Taxation - DT Ch 06: Capital Gains - Test 1: answer key

Question 1 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Scenario. Smt. Anuradha Sen, a resident individual, inherited several agricultural parcels in April 2024 and continues to cultivate them through local contractors. For deciding whether the parcels are capital assets, she has obtained the relevant population figures from the last preceding census whose figures were published before 1 April 2026. Plot A lies within the municipal limits of Devgarh, whose population is 10,000. Plot B is outside the limits of a municipality with a population of 90,000; its aerial distance from the municipal boundary is 1.95 km, although the shortest motorable road is 3.6 km. Plot C is also outside that municipality and is 2.05 km away aerially. Plot D is 5.8 km aerially from a municipality with a population of 1,20,000. Plot E is 7.5 km aerially from a municipality with a population of 10,50,000. All five parcels are in India and are used for agricultural operations. Anuradha also keeps a family car, ordinary household furniture and cotton clothing for personal use. She wears a diamond necklace and owns a gold ornament inherited from her mother. In addition, she displays a family painting and a small sculpture at home. She has retained a Gold Deposit Bond issued under the Gold Deposit Scheme, 1999, and a deposit certificate issued under the Gold Monetisation Scheme, 2015, which the Central Government has notified. Separately, she holds two kilograms of physical gold bars as a long-term investment. Her adviser is asked to classify these items before she considers any sale during T.Y. 2026-27. No parcel is held as stock-in-trade, and none of the personal items is used in a business. All dates and distances are supported by the transaction records and survey plans available to her.

Considering Plots B and C, which conclusion correctly applies the population-based aerial distance test for determining whether agricultural land is a capital asset?

1. Plot B is a capital asset, while Plot C is rural agricultural land outside the specified urban belt. (correct answer)
2. Both Plot B and Plot C are capital assets because the municipality has more than 10,000 residents.
3. Both plots are rural agricultural land because neither is located inside the municipal boundary.
4. Plot B is rural, while Plot C is urban, because the road distance is decisive.

Answer: A — Plot B is a capital asset, while Plot C is rural agricultural land outside the specified urban belt.

Explanation. Under section 2(22), agricultural land is outside the definition only if it is rural. A municipality with population 90,000 falls in the more than 10,000 to 1,00,000 band, for which the aerial limit is 2 km. Plot B: 1.95 km is within 2 km, hence urban and a capital asset. Plot C: 2.05 km exceeds 2 km, hence outside the specified belt and rural. Road distance of 3.6 km is irrelevant; aerial distance controls.

Where it goes wrong. Using road distance instead of aerial distance, or treating every agricultural parcel outside municipal boundaries as rural.

Authority. Section 2(22) of the Income-tax Act, 2025

Question 2 · 2 marks · Taxation - DT Ch 06: Capital Gains · medium

Which conclusion follows for Plot A and Plot D after applying the minimum municipal population requirement and the applicable aerial distance limit?

1. Only Plot A is a capital asset; Plot D remains rural agricultural land.
2. Only Plot D is a capital asset; Plot A remains rural agricultural land.
3. Both Plot A and Plot D are capital assets under the population and distance tests. (correct answer)
4. Neither Plot A nor Plot D is a capital asset under the stated facts.

Answer: C — Both Plot A and Plot D are capital assets under the population and distance tests.

Explanation. Section 2(22) captures agricultural land within municipal limits where population is not less than 10,000. Plot A: 10,000 is equal to the minimum, so it is a capital asset. Plot D: 1,20,000 falls in the more than 1,00,000 to 10,00,000 band, for which the aerial limit is 6 km. Its distance of 5.8 km is within that limit. Therefore, both plots are capital assets.

Where it goes wrong. Reading the municipal population requirement as more than 10,000 instead of not less than 10,000.

Authority. Section 2(22) of the Income-tax Act, 2025

Question 3 · 2 marks · Taxation - DT Ch 06: Capital Gains · medium

Anuradha's personal effects include clothing, furniture, a car, jewellery, a painting and a sculpture. Which classification is appropriate under the statutory definition of personal effects?

1. Only the diamond necklace is a capital asset; the painting and sculpture are personal effects.
2. Only the painting and sculpture are capital assets; jewellery remains excluded as personal effects.
3. The car, furniture and clothing are capital assets because Anuradha holds them personally.
4. Jewellery, painting and sculpture are capital assets; car, furniture and clothing are excluded. (correct answer)

Answer: D — Jewellery, painting and sculpture are capital assets; car, furniture and clothing are excluded.

Explanation. Section 2(22) excludes ordinary personal effects, including the car, furniture and clothing, but specifically removes jewellery, paintings and sculptures from that exclusion. Count the relevant categories: car, furniture and clothing (3) remain non-capital personal effects; jewellery, painting and sculpture (3) are capital assets. Personal use does not alter the statutory treatment of the excluded categories. Consequently, the necklace and inherited gold ornament are both capital assets.

Where it goes wrong. Assuming that an item remains a personal effect merely because it is used personally or displayed at home.

Authority. Section 2(22) of the Income-tax Act, 2025

Question 4 · 2 marks · Taxation - DT Ch 06: Capital Gains · medium

Which statement correctly classifies Anuradha's Gold Deposit Bond, notified Gold Monetisation certificate and physical gold bars?

1. The bond, certificate and investment bars are all excluded from the capital asset definition.
2. The notified bond and certificate are excluded; physical gold held as investment remains a capital asset. (correct answer)
3. Only the 1999 Gold Deposit Bond is excluded; the 2015 certificate remains a capital asset.
4. Only certificates held for personal use are excluded; investment gold bars are personal effects.

Answer: B — The notified bond and certificate are excluded; physical gold held as investment remains a capital asset.

Explanation. Section 2(22) excludes Gold Deposit Bonds under the Gold Deposit Scheme, 1999 and deposit certificates issued under the notified Gold Monetisation Scheme. It does not exclude physical bullion held as an investment. Thus, of the three categories presented, the two notified deposit instruments are excluded, while the 2 kg gold bars remain capital assets. The exclusion is instrument-specific; it does not extend to all forms of gold.

Where it goes wrong. Extending the exclusion applicable to specified gold deposit instruments to physical gold bullion generally.

Authority. Section 2(22) of the Income-tax Act, 2025

Question 5 · 2 marks · Taxation - DT Ch 06: Capital Gains · medium

Scenario. Vikramaditya Tech Labs LLP provides software services and has recently expanded its treasury operations. Its accounts distinguish long-term strategic investments from securities acquired for frequent resale. On 1 July 2024, the LLP acquired 10,000 equity shares of Narmada Semiconductors Ltd. as a strategic investment, recorded separately from its business trading inventory. On 1 November 2026, after commencing a share-dealing desk, the partners resolved to treat 4,000 of those investment shares as stock-in-trade. The fair market value of the 4,000 shares on that date was ₹72,00,000. The remaining 6,000 shares continued to be held as investments. The LLP later sold 2,500 of the converted shares on 15 February 2027. A separate entity, Meridian Global Fund, is registered as a Foreign Institutional Investor and acquired 50,000 listed shares of Aryan Steels Ltd. in accordance with SEBI regulations. Its internal mandate describes the position as trading inventory and the fund regularly buys and sells such securities. The finance team is unsure whether that accounting description changes the character of the securities for capital asset purposes. The LLP also held 800 shares in Orion Cables Ltd. The company announced a rights offer on 5 August 2026. The LLP renounced 300 of its rights in favour of an associate on 15 August 2026. The associate subscribed to those rights and received 300 shares on 10 September 2026. The LLP itself subscribed to the remaining 500 rights shares, which were also allotted on 10 September 2026. The partners seek advice on the character of the existing investment, the conversion into trading inventory, the FII's securities, and the commencement date for computing the holding period of the renounced right and the newly allotted shares.

Which treatment should be adopted for the LLP's strategic investment shares and its ordinary share-dealing inventory while determining whether they are capital assets?

1. All shares are capital assets because the LLP acquired them as financial securities.
2. All shares are stock-in-trade because the LLP carries on a commercial business.
3. Strategic investment shares are capital assets, while ordinary trading inventory is excluded. (correct answer)
4. Share classification depends only on listing status, not the purpose of holding.

Answer: C — Strategic investment shares are capital assets, while ordinary trading inventory is excluded.

Explanation. Section 2(22)(a) excludes stock-in-trade, consumable stores and raw materials of a business. Whether shares are capital assets depends on how they are held, not their nature alone. Here, 10,000 Narmada shares are strategic investments, while ordinary trading inventory is held for resale. Therefore, the investment lot is a capital asset and ordinary trading stock is excluded. The classification cannot be made merely from the fact that both holdings are shares.

Where it goes wrong. Treating the nature of the asset as decisive instead of examining the purpose and manner of holding.

Authority. Section 2(22)(a) of the Income-tax Act, 2025

Question 6 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Meridian Global Fund is an FII investing in securities in accordance with SEBI regulations. Its 50,000 Aryan Steels shares are described as trading inventory. Which statement correctly applies the capital asset definition?

1. All qualifying FII securities remain capital assets even when held as trading inventory. (correct answer)
2. FII securities become stock-in-trade whenever the fund regularly buys and sells them.
3. Only securities kept outside the trading mandate can be capital assets for an FII.
4. A security is a capital asset only when it is listed in India.

Answer: A — All qualifying FII securities remain capital assets even when held as trading inventory.

Explanation. Section 2(22)(b) specifically includes securities held by a Foreign Institutional Investor that invested in accordance with SEBI regulations. Unlike the general stock-in-trade exclusion, this special inclusion preserves qualifying securities as capital assets even where the fund's mandate describes them as trading inventory. Hence, all 50,000 shares meet the specified category. Accounting descriptions and frequency of dealing do not convert these securities into ordinary excluded business stock for this definition.

Where it goes wrong. Applying the general stock-in-trade exclusion to securities specifically covered by the FII inclusion.

Authority. Section 2(22)(b) of the Income-tax Act, 2025

Question 7 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

The LLP converts 4,000 investment shares into stock-in-trade on 1 November 2026 and subsequently sells part of that inventory. Which statement correctly identifies the transfer?

1. The change into inventory is not a transfer until an outside buyer acquires the shares.
2. The conversion is a transfer only if the shares appreciate above original cost.
3. Only the later inventory sale is a transfer; internal reclassification is not included.
4. Conversion of an investment capital asset into stock-in-trade itself constitutes a transfer. (correct answer)

Answer: D — Conversion of an investment capital asset into stock-in-trade itself constitutes a transfer.

Explanation. Section 2(109)(d) includes conversion of a capital asset into stock-in-trade as a transfer. The LLP changed the character of 4,000 investment shares on 1 November 2026; that date is the transfer date, even though no third-party sale occurred then. The subsequent sale of 2,500 shares is a separate inventory sale. Section 67(6) postpones chargeability of the conversion gain until the stock is sold, but does not remove the conversion from the definition of transfer.

Where it goes wrong. Confusing the date on which conversion constitutes a transfer with the later year in which the resulting capital gain becomes chargeable.

Authority. Section 2(109)(d) of the Income-tax Act, 2025; Section 67(6) of the Income-tax Act, 2025

Question 8 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Which dates should be used to begin calculating the holding period for the 300 renounced rights and the 500 rights shares subscribed to by the LLP?

1. Both periods begin on the rights offer date, irrespective of allotment or renunciation.
2. Renounced rights run from the offer date; subscribed rights shares run from allotment. (correct answer)
3. Both periods begin from the date the original equity shares were acquired.
4. Both periods begin on the date payment is made for the rights subscription.

Answer: B — Renounced rights run from the offer date; subscribed rights shares run from allotment.

Explanation. Under section 2(101)(c)(C), the period for a right to subscribe that is renounced is reckoned from the company's offer date. The 300 renounced rights therefore start on 5 August 2026. For the 500 rights shares subscribed to by the LLP itself, the period starts on allotment, 10 September 2026. These are distinct dates: 5 August versus 10 September, a difference of 36 days.

Where it goes wrong. Applying the allotment-date rule to a renounced right instead of using the company's offer date.

Authority. Section 2(101)(c)(C)(2) of the Income-tax Act, 2025; Section 2(101)(c)(C)(3) of the Income-tax Act, 2025

Question 9 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Scenario. Nandini Real Estates Pvt. Ltd. entered into an agreement on 10 June 2026 to sell its warehouse building to Horizon Logistics Ltd. for ₹4.80 crore. The buyer paid ₹1.20 crore on 15 July 2026. On 1 September 2026, Nandini handed over possession under the written contract; the buyer performed the material obligations required of it, and the parties agree that the arrangement satisfies section 53A of the Transfer of Property Act, 1882. The registered conveyance deed was executed only on 20 December 2026. The directors wish to identify the date on which the transaction is treated as a transfer for capital gains purposes. The company's director, Smt. Leela Rao, has separate personal investments. She became a member of Sunrise Co-operative Housing Society and was allotted the society shares linked to a flat on 15 September 2023. Physical possession of the flat was delivered on 20 February 2024. She proposes to transfer her rights in the flat on 16 September 2025. She also acquired unlisted preference shares of Delta Components Ltd. on 1 April 2023. Those preference shares were converted into equity shares of the same company on 1 October 2025, and she sold the resulting equity shares on 2 October 2026. Leela acquired another block of unlisted shares in Meridian Textiles Ltd. on 1 July 2025. The company went into liquidation on 1 October 2025. She transferred those shares on 31 March 2027. For period-of-holding purposes, the period after the company entered liquidation is to be excluded. The company and Leela have retained the relevant allotment letters, contracts, possession records and corporate resolutions. The questions below concern only the character of the assets, the occurrence of transfer and the periods relevant to short-term or long-term classification.

Assuming the contractual arrangement satisfies section 53A of the Transfer of Property Act, 1882, on which date is Nandini's warehouse transaction treated as a transfer?

1. 1 September 2026, when possession passed under the qualifying part-performance contract. (correct answer)
2. 10 June 2026, when Nandini and Horizon signed the sale agreement.
3. 15 July 2026, when the buyer paid the first part of consideration.
4. 20 December 2026, when the conveyance deed was registered by the parties.

Answer: A — 1 September 2026, when possession passed under the qualifying part-performance contract.

Explanation. Section 2(109)(g) includes possession of immovable property given in part performance of a contract meeting section 53A of the Transfer of Property Act, 1882. On the facts, possession and contractual performance occurred on 1 September 2026. The 10 June agreement and 15 July payment preceded that event; registration on 20 December followed it. The relevant transfer is therefore 1 September 2026, not the conveyance date.

Where it goes wrong. Treating registration of the conveyance deed as essential even when possession under qualifying part-performance provisions has already taken place.

Authority. Section 2(109)(g) of the Income-tax Act, 2025; Section 53A of the Transfer of Property Act, 1882

Question 10 · 2 marks · Taxation - DT Ch 06: Capital Gains · medium

For determining the holding period of Leela's flat acquired through Sunrise Co-operative Housing Society, which date is relevant for the commencement of the holding period?

1. 20 February 2024, when Leela first received physical possession of the flat.
2. 16 September 2025, when Leela entered into the transfer arrangement for the flat.
3. 15 September 2023, when the society shares linked to the flat were allotted. (correct answer)
4. 10 August 2023, when Leela submitted her original membership application to society.

Answer: C — 15 September 2023, when the society shares linked to the flat were allotted.

Explanation. For a flat obtained through a co-operative society, the study unit reckons the holding period from allotment of the society shares that confer the property right. The relevant start is 15 September 2023, not possession on 20 February 2024. From 15 September 2023 to 16 September 2025 is 24 months plus 1 day, exceeding the 24-month threshold for this immovable-property right. It is therefore long-term.

Where it goes wrong. Starting the period from physical possession instead of the date on which the society shares conferring the right were allotted.

Authority. Section 2(109)(f) of the Income-tax Act, 2025; Section 2(101) of the Income-tax Act, 2025

Question 11 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Leela converts preference shares into equity shares of the same company. Which date should be adopted as the commencement of the holding period of the resulting equity shares?

1. 1 October 2025, when the preference shares were converted into equity shares.
2. 1 April 2023, when Leela first acquired the preference shares of Delta Components Ltd. (correct answer)
3. 2 October 2026, when Leela completed the sale of the resulting equity shares.
4. The date on which Delta Components Ltd. first commenced commercial operations.

Answer: B — 1 April 2023, when Leela first acquired the preference shares of Delta Components Ltd.

Explanation. Section 2(101)(c)(B)(4) includes the period for which preference shares were held when equity shares arise by conversion under section 70(1)(zb). Count from 1 April 2023 to 2 October 2026: 3 years, 6 months and 1 day, which exceeds 24 months. Do not restart the clock on 1 October 2025. The resulting unlisted equity shares therefore qualify as a long-term capital asset.

Where it goes wrong. Resetting the holding-period clock on conversion instead of carrying forward the preference-share holding period.

Authority. Section 2(101)(c)(B)(4) of the Income-tax Act, 2025; Section 70(1)(zb) of the Income-tax Act, 2025

Question 12 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

For the shares of Meridian Textiles Ltd., how should the period after the company entered liquidation be treated when determining the holding period?

1. The full calendar period from 1 July 2025 to 31 March 2027 is counted.
2. Only the period after 1 October 2025 is counted for the shares.
3. The holding period restarts on 1 October 2025 when liquidation begins.
4. Only 1 July 2025 to 1 October 2025 is counted; later period is excluded. (correct answer)

Answer: D — Only 1 July 2025 to 1 October 2025 is counted; later period is excluded.

Explanation. Section 2(101)(c)(A)(1) requires exclusion of the period after the company enters liquidation. Count only 1 July 2025 to 1 October 2025, approximately 3 months. The 18 months from 1 October 2025 to 31 March 2027 are excluded, although calendar time from purchase to transfer is about 21 months. Three months does not exceed the 24-month test for unlisted shares; the asset remains short-term.

Where it goes wrong. Including the period during which the company remained in liquidation when calculating the period of holding.

Authority. Section 2(101)(c)(A)(1) of the Income-tax Act, 2025

Question 13 · 2 marks · Taxation - DT Ch 06: Capital Gains · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Mr. Dev purchased equity shares listed on a recognised stock exchange on 10 March 2026 for ₹12,00,000 and transferred them on 10 March 2027 for ₹14,40,000. The shares remained listed throughout, and the transfer took place in T.Y. 2026-27. Ignore the amount of capital gain and any concessional tax rate; classify the shares solely by their period of holding under the rules applicable on the transfer date. Which statement is correct?

1. Long-term, because a listed equity share becomes long-term on completion of 12 months.
2. Long-term, because the sale price exceeds the acquisition cost by ₹2,40,000.
3. Short-term, because long-term status requires a period exceeding 12 months. (correct answer)
4. Short-term only when the share was held for less than 12 months.

Answer: C — Short-term, because long-term status requires a period exceeding 12 months.

Explanation. Section 2(101) treats listed equity shares as long-term only when held for more than 12 months. From 10 March 2026 to 10 March 2027 is 12 months, not more than 12. Hence, the shares remain short-term. The ₹2,40,000 appreciation (₹14,40,000 minus ₹12,00,000) does not affect the holding-period test; classification depends on elapsed time, not the size of the gain.

Where it goes wrong. Treating a period of exactly 12 months as sufficient when the statutory test requires more than 12 months.

Authority. Section 2(101) of the Income-tax Act, 2025; Section 2(67) of the Income-tax Act, 2025

Question 14 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Ms. Rhea acquired units of an equity-oriented mutual fund on 5 June 2025 for ₹8,00,000. The units were not listed on a recognised stock exchange. She transferred the entire holding on 6 October 2026 for ₹9,10,000. The fund satisfies the statutory definition of an equity-oriented fund throughout the relevant period. Determine whether the units are short-term or long-term, keeping in view the special holding period for units of an equity-oriented fund and the difference between that rule and the general period for other assets.

1. Long-term, since 16 months exceeds the 12-month threshold for equity-oriented fund units. (correct answer)
2. Short-term, since unlisted mutual fund units always require a 24-month holding period.
3. Long-term only if the equity-oriented fund units were listed on a recognised exchange.
4. Short-term, because every mutual fund unit is subject to a 24-month period.

Answer: A — Long-term, since 16 months exceeds the 12-month threshold for equity-oriented fund units.

Explanation. Under section 2(101), units of an equity-oriented fund and units of UTI use the 12-month holding threshold, whether listed or unlisted. From 5 June 2025 to 6 October 2026 is 16 months and 1 day, so the period exceeds 12 months. The units are long-term. The 24-month general rule for other capital assets does not displace the specific 12-month category applicable to these units.

Where it goes wrong. Assuming that unlisted units of an equity-oriented fund automatically fall under the general 24-month threshold.

Authority. Section 2(101) of the Income-tax Act, 2025

Question 15 · 2 marks · Taxation - DT Ch 06: Capital Gains · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

On 1 July 2024, Karan acquired 2,000 equity shares of a closely held company that are not listed on any recognised stock exchange. He sold all the shares on 1 July 2026. There was no conversion, inheritance, amalgamation or other event affecting the period of holding. The transaction falls in T.Y. 2026-27. Determine the classification under the unlisted-share holding period, paying attention to whether the statute requires the period to be more than 24 months or merely equal to that period.

1. Long-term, because holding for 24 months is sufficient under the unlisted-share rule.
2. Short-term only where the shares are held for less than 12 months.
3. Long-term, because the date of transfer falls in T.Y. 2026-27.
4. Short-term, because 24 months is not more than 24 months. (correct answer)

Answer: D — Short-term, because 24 months is not more than 24 months.

Explanation. Section 2(101) requires a holding period exceeding 24 months for an unlisted share to be long-term. The period from 1 July 2024 to 1 July 2026 is 24 months, with no additional day. Since the statutory test is more than 24 months, not 24 months or more, the shares are short-term. A transfer on 2 July 2026 would cross the threshold, but that is not the date given.

Where it goes wrong. Reading more than 24 months as 24 months or more.

Authority. Section 2(101) of the Income-tax Act, 2025

Question 16 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Mrs. Iyer purchased a commercial building on 20 January 2024 and sold it on 21 February 2026. It was held as an investment and not as stock-in-trade. There is no previous-owner period to include and no special rule altering the date of acquisition. The building is situated in India, and the sale occurs in T.Y. 2026-27. Determine whether it is a short-term or long-term capital asset by applying the holding period prescribed for immovable property.

1. Short-term, because a building must be held for more than 36 months.
2. Long-term, because 25 months and 1 day exceeds the 24-month threshold. (correct answer)
3. Short-term, because the asset was acquired after 1 April 2023.
4. Long-term, because every property held across two financial years qualifies.

Answer: B — Long-term, because 25 months and 1 day exceeds the 24-month threshold.

Explanation. Immovable property transferred in T.Y. 2026-27 is long-term when held for more than 24 months under section 2(101). From 20 January 2024 to 21 February 2026 is 25 months and 1 day. The period is therefore 1 month and 1 day beyond the 24-month threshold, so the building is a long-term capital asset. The historical 36-month rule does not apply to this transfer date.

Where it goes wrong. Applying a historical 36-month holding period to an immovable property transferred in T.Y. 2026-27.

Authority. Section 2(101) of the Income-tax Act, 2025

Question 17 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Mr. Kabir acquired a sculpture as an investment on 1 January 2024 and transferred it on 1 July 2026, after holding it for 30 months. It is a work of art, and therefore not excluded as an ordinary personal effect. Assume there was no inheritance or other period-inclusion rule. Determine the holding-period threshold applicable to this transfer in T.Y. 2026-27. The question also asks whether the 36-month general threshold still applies to a transfer made in this tax year.

1. Long-term, because the current general threshold is more than 24 months. (correct answer)
2. Short-term, because all works of art require a 36-month holding period.
3. Long-term, because all works of art have a 12-month holding period.
4. Short-term, because the 36-month period applies to every other asset.

Answer: A — Long-term, because the current general threshold is more than 24 months.

Explanation. Section 2(101) in the attached ICAI unit for T.Y. 2026-27 follows the Income-tax Act, 2025, in force from 1 April 2026, which replaced the 1961 Act. For a transfer in this year, the general period for other capital assets is more than 24 months; the 36-month rule relates to transfers before 23 July 2024. Calculation: 30 months is greater than 24 months, so the sculpture is long-term. This distinction corrects the historical threshold to match the supplied study material.

Where it goes wrong. Importing the pre-23 July 2024 general holding-period threshold into a transfer made in T.Y. 2026-27.

Authority. Section 2(101) of the Income-tax Act, 2025; Section 2(67) of the Income-tax Act, 2025

Question 18 · 2 marks · Taxation - DT Ch 06: Capital Gains · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Meera acquired a notified zero-coupon bond on 15 January 2026 and redeemed it on 16 February 2027. It satisfies the statutory definition of a zero-coupon bond and is not a market-linked debenture or unlisted debenture. The issuer made no payment or benefit before redemption. Determine whether the asset is short-term or long-term, applying the special period prescribed for zero-coupon bonds rather than the general holding period for other capital assets.

1. Short-term, because every bond follows the general 24-month holding period.
2. Short-term, because zero-coupon bonds cannot be long-term capital assets.
3. Long-term, because 13 months exceeds the 12-month zero-coupon bond threshold. (correct answer)
4. Long-term, because every bond is long-term once one financial year ends.

Answer: C — Long-term, because 13 months exceeds the 12-month zero-coupon bond threshold.

Explanation. Section 2(101) assigns a 12-month threshold to zero-coupon bonds. From 15 January 2026 to 16 February 2027 is 13 months and 1 day, which is more than 12 months. Accordingly, the bond is long-term. Do not apply the 24-month general rule for other capital assets to a category expressly listed with a 12-month period. The conclusion concerns classification only, not the applicable tax rate.

Where it goes wrong. Applying the general 24-month threshold instead of the specific 12-month threshold for zero-coupon bonds.

Authority. Section 2(101) of the Income-tax Act, 2025; Section 2(112) of the Income-tax Act, 2025

Question 19 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Arun invested ₹15,00,000 in units of a specified mutual fund on 5 April 2023 and continued to hold the units until 6 April 2027, when he transferred them for ₹19,00,000. The units fall within the statutory category of specified mutual fund, and the acquisition date is after 1 April 2023. There was no conversion or other transaction affecting the holding period. Determine the character of the capital gain, having regard to the special deeming provision applicable to this class of units.

1. Long-term, because the units were held for four years before transfer.
2. Short-term, because section 76 deems such gains short-term irrespective of period. (correct answer)
3. Long-term, because the transfer value exceeds the investment cost by ₹4,00,000.
4. Short-term only if the specified mutual fund units were listed during the period.

Answer: B — Short-term, because section 76 deems such gains short-term irrespective of period.

Explanation. Section 76 deems gains from specified mutual fund units acquired on or after 1 April 2023 to arise from a short-term capital asset, irrespective of the holding period. Acquisition on 5 April 2023 satisfies the date condition; retention for 4 years does not override the deeming rule. Therefore, the gain remains short-term. The usual elapsed-period calculation would not change the statutory result for this specified asset.

Where it goes wrong. Applying the ordinary holding-period test without first checking the special deeming provision applicable to specified mutual fund units.

Authority. Section 76 of the Income-tax Act, 2025

Question 20 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A trader acquired 500 units of a commodity inventory on 1 October 2019 for ₹6,00,000. On 1 October 2026, the trader withdrew the units from business inventory and treated them as an investment capital asset. The units were then sold on 30 September 2027 for ₹11,00,000. Assume the conversion is properly recorded and the units are not a specified asset subject to a special deeming rule. Determine the date from which the period of holding must be counted.

1. 1 October 2019, when the units were first acquired as business inventory.
2. 30 September 2027, when the trader transferred the investment units to a buyer.
3. The first day of the previous year in which the business was commenced.
4. 1 October 2026, when the trader converted inventory into a capital asset. (correct answer)

Answer: D — 1 October 2026, when the trader converted inventory into a capital asset.

Explanation. Section 2(101)(c)(C)(1) reckons the period from the date business inventory is converted or treated as a capital asset. The starting date is therefore 1 October 2026, not 2019 when it was bought as stock. From 1 October 2026 to 30 September 2027 is less than 12 months and, in any event, below the 24-month general threshold for an ordinary asset. Original inventory holding is not carried over.

Where it goes wrong. Counting the period from the original inventory purchase rather than from the date of conversion into a capital asset.

Authority. Section 2(101)(c)(C)(1) of the Income-tax Act, 2025

Question 21 · 2 marks · Taxation - DT Ch 06: Capital Gains · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Listed equity shares of a company were held by Neha from 2019. The company allotted bonus equity shares to her on 1 April 2026 without payment, on the basis of her existing shareholding. Neha sold only the bonus shares on 2 April 2027. No other special rule applies. Determine the start date of the holding period for the bonus lot and classify it on the transfer date. Do not use the original shares' acquisition date merely because the bonus entitlement arose from that holding.

1. 1 April 2026, the allotment date of the bonus shares, not the 2019 date. (correct answer)
2. The acquisition date in 2019 of the original shares on which bonus arose.
3. 2 April 2027, the transfer date, because no holding period accrues earlier.
4. The date the company first announced its intention to issue bonus shares.

Answer: A — 1 April 2026, the allotment date of the bonus shares, not the 2019 date.

Explanation. Section 2(101)(c)(C)(4) reckons the holding period of a financial asset allotted without payment on the basis of another financial asset from the allotment date. For bonus shares allotted on 1 April 2026, the period ends at transfer on 2 April 2027: 12 months and 1 day. Listed equity shares therefore exceed the 12-month threshold and are long-term. The original 2019 acquisition date applies to the original lot, not the bonus lot.

Where it goes wrong. Combining the holding period of the original shares with that of bonus shares.

Authority. Section 2(101)(c)(C)(4) of the Income-tax Act, 2025

Question 22 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Mr. Sen acquired a parcel of agricultural land, which is an urban capital asset, on 1 May 2024. He died on 1 December 2025 and the land devolved by inheritance to his daughter, Leela, who transferred it on 2 June 2026. Assume the land qualifies as a capital asset and that no special exemption applies. Determine whether Leela's holding period includes the period for which her father owned the land, and classify the asset using the relevant 24-month test.

1. Only Leela's period from 1 December 2025 to 2 June 2026 is included.
2. The holding period restarts at inheritance because the owner changed.
3. Her father's holding from 1 May 2024 is included; the total exceeds 24 months. (correct answer)
4. The holding period starts when the land was first brought under cultivation.

Answer: C — Her father's holding from 1 May 2024 is included; the total exceeds 24 months.

Explanation. Section 2(101)(c)(B)(1), read with section 73(1), Table Sl. No. 1, includes the previous owner's holding period for inherited property. Count from 1 May 2024 to 2 June 2026: 25 months and 1 day, which exceeds the 24-month threshold for land. Leela's own period after inheritance, from 1 December 2025 to 2 June 2026, is not the only period counted. The land is long-term.

Where it goes wrong. Ignoring the previous owner's holding period when property is received by inheritance.

Authority. Section 2(101)(c)(B)(1) of the Income-tax Act, 2025; Section 73(1), Table Sl. No. 1, of the Income-tax Act, 2025

Question 23 · 2 marks · Taxation - DT Ch 06: Capital Gains · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

On 1 October 2026, a listed company made a rights offer to its existing shareholders. Nisha exercised the right and was allotted 1,000 listed equity shares on 20 November 2026. She sold those shares on 21 November 2027. The original shares that enabled her to subscribe had been acquired in 2020. There was no renunciation of the right by Nisha. Determine the date from which the holding period of the newly allotted rights shares is reckoned and the resulting classification.

1. 1 October 2026, when the company first announced the rights offer.
2. 20 November 2026, when the newly subscribed rights shares were allotted. (correct answer)
3. The date Nisha originally bought her existing shares during 2020.
4. 21 November 2027, when Nisha transferred the newly allotted share lot.

Answer: B — 20 November 2026, when the newly subscribed rights shares were allotted.

Explanation. Section 2(101)(c)(C)(2) reckons the holding period for shares subscribed on the basis of a rights offer from their allotment date. The 20 November 2026 allotment is the start; 1 October 2026 is only the offer date. From 20 November 2026 to 21 November 2027 is 12 months and 1 day. For listed equity shares, that exceeds the 12-month threshold, so the newly allotted lot is long-term.

Where it goes wrong. Using the rights offer date instead of the allotment date for shares actually subscribed by the assessee.

Authority. Section 2(101)(c)(C)(2) of the Income-tax Act, 2025

Question 24 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Pranav held unlisted shares of Alpha Ltd. from 1 June 2024. On 1 June 2026, Alpha Ltd. amalgamated with Beta Ltd., and Pranav received shares in Beta Ltd. in consideration of his Alpha Ltd. holding, satisfying the statutory conditions for the amalgamation exemption. He transferred the Beta Ltd. shares on 2 July 2026. Determine whether the holding period of the Alpha shares is included and whether the resulting unlisted shares are short-term or long-term.

1. The holding period starts on 1 June 2026, when Beta allotted replacement shares.
2. The period of Alpha shares is excluded because a new company issued shares.
3. The holding period restarts when the amalgamation becomes effective.
4. The Alpha holding period is included; the combined period exceeds 24 months. (correct answer)

Answer: D — The Alpha holding period is included; the combined period exceeds 24 months.

Explanation. Section 2(101)(c)(B)(2) includes the period for which shares in the amalgamating company were held when replacement shares are received under section 70(1)(f). From 1 June 2024 to 2 July 2026 is 25 months and 1 day, exceeding the 24-month threshold for unlisted shares. The 1 June 2026 amalgamation allotment does not reset the clock. The transferred replacement shares are long-term.

Where it goes wrong. Treating the shares received on amalgamation as a fresh acquisition without including the predecessor shares' holding period.

Authority. Section 2(101)(c)(B)(2) of the Income-tax Act, 2025; Section 70(1)(f) of the Income-tax Act, 2025

Question 25 · 2 marks · Taxation - DT Ch 06: Capital Gains · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

State authorities compulsorily acquired a land parcel owned by Aryan Steels Ltd. under a statute for a public infrastructure project. The acquisition proceedings culminated on 15 February 2027, and compensation of ₹45,00,000 became payable. The company did not negotiate a voluntary sale, exchange the land or sign a conveyance deed. For purposes of the definition of transfer in relation to a capital asset, determine how compulsory acquisition under a law is treated.

1. It is a transfer under the compulsory-acquisition limb of the statutory definition. (correct answer)
2. It is not a transfer because the owner did not sign a voluntary sale deed.
3. It is not a transfer until the company exchanges the land for other property.
4. It is a transfer only if the company negotiates the compensation amount.

Answer: A — It is a transfer under the compulsory-acquisition limb of the statutory definition.

Explanation. Section 2(109)(c) expressly includes compulsory acquisition under any law within transfer. The acquisition is not taken outside the definition merely because the owner did not negotiate a voluntary sale or execute a sale deed. Here, the State's statutory acquisition of the land is the relevant kind of transaction. Compensation of ₹45,00,000 is not required to establish that the event is a transfer. Compulsory taking is specifically covered.

Where it goes wrong. Assuming that a transfer must always arise from a voluntary sale or an agreement executed by the owner.

Authority. Section 2(109)(c) of the Income-tax Act, 2025