When we think of capital gains, our minds instantly go to "transfers" of capital assets – selling shares, property, mutual funds, etc. But did you know there are certain transactions that look like transfers but are not taxed as such under the Income Tax Act?
Enter Section 47.
Section 47 of the Income Tax Act plays a crucial role in identifying & listing transactions not regarded as a transfer for capital gains tax. This means that even if there's an exchange of assets, not all of them attract capital gains liability, provided they fall under the exemptions covered in this section. “
What Does Section 47 Say?
Section 47 exempts certain transactions from being classified as transfers. These include:
- Transfers during a gift, will, or inheritance
- Transfers between holding & 100% subsidiary companies (subject to certain conditions)
- Transfers in amalgamation or demerger between companies
- Conversion of bonds or debentures into shares
- Transfer of capital assets under a scheme of lending of securities
In simple words, these exempted transfers for capital gains are not taxed, provided they meet the prescribed rules. “
Why This Matters?
Many taxpayers unknowingly report these exempted transactions as capital gains, leading to confusion & unnecessary tax burdens. But Section 47 specifies transactions that are not regarded as transfers, helping taxpayers avoid over-reporting & make informed decisions.
It provides for exemptions from capital gains tax liability & determines short-term capital gains (STCG) on the sale of certain assets by clarifying which transactions are not to be taxed.
Examples of Transactions Not Regarded as Transfers under Section 47
Let’s break this down with practical examples:
- Gifts or Inheritance
You received a plot of land from your grandfather? That’s not a "transfer" under this section. - Corporate Restructuring
In a demerger where assets are transferred from one company to another, Section 47 exempts this from capital gains tax, provided the conditions are satisfied. - Conversion of Bonds into Shares
When your convertible bonds turn into equity shares — yes, it’s a transfer. But not for tax purposes.
Not All Transactions Are Equal
It’s important to note that not all transactions qualify under Section 47. If the prescribed conditions under this section are violated — say, the shareholding in a merged entity doesn’t meet the required ratio — the exemption may be withdrawn.
That’s where understanding the specific clauses & amendments under Section 47 of the Income Tax Act 1961 becomes necessary. From Section 47(xiii)B to 47(vii) & beyond, each sub-clause serves a unique role in offering tax relief during asset transitions.
Why Should You Care?
- If you’re an investor transferring assets in a company restructuring, this section could save you lakhs in taxes.
- If you’re an individual planning succession or gifting, understanding this provision can help you do it tax-efficiently.
- If you're into capital gains tax planning, this is your go-to section for spotting the exceptions.
To know more about this section, contact our experts on Callmyca.com.
