • Tax at 12.5% = ₹37,50,000, plus surcharge (capped at 15% on this gain) and cess.

Practical points

  • Do not allocate the price to the assets. If the agreement fixes values for individual assets, the transaction can fail the slump sale test, and each asset is taxed separately, including depreciable assets, under section 74.
  • A demerger or amalgamation that satisfies the Act’s conditions is not a transfer at all (section 70), and has no capital gain.
  • Keep the valuation reports, the net worth working and the Form 28 on file for the return.

Frequently asked questions

What is a slump sale?

The transfer of one or more undertakings, by any means, for a lump sum consideration without values being assigned to the individual assets and liabilities (section 2(103)). Fixing values for stamp duty or registration purposes does not count as assigning values.

Is the gain long-term or short-term?

Long-term if the undertaking or division was owned and held for more than 36 months immediately before the transfer; otherwise short-term (section 77(1) and (2)).

How is the gain computed?

Full value of consideration is the fair market value of the capital assets on the transfer date, worked out under Rule 53; the cost of acquisition and improvement is the net worth of the undertaking (section 77(3)).

What is net worth?

The aggregate value of total assets of the undertaking, less its liabilities as shown in the books, ignoring any revaluation. Depreciable assets are taken at the written down value of the block, self-generated goodwill at nil, and assets whose cost was fully deductible at nil (section 77(5)).

Which report is needed?

An accountant’s report in Form 28 computing and certifying the net worth, furnished before the specified date in section 63, that is the date by which the tax audit report is due (Rule 54).

What is the tax rate on a long-term slump sale gain?

12.5% without indexation (section 197), plus surcharge (at most 15% on this gain) and 4% cess.

Official sources

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Sovereign Gold Bonds: Capital Gains Tax on Redemption and Sale from 1 April 2026

Posted on by CA Meet Dhrangadhariya

Last updated: 20 July 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • From 1 April 2026, redemption of a Sovereign Gold Bond is not a taxable transfer only if the bond is held by an individual from the date of original issue until maturity (section 70(1)(x) of the Income-tax Act, 2025, as amended by the Finance Act, 2026).
  • A bond bought in the secondary market is taxed on redemption: the gain is a capital gain, long-term at 12.5% if held for more than 12 months, short-term at slab rates otherwise.
  • A bond sold on the stock exchange before maturity is taxed in the same way, for every holder.
  • The 2.5% annual interest is taxable as income from other sources at slab rates.

Sovereign Gold Bonds (SGBs) were popular because the gain on redemption was tax free. The Finance Act, 2026 narrowed that relief from 1 April 2026. This post explains who still gets it, who pays tax and how much.

What the Act now says

Section 70(1) lists transactions that are not a transfer, so no capital gains tax arises on them. Clause (x), as amended by the Finance Act, 2026 with effect from 1 April 2026, covers:

redemption of a Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, 2015 or any subsequent Sovereign Gold Bond Scheme, if held by an individual from the date of original issue till maturity.

Before the amendment, the clause covered redemption of a bond under the 2015 scheme by an individual, whether he had subscribed to it or bought it later. The amendment adds two conditions: the original issue and till maturity, and it extends to later schemes.

Who pays tax

Holder On redemption at maturity On sale on the exchange before maturity
Individual who subscribed at issue and holds till maturity No tax Not applicable
Individual who subscribed at issue but sells before maturity Not applicable Capital gain taxed
Anyone who bought the bond in the secondary market Capital gain taxed on redemption Capital gain taxed
HUF, company or trust Capital gain taxed (the clause covers individuals only) Capital gain taxed

How the gain is taxed

Where the exemption does not apply, the gain is the redemption or sale price less your cost of acquisition (the price you paid, with the expenses of the transfer).

  • SGBs are listed securities, so the holding period is 12 months: more than 12 months is long-term, 12 months or less is short-term (section 2(101)).
  • Long-term gain: 12.5% without indexation (section 197). The ₹1,25,000 exemption in section 198 does not apply, because it is only for equity shares and equity-oriented fund units.
  • Short-term gain: added to your income and taxed at slab rates.
  • The surcharge on this long-term gain is capped at 15%, and cess is 4%.

Example. You bought an SGB from the stock exchange for ₹7,000 a unit and held it for two years. It is redeemed at maturity at ₹12,000 a unit (a figure for illustration). The gain per unit is ₹5,000, long-term. Tax at 12.5% is ₹625 a unit, plus 4% cess = ₹650. For an original subscriber who held to maturity, the tax is nil.

Interest

SGBs pay interest of 2.5% a year (as set by the scheme). It is income from other sources (section 92) at your slab rate, in the year it is received or due, whichever your method of accounting is.

What to do if you hold SGBs

  1. Check how you acquired each bond: original issue (the allotment letter or demat statement shows the date) or secondary market.
  2. If you are an original holder, hold to maturity if you want the exemption. An early sale or a premature redemption may be taxed.
  3. For secondary market bonds, plan for tax on redemption and keep the purchase contract note, which fixes your cost and holding period.
  4. Report the interest every year and the capital gain in the capital gains schedule of the return. See our post on capital gains tax for the rates and the way to set off losses.

Frequently asked questions

Is SGB redemption tax free?

Yes, but only if you are an individual who has held the bond from the date of its original issue until maturity. The redemption is then not treated as a transfer (section 70(1)(x)).

What if I bought the SGB from the stock exchange?

The exemption on redemption does not apply to you. The redemption is a transfer, and the gain over your purchase cost is a capital gain.

What is the tax rate on SGB gains?

Long-term (held for more than 12 months, since SGBs are listed securities): 12.5% without indexation. Short-term: your slab rate (sections 2(101) and 197).

Is the interest on SGB taxable?

Yes. The 2.5% a year interest is income from other sources at your slab rate (section 92).

What about premature redemption after five years?

The exemption in section 70(1)(x) speaks of redemption of a bond held from original issue until maturity. A premature redemption is not clearly covered, so take advice before treating it as tax free.

Does the new rule apply to bonds already bought?

It applies from 1 April 2026, to redemptions and transfers from that date, whenever the bond was bought. A bond held by an original subscriber to maturity remains exempt.

Official sources

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Capital Gains on Shares and Mutual Funds: STCG, LTCG, STT Conditions and Special Rules (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 21 July 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Listed equity shares and equity-oriented mutual fund units sold on an exchange with STT paid: short-term gain at 20% (section 196), long-term gain (over 12 months) at 12.5% on the amount above ₹1,25,000 a year (section 198).
  • Debt mutual fund units bought on or after 1 April 2023 and market linked debentures always give short-term gains taxed at slab rates (section 76).
  • Gains on demat shares use first-in-first-out for cost and holding period (section 67(7)); shares bought before 1 February 2018 get a grandfathered cost (section 90(7)).
  • A loss on shares bought just before a dividend record date and sold soon after can be ignored (section 175), and buyback proceeds are now taxed as capital gains in the shareholder’s hands (section 69).

For most investors, shares and mutual funds are the biggest source of capital gains. The tax rate depends on three things: the holding period, whether securities transaction tax (STT) was paid, and what the fund invests in. This post explains each for tax year 2026-27 under the Income-tax Act, 2025.

Holding period (section 2(101))

Asset Short-term if held for
Listed shares, UTI units, units of an equity-oriented fund, zero coupon bonds 12 months or less
Unlisted shares, foreign shares, units of debt funds and other assets 24 months or less

Listed equity shares and equity-oriented funds

Short-term (section 196): if the asset is an equity share, a unit of an equity-oriented fund or a unit of a business trust, and the sale is chargeable to STT, the short-term gain is taxed at 20%.

Long-term (section 198): if the gain is on an equity share, a unit of an equity-oriented fund or a unit of a business trust, and STT has been paid:

  • on acquisition and on transfer, for an equity share; and
  • on transfer, for a fund or business trust unit,

the tax is 12.5% on the long-term gain above ₹1,25,000 in the tax year. The Central Government may notify types of acquisition for which the STT-on-acquisition condition does not apply (section 198(5)).

For a resident individual or HUF, any shortfall in the basic exemption limit is first set against the gain (sections 196(2) and 198(3)). Deductions under section 123 and other Chapter VIII deductions are allowed only from income other than these gains. Surcharge on this tax is capped at 15%.

What is an equity-oriented fund (section 198(8))

A fund set up under a mutual fund scheme (or an insurance unit-linked scheme that does not enjoy the exemption in Schedule II, serial 2) that invests a minimum of 65% of its total proceeds in equity shares of domestic companies listed on a recognised stock exchange (the percentage is averaged over the year); or, for a fund of funds investing in another listed fund, at least 90% of proceeds in that fund, which itself invests at least 90% in listed domestic equity.

When STT is not paid

If the conditions for section 196 or 198 are not met (for example an off-market sale of shares, or an unlisted share), the long-term gain is taxed at 12.5% without the ₹1,25,000 exemption (section 197) and the short-term gain at slab rates.

Debt mutual funds, bonds and market linked debentures (section 76)

The gain on transfer, redemption or maturity of the following is always a short-term capital gain, whatever the holding period, taxed at slab rates:

  • a unit of a Specified Mutual Fund acquired on or after 1 April 2023, being a mutual fund that invests more than 65% of its proceeds in debt and money market instruments (or a fund that invests 65% or more in units of such a fund);
  • a market linked debenture; and
  • an unlisted bond or debenture transferred, redeemed or maturing on or after 23 July 2024.

STT is not deducted in computing these gains. Debt fund units bought before 1 April 2023 are ordinary capital assets: short-term if held for 24 months or less, and long-term gains taxed at 12.5% without indexation.

How cost and holding period are fixed

  • First-in-first-out (section 67(7)(c)): for securities held in demat form, if you buy the same security at different times and sell part of the holding, the earliest purchases are treated as sold first, for both the cost of acquisition and the period of holding.
  • Grandfathering (section 90(7)): for long-term equity shares and units covered by section 198 that you bought before 1 February 2018, the cost is the higher of the actual cost and the lower of the value on 31 January 2018 and the sale price.
  • Bonus shares have a nil cost and their holding period runs from the allotment; rights shares cost what you paid (section 90(5) and (6)).
  • STT paid is not deductible (section 72(3)). Brokerage and other expenses incurred wholly and exclusively on the transfer are deducted (section 72(1)(a)).

Special rules

Buyback (section 69): when a company buys back its own shares, the consideration you receive is taxed in your hands as capital gains: the difference between the cost and the amount received. Before the Finance Act, 2026 the buyback consideration was treated as a dividend and was taken as nil for capital gains; from 1 April 2026 it is capital gains. If the shareholder is a promoter, an additional tax applies: 2% (short-term gain) or 9.5% (long-term gain) for a domestic company promoter, and 10% or 17.5% for other promoters (section 69(2)).

Dividend stripping (section 175(8)): if you buy securities within three months before a record date and sell them within three months after it (for units, within nine months), and the dividend or income is exempt, the loss on that purchase and sale is ignored to the extent of the dividend or income. Under section 175(9), a loss on securities bought within three months before the record date and sold within nine months after, while you continue to hold bonus securities allotted on that holding, is ignored and added to the cost of the bonus securities.

Intraday and F&O: a sale without delivery is a speculative transaction (section 66(31)), and a derivative transaction in the exchange is a business transaction. Both give business income and not capital gains. Delivery-based trades by an investor are capital gains.

Dividends: dividend is taxed at slab rates as income from other sources (section 92(2)(a)).

Example

A resident individual during tax year 2026-27, all on a stock exchange with STT paid:

  • Sold shares bought two years ago: long-term gain ₹1,90,000.
  • Sold units of an equity fund bought four months ago: short-term gain ₹60,000.
  • Sold shares bought in November 2016 for ₹1,00,000, worth ₹2,50,000 on 31 January 2018, sold for ₹4,00,000: cost = higher of 1,00,000 and the lower of 2,50,000 and 4,00,000 = ₹2,50,000; long-term gain ₹1,50,000.
  • Long-term gains total ₹3,40,000. Less ₹1,25,000 = ₹2,15,000 at 12.5% = ₹26,875.
  • Short-term gain ₹60,000 at 20% = ₹12,000.
  • Total ₹38,875, plus 4% cess = ₹40,430.

Before you file

  1. Download the capital gains statement from your broker or mutual fund registrar and check it against your own contract notes.
  2. Report each sale with the correct buy date and cost, in the capital gains schedule of ITR-2 or ITR-3. ITR-1 can be used only if the long-term gains under section 198 are no more than ₹1,25,000 and there is no other capital gain (see our post on which ITR form to file).
  3. Pay advance tax on gains as they arise.
  4. Set off losses as explained in our post on capital loss.

Frequently asked questions

What are the tax rates on shares and equity mutual funds?

Short-term gain (held for 12 months or less) on a sale on a stock exchange with STT paid: 20%. Long-term gain (more than 12 months): 12.5% on the gain above ₹1,25,000 in the tax year (sections 196 and 198).

When does the 12.5% rate with the ₹1.25 lakh exemption apply?

When the long-term gain is on an equity share or a unit of an equity-oriented fund or a business trust, and STT was paid on the transfer (and, for an equity share, also on acquisition, unless the Central Government has notified the type of acquisition). Otherwise long-term gains are at 12.5% without the exemption (section 197).

How are debt mutual funds taxed?

If the fund invests more than 65% in debt and money market instruments (a specified mutual fund) and the units were bought on or after 1 April 2023, the gain is a short-term gain taxed at slab rates, however long you hold them (section 76).

How is the cost worked out when I buy the same share at different times?

By first-in-first-out for securities held in demat form: the earliest bought shares are treated as sold first, for both cost and holding period (section 67(7)(c)).

Is intraday trading a capital gain?

No. A transaction settled without delivery is a speculative transaction (section 66(31)) and the profit is business income, not a capital gain, unless it is an exempt derivative transaction.

What is dividend stripping?

Buying shares or units shortly before a dividend record date and selling soon after, to book a loss against exempt dividend. The loss is ignored up to the dividend received if you buy within three months before the record date and sell within three months after (nine months for units) (section 175).

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Senior Citizens Aged 75 or More: When No Income Tax Return Is Needed (Form 125, Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 19 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • A resident aged 75 or more whose only income is pension and interest from the same specified bank, and who gives the bank a declaration in Form 125, need not file a return for a year in which the bank deducts tax (section 263(8)(b), earlier section 194P).
  • The bank works out the tax on the total income after Chapter VIII deductions and the section 156 rebate, and deducts it at the rates in force (Rule 208).
  • The relief is lost if there is any other income, such as rent or interest from another bank, or if the bank does not deduct tax under the provision.
  • Higher TDS and TCS for non-filers (old sections 206AB and 206CCA) were omitted from 1 April 2025 and are not in the 2025 Act.

A retired person whose income is only a pension and the interest on the account into which the pension is paid can be spared the trouble of a return. The rule was section 194P of the 1961 Act; in the Income-tax Act, 2025 it is split between the definition of a “specified senior citizen” (section 402(39)), the relief from filing a return (section 263(8)(b)) and the bank’s duty to deduct tax (section 393(1), Table serial 8(iii)).

Who is a “specified senior citizen”

An individual who is:

  1. a resident in India;
  2. aged 75 years or more at any time during the tax year;
  3. having pension income and no other income except interest received or receivable from an account kept in the same specified bank in which the pension is received; and
  4. someone who has furnished a declaration to that specified bank, in the prescribed form and manner.

A specified bank is a banking company that the Central Government has notified for the purpose (section 402(35)).

What the relief is

Section 263 is the section that requires a return. Section 263(8)(b) says it does not apply to a specified senior citizen for the tax year in which tax has been deducted at source by the specified bank under section 393(1), Table serial 8(iii). So no return is needed for that year. The section on updated returns (section 263(6)) also does not apply to such a person for that year.

How the bank deducts tax (Rule 208)

  • You give the bank a declaration in Form 125. It asks for your PAN, date of birth, the pension payer and pension payment order number, your accounts with the bank, and whether you opt out of the new regime under section 202. In the declaration you state that you have no income other than pension and interest in the accounts with that bank.
  • The bank computes your total income for the year after giving effect to the deductions under Chapter VIII, on the evidence you furnish during the year, and the rebate under section 156.
  • It deducts income-tax at the rates in force on that total income (Rule 208(2)).
  • The bank keeps the declaration and the evidence and must make them available to the Chief Commissioner when required (Rule 208(4)).

This means the bank, not you, finishes the tax computation for the year.

When the relief does not apply

  • You have other income, for example rent, interest from a deposit with another bank, capital gains or dividends. You are then not a specified senior citizen and must file a return if your income exceeds the exemption limit.
  • You did not give the declaration to the bank or it is not a specified bank.
  • Your age is below 75 in the whole tax year.
  • You are a non-resident.

If any of these happens, file the return, using the TDS deducted by the bank as credit.

Example

A resident aged 78 receives a pension of ₹6,00,000 a year through a specified bank and gets ₹1,20,000 interest on his savings and fixed deposit accounts in the same bank. He has no other income. He gives Form 125 to the bank at the start of the year, and the bank works out his total income after the deductions and the rebate that apply and deducts tax if any is due. He need not file a return for that year.

If he also had ₹30,000 of rent, he would not qualify, and he would have to file a return, with credit for the tax the bank deducted.

Higher TDS for non-filers is gone

Sections 206AB and 206CCA of the 1961 Act required higher TDS and TCS from a person who had not filed returns. The Finance Act, 2025 omitted them from 1 April 2025, and the Income-tax Act, 2025 has no such provision. Deductors no longer need to check whether a person has filed before deducting tax. The late fee and interest for a missed return still apply.

Practical advice for pensioners

  1. Give Form 125 to the bank at the beginning of the year, not the end.
  2. Keep all savings and deposits in the one specified bank if you rely on this relief.
  3. If your income changes, for example a rent receipt starts, tell the bank and file a return.
  4. Check your Form 130 and the pension TDS for the year, and the annual information statement, for any other income reported against your PAN.

Frequently asked questions

Who need not file an ITR at age 75?

A resident individual aged 75 or more at any time in the tax year whose only income is pension, plus interest from an account in the same specified bank that pays the pension, who has furnished the declaration in Form 125 to that bank, and from whose income the bank has deducted tax (section 402(39) and section 263(8)(b)).

What if I have rent or interest from another bank?

Then you are not a specified senior citizen for that year. You must file a return if your income exceeds the exemption limit, and the bank cannot give you the benefit of this provision.

Who calculates the tax?

The specified bank. It computes your total income after the deductions under Chapter VIII (on the evidence you give during the year) and the rebate under section 156, and deducts tax at the rates in force (section 393(1), Table serial 8(iii), and Rule 208).

Which tax regime applies?

The new regime is the default. Form 125 asks whether you opt out of the new regime under section 202.

Is any bank allowed to do this?

Only a banking company notified by the Central Government as a specified bank (section 402(35)).

Are higher TDS rates for non-filers still there?

No. Sections 206AB and 206CCA of the 1961 Act were omitted from 1 April 2025 and the 2025 Act has no such provision.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Capital Loss: Set-Off and Carry Forward Rules (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 16 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • A short-term capital loss can be set off against any capital gain of the year, short-term or long-term; a long-term capital loss only against long-term gains (section 108(2)).
  • A capital loss cannot be set off against income under any other head, such as salary or house property (section 109(2)).
  • The unabsorbed loss carries forward for eight tax years, against capital gains of the matching kind, but only if the loss was determined in a return filed by the due date (sections 111 and 121).
  • A loss that you could not use because you filed late is lost.

Selling an asset at a loss gives you a capital loss. It reduces tax only if you use it correctly: against the right kind of gain, in the right year, and in a return filed on time. The rules are in sections 108 to 111 and 121 of the Income-tax Act, 2025.

Set-off in the same year (section 108(2))

The net result of each capital asset is computed under sections 72 to 90. Then:

Loss Can be set off against
Short-term capital loss The income computed on any other capital asset, short-term or long-term
Long-term capital loss Only the income on other long-term capital assets

A short-term loss is usually best set off first against short-term gains, which are taxed at higher rates (20% or slab rates), and then against long-term gains.

No set-off against other heads (section 109(2))

For any tax year, the loss under the head Capital gains cannot be set off against income under any other head: not salary, house property, business or other sources. The reverse is allowed: a loss under another head can be set off against capital gains (section 109(1)).

Carry forward (section 111)

If a capital loss cannot be wholly set off in the year, it is carried forward to the following tax years:

  • a short-term loss is set off against the income under the head Capital gains of the next year in respect of any other capital asset;
  • a long-term loss is set off only against long-term capital gains of the next year; and
  • the balance moves on, and no loss is carried forward for more than eight tax years immediately following the year in which it was first computed (section 111(2)).

You must file on time (section 121)

Irrespective of anything else, no loss that has not been determined in pursuance of a return filed under section 263(1) can be carried forward and set off. In practice, you must file the return by the due date and report the loss in it, even if you owe no tax. A belated return (filed after the due date) cannot be used to carry the loss forward; the loss of that year is lost, though it can still be set off against gains of the same year if the return is filed.

Examples

1. Same year. In tax year 2026-27 you have:

  • short-term gain on shares: ₹60,000
  • short-term loss on other shares: ₹1,00,000
  • long-term gain on listed shares: ₹3,00,000

Set off the short-term loss first against the short-term gain (₹60,000), leaving ₹40,000 of the loss. That is set off against the long-term gain, giving net long-term gain ₹2,60,000. The ₹1,25,000 exemption is applied, so ₹1,35,000 is taxed at 12.5% = ₹16,875.

2. Long-term loss. Long-term loss ₹2,00,000 on unlisted shares; short-term gains ₹1,50,000 on listed shares. The long-term loss cannot be set off against the short-term gains. It is carried forward for up to eight years against long-term gains, provided you filed on time.

3. Carry forward. You have a short-term loss of ₹80,000 in 2026-27 and no gains. You file on time. In 2027-28 you have a long-term gain of ₹3,00,000 from the sale of a flat and a short-term gain of ₹20,000. The carried forward short-term loss is set off against both: first the short-term gain (₹20,000) and ₹60,000 against the long-term gain.

4. Salary and capital loss. Salary income ₹12,00,000 and long-term capital loss ₹1,50,000. The loss cannot reduce salary. It is carried forward against future long-term gains.

Practical points

  • Report the loss in the return in the capital gains and carry forward schedules, with the year it arose, and file by the due date.
  • Where the loss is on shares you hold as business stock (a trader), it is a business loss, not a capital loss, and different rules apply (section 112).

Checklist

  1. List all sales of the year with gain or loss, short-term or long-term.
  2. Set off within the year as the table shows.
  3. Carry forward the balance with the year of origin.
  4. File by the due date.

Frequently asked questions

Can I set off a capital loss against salary?

No. Under section 109(2), a loss under the head Capital gains cannot be set off against income under any other head.

How is a short-term loss set off?

Against any capital gain of the same year, whether short-term or long-term (section 108(2)(a)).

How is a long-term loss set off?

Only against long-term capital gains of the same year (section 108(2)(b)).

For how long can I carry forward a loss?

For eight tax years immediately after the year in which it first arose. A short-term loss carried forward can be set off against any capital gain; a long-term loss only against long-term gains (section 111).

Do I have to file my return on time to carry forward a loss?

Yes. A loss not determined in a return filed under section 263(1), that is by the due date, cannot be carried forward (section 121).

Does a capital loss reduce the ₹1,25,000 exempt amount?

The long-term gain on listed equity is computed after set-off of losses, and the ₹1,25,000 is then deducted from the net gain (section 198(2)). A loss set off against a long-term gain reduces the net gain on which the exemption works.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Cost of Acquisition for Capital Gains: Gifted, Inherited and Pre-2001 Assets (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 16 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • A gift, will or inheritance is not a transfer, so the giver pays no capital gains tax. The receiver takes over the previous owner’s cost of acquisition and counts his holding period (section 70, section 73 Table serial 1, section 2(101)).
  • For assets acquired before 1 April 2001, the cost is the actual cost or the fair market value on that date, at your option; for land or building the fair market value is capped at the stamp duty value (section 90(9) and (10)).
  • For listed equity shares and equity-oriented fund units bought before 1 February 2018, the cost is the higher of actual cost and the lower of the value on 31 January 2018 and the sale price (section 90(7)).
  • If the previous owner’s cost cannot be found, his cost is the fair market value on the date he acquired it (section 90(11)).

To compute a capital gain you subtract the cost of acquisition from the sale price. For an asset you bought, that is simple. For an asset you received as a gift or inheritance, or that has been in the family since before 2001, the Income-tax Act, 2025 has specific rules. They are in sections 73 and 90.

Gifts and inheritance: no tax on receipt of the asset

  • A transfer by gift, will or irrevocable trust by an individual or HUF is not a transfer for capital gains (section 70(1)(b)), and a partition of a HUF is also outside it (section 70(1)(a)). The giver does not pay capital gains tax.
  • The receiver is not taxed on a gift of money or property received from a relative, on the occasion of marriage, under a will or by way of inheritance, or in contemplation of death (section 92(3)). A gift from a non-relative above ₹50,000 in a year, in cash or property, is taxed as income from other sources (section 92(2)(m)). “Relative” includes the spouse, brothers and sisters, and lineal ascendants and descendants and their spouses (section 92(5)(g)).
  • Income from an asset you gift to your spouse or minor child is generally added to your own income (section 99, income of other persons included), and a house gifted to a spouse or minor child remains yours for house property tax (section 25).

The receiver’s cost and holding period

When the receiver sells the asset:

  • Cost of acquisition is the cost for which the previous owner acquired it, increased by the cost of improvement borne by the previous owner or by the receiver (section 73(1), Table serial 1).
  • Previous owner means the last owner who acquired the asset in a way other than gift, will, inheritance, trust transfer, distribution on liquidation and the other modes in that serial (section 73(2)(a)).
  • Holding period includes the period the previous owner held the asset (section 2(101)(c)(B)(I)).
  • If the cost to the previous owner cannot be found, it is taken as the fair market value on the date he acquired the asset (section 90(11)).
  • Cost of improvement covers capital expenditure on additions and alterations. For an asset that came to the previous owner before 1 April 2001, only expenditure on or after 1 April 2001 counts (section 90(1)(b)(i)). It excludes expenditure already claimed against house property, business or other sources income (section 90(2)).

Assets held since before 1 April 2001

For an asset that became yours, or the previous owner’s, before 1 April 2001, the cost of acquisition is the actual cost or the fair market value on 1 April 2001, at your option (section 90(9)(a) and (b)). For land or building the fair market value on 1 April 2001 cannot exceed the stamp duty value on that date, where it is available (section 90(10)).

Shares and units bought before 1 February 2018 (grandfathering)

For long-term equity shares of a company, units of an equity-oriented fund or units of a business trust that are covered by section 198 and were acquired before 1 February 2018, the cost of acquisition is the higher of:

  • (a) the actual cost; and
  • (b) the lower of (i) the fair market value, and (ii) the sale price.

The fair market value is the highest quoted price on 31 January 2018 for a listed asset, the highest price on the nearest earlier trading day if there was no trade that day, and the net asset value for an unlisted unit (section 90(8)). For shares not listed on 31 January 2018 but listed on the transfer date, the Act gives an indexed cost formula.

Other cost rules

Asset Cost of acquisition
Bonus shares or other financial assets allotted without payment on the basis of holding Nil (section 90(6)(d))
Rights shares you subscribe for The amount you paid (section 90(6)(c))
The right to subscribe, if you renounce it Nil (section 90(6)(b))
Shares you buy from the person who renounced the right The price paid to him plus the amount paid to the company (section 90(6)(e))
Shares after consolidation, sub-division or conversion Cost worked out from the original shares (section 90(9)(d))
Shares on distribution of assets in liquidation Fair market value on the date of distribution (section 90(9)(c))
Shares allotted under an ESOP or RSU The fair market value taxed as a perquisite (section 73, serial 4)
Goodwill, brand, tenancy rights and other rights The purchase price, or nil in other cases (section 90(3))

Examples

1. Inherited house. Your father bought a house in 1990 for ₹2,00,000. Its fair market value on 1 April 2001 was ₹10,00,000, below the stamp duty value on that date. You inherit it in 2018 and sell it in September 2026 for ₹80,00,000. You can choose the cost: ₹2,00,000 (actual) or ₹10,00,000 (value on 1 April 2001). Choose ₹10,00,000, which gives the lower gain. The holding period includes your father’s, so the gain is long-term: 80,00,000 - 10,00,000 = ₹70,00,000. Tax is at 12.5% without indexation, or, as the house was acquired before 23 July 2024, the lower of that and 20% with indexation, if you are a resident individual (section 197).

2. Gifted shares. Your father gives you listed shares he bought in 2015 for ₹1,00,000. They were worth ₹3,00,000 on 31 January 2018. You sell them in 2026 for ₹5,00,000. The cost is the higher of ₹1,00,000 and the lower of ₹3,00,000 and ₹5,00,000, that is ₹3,00,000. The gain is ₹2,00,000, long-term, and taxable above ₹1,25,000 at 12.5%.

3. Gift from a friend. If a friend (not a relative) gives you land with a stamp duty value of ₹20,00,000, you are taxed on ₹20,00,000 as income from other sources in the year you receive it (section 92(2)(m)). That value is then your cost of acquisition if you sell the land later (section 73, serial 17).

Points to keep in mind

  • Keep the documents of the previous owner’s cost and any improvements. For old assets, a registered valuer’s report for the value on 1 April 2001 supports the option.
  • The cost of acquisition cannot include interest you claimed as a deduction elsewhere (section 72(3)).
  • For ESOP shares and shares of a foreign company, see our posts on ESOP taxation and on capital gains.
  • If the property was inherited, check whether the heir needs a will or legal heir certificate to prove the mode of acquisition.

Frequently asked questions

Is there capital gains tax when I gift or inherit an asset?

No. A transfer by gift, will or inheritance is not a transfer for capital gains (section 70(1)(b)), and the receiver is not taxed on a gift from a relative or on an inheritance (section 92(3)). Tax arises when the receiver later sells the asset.

What is the cost of an inherited or gifted asset?

The cost for which the previous owner acquired it, plus any cost of improvement borne by the previous owner or by you (section 73(1), Table serial 1). “Previous owner” is the last owner who acquired it other than by gift, will, inheritance or one of the other modes in that serial.

Does the holding period of the giver count?

Yes. The period for which the previous owner held the asset is included in your holding period (section 2(101)(c)), so an asset held by the giver for a long time is long-term in your hands even if you sell soon after receiving it.

What if the asset was bought before 1 April 2001?

You may take either the actual cost or its fair market value on 1 April 2001. For land or building the fair market value cannot exceed the stamp duty value on that date (section 90(9) and (10)). The same applies where the previous owner held it before that date.

How are shares bought before 1 February 2018 treated?

For long-term listed equity shares, units of an equity-oriented fund or a business trust, the cost is the higher of the actual cost and the lower of (i) the highest quoted price on 31 January 2018 (or net asset value for unlisted units) and (ii) the sale price (section 90(7) and (8)).

What is the cost of bonus and rights shares?

Bonus shares: nil. Rights shares: the amount you paid for them. A right to subscribe that you renounce: nil (section 90(5) and (6)).

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Section 85 (Earlier 54EC) Capital Gain Bonds, and Sections 83 and 84 (Earlier 54B and 54D) (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 03 October 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Section 85 (earlier 54EC) exempts the long-term gain on land or building if the gain is invested within six months in NHAI or REC bonds redeemable after five years, up to ₹50 lakh.
  • The bonds must not be sold, converted into money or pledged for a loan within five years, or the exempted gain is taxed in that year (section 85(3) and (4)).
  • Section 83 (earlier 54B) exempts the gain on agricultural land if you buy other agricultural land within two years; section 84 (earlier 54D) exempts gain on compulsory acquisition of industrial land or building if you buy or build a replacement within three years.
  • Gains not used by the return due date go to the capital gains deposit scheme, except for section 85, where the investment must be within six months.

If you sell land or a building, investing the long-term gain in specified bonds can save tax on it. Two other sections give similar relief for agricultural land and for land taken by the government. This post covers sections 83 to 85 of the Income-tax Act, 2025.

Section 85 (earlier 54EC): investment in specified bonds

Original asset: land or building, or both, with a long-term capital gain. Gain on shares, gold or other assets does not qualify.

Who: any assessee, not only individuals.

Investment: all or part of the capital gain, within six months after the date of transfer, in a long-term specified asset: a bond redeemable after five years, issued on or after 1 April 2018 by the National Highways Authority of India or Rural Electrification Corporation Limited, or another bond notified by the Central Government.

Limit (section 85(2)): the investment from the gain on one or more original assets cannot exceed ₹50 lakh, either in a tax year, or in the year of the transfer and the next tax year taken together.

Exemption (section 85(1)):

  • If the gain is more than the investment, the excess is taxed under section 67.
  • If the gain is equal to or less than the investment, the whole gain is exempt.

Lock-in (section 85(3) and (4)): if you transfer the bonds, or convert them into money, within five years of acquiring them, the exempted gain is treated as long-term capital gain of that year. Taking a loan or advance on the security of the bonds is treated as converting them into money on that date.

No double benefit (section 85(5)): if you use the investment for this exemption, you cannot also claim a section 123 deduction for it.

Example. A plot held for six years is sold on 20/08/2026 for a long-term gain of ₹60,00,000. Within six months, by 19/02/2027, you invest ₹50,00,000 in NHAI bonds. Exempt: ₹50,00,000. Taxed: ₹10,00,000 at 12.5%, i.e. ₹1,25,000 plus cess. If you also sell another plot in the same year, the ₹50 lakh limit is shared.

Points to watch:

  • The six months run from the date of transfer, not the end of the year, and there is no deposit scheme alternative for this section. The bond must be bought in time, even if the return is not yet due.
  • If the sale price for a compulsory acquisition is not received on the date of transfer, the period for investment is counted from the date the compensation is received (section 89).
  • Interest on the bonds is taxable; the exemption is only for the capital gain.
  • The investment limit is for the gain from land or building, not the sale price. Invest no more than the gain.

Section 83 (earlier 54B): agricultural land

Who: an individual or HUF.

Original asset: land used for agricultural purposes by the assessee, his parent or the HUF in the two years immediately before the transfer. (The land must be a capital asset: urban land, as explained in our post on property sales.)

New asset: other land bought within two years after the transfer, for use for agriculture.

  • If the gain exceeds the cost of the new land, the excess is taxed, and the cost of the new land is nil if it is sold within three years of purchase.
  • If the gain is less than or equal to the cost, nothing is taxed, and the cost of the new land is reduced by the gain if it is sold within three years.

Deposit: if the gain is not used by the date of filing the return, deposit it in a specified bank under the capital gains deposit scheme before the due date and attach proof (section 83(2)). Any unused amount is taxed as income of the year in which two years from the transfer expire (section 83(4)).

Section 84 (earlier 54D): compulsory acquisition of an industrial undertaking’s land or building

Original asset: land, building or a right in them, belonging to an industrial undertaking and used by the assessee for its business in the two years before the transfer, compulsorily acquired under any law.

New asset: other land, building or a right, bought within three years after the transfer, or a building constructed in that period, for shifting or re-establishing the undertaking or setting up another industrial undertaking.

The same two-way rule applies: the gain above the cost of the new asset is taxed, and the cost of the new asset is nil or reduced if it is transferred within three years. The unused gain goes into the capital gains deposit scheme before the return due date, and any amount not used within three years of the transfer is taxed in the year those three years expire (section 84(4)).

Which section for which gain

Asset sold Residential house Land or building (not a house) Agricultural land Shares and other assets
Reinvest in a house Section 82 Section 86 Section 86 Section 86
Reinvest in NHAI or REC bonds Section 85 Section 85 Section 85 Not available
Reinvest in agricultural land Not available Not available Section 83 Not available

Our post on sections 82 and 86 explains the house exemptions, and the post on capital gains on property compares them with the bond route.

Before you invest

  1. Count six months from the date of transfer, and invest earlier than that if you want a margin.
  2. Keep the bond certificate and the allotment letter, and a note of the five-year date.
  3. Do not borrow against the bonds.
  4. Report the bonds and exemption in the capital gains schedule of the return.

Frequently asked questions

Who can claim the section 85 (earlier 54EC) exemption?

Anyone, including a company, with a long-term capital gain from the transfer of land or building or both who invests the gain, or part of it, within six months after the transfer in a long-term specified asset. Only gain on land or building qualifies.

What is a long-term specified asset?

A bond redeemable after five years issued on or after 1 April 2018 by the National Highways Authority of India or by Rural Electrification Corporation Limited, or any other bond notified by the Central Government (section 85(6)).

How much can I invest?

Not more than ₹50 lakh from the gain on one or more original assets in a tax year, or in the year of transfer and the next tax year together (section 85(2)).

How long must I hold the bonds?

Five years. If you transfer them, convert them into money or take a loan or advance against them within five years, the exempted gain is taxed as long-term gain in that year (section 85(3) and (4)).

Can I also claim section 123 on the same investment?

No. If the investment is used for section 85, no deduction under section 123 is allowed for it (section 85(5)).

When does section 83 apply?

When an individual or HUF sells agricultural land that was used for agriculture by the assessee, his parent or the HUF in the two preceding years, and buys other agricultural land within two years.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.