Capital Gains on Transfers Before 1 April 2026: How Section 536 of the Income-tax Act, 2025 Applies
The Income-tax Act, 2025 came into force on 1 April 2026 and Section 536 of that Act repealed the Income-tax Act, 1961. Capital gains cause more transition questions than most heads of income, because a sale is often followed by a reinvestment, a lock-in or a carried-forward loss that runs for years after the cutover. This article sets out which Act taxes a transfer made before 1 April 2026, what Section 536 actually provides for capital gains, and how exemptions claimed under the 1961 Act are treated if a condition is breached later.
Key Takeaways
- A capital asset transferred on or before 31 March 2026 is taxed under the 1961 Act. Section 45(1) makes the gain income of the previous year in which the transfer took place, and income of FY 2025-26 is assessed for AY 2026-27 under the 1961 Act.
- For FY 2025-26 transfers, the 1961 Act rates apply: 20 per cent under Section 111A, 12.5 per cent above Rs 1.25 lakh under Section 112A, and 12.5 per cent under Section 112, with a relief for land or building acquired before 23 July 2024 by resident individuals and HUFs.
- If an exemption claimed under Sections 54, 54B, 54EC, 54F or a similar provision is withdrawn because a condition is breached on or after 1 April 2026, Section 536(2)(h) of the Income-tax Act, 2025 taxes the amount in the tax year of the breach, under the capital gains head.
- Breach of the conditions attached to Section 47(iv), (v), (xiii), (xiiib) or (xiv) transfers is dealt with by Section 536(2)(q). Brought-forward capital losses continue under Section 536(2)(n).
Which Act Taxes a Transfer Made Before 1 April 2026
Section 45(1) of the 1961 Act charges profits or gains arising from the transfer of a capital asset effected in the previous year and deems them to be income of the previous year in which the transfer took place. The date of transfer, not the date on which the money is received, therefore fixes the year. A transfer made on or before 31 March 2026 falls in previous year 2025-26 or an earlier year.
The CBDT FAQs on the transition (Q1.12 and Q3.5) confirm that income earned from 1 April 2025 to 31 March 2026 is governed by the 1961 Act and assessed for AY 2026-27, and that the return for that income is filed under the 1961 Act even though it is filed after 1 April 2026. Income earned from 1 April 2026 is governed by the Income-tax Act, 2025 and assessed for Tax Year 2026-27.
Section 536(3) of the Income-tax Act, 2025 adds that any reference in that Act to a tax year commencing on 1 April 2025 or earlier is read as a reference to the corresponding previous year under the 1961 Act.
What Section 536 Provides for Capital Gains
Section 536 has four sub-sections. Sub-section (2) lists specific savings in clauses (a) to (v). The provisions that matter for capital gains are:
| Provision of the Income-tax Act, 2025 | What it says | Capital gains relevance |
|---|---|---|
| Section 536(1) | The Income-tax Act, 1961 is repealed. | Starting point for every transition question. |
| Section 536(2)(a) and (b) | The repeal does not affect the previous operation of the 1961 Act, or any right, privilege, obligation or liability acquired, accrued or incurred under it. | A gain on a pre-April 2026 transfer, and the tax on it, stay under the 1961 Act. |
| Section 536(2)(c) | The 1961 Act continues to apply to pending proceedings and to proceedings initiated on or after 1 April 2026 (including assessment, reassessment, rectification, penalty, revision and appeals) for any tax year beginning before 1 April 2026, under the 1961 Act procedure. | Scrutiny or reassessment of AY 2026-27 capital gains runs under the 1961 Act. |
| Section 536(2)(f) | An election, declaration or option made under the 1961 Act and in force immediately before the new Act commenced is deemed made under the corresponding provision of the new Act. | Relevant when asking whether an option used under the 1961 Act, such as the Section 54 two-house option, carries into the new Act (see the FAQ below). |
| Section 536(2)(h) | A sum allowed as a deduction or not included in total income for a tax year beginning before 1 April 2026, which the 1961 Act would have required to be included in a later year, is deemed income of that later year and included under the same head of income. | Withdrawal of Section 54, 54EC, 54F type exemptions and unutilised Capital Gains Account Scheme deposits. |
| Section 536(2)(n) | Capital losses referred to in Section 74 of the 1961 Act, brought forward from a tax year beginning before 1 April 2026, are carried forward and set off in the manner provided in the 1961 Act, up to eight financial years after the year in which the loss was first computed. | Old long-term and short-term capital losses keep their set-off rules and time limit. |
| Section 536(2)(q) | Gains not charged because of Section 47(iv), (v), (xiii), (xiiib) or (xiv) of the 1961 Act are deemed income under the capital gains head if the Section 47A(1) conditions are triggered, or if the conditions of Section 47(xiii), (xiiib) or (xiv) are not complied with. | Intra-group transfers and conversions of firms, companies and proprietary concerns. |
| Section 536(4) | Without prejudice to sub-section (2), Section 6 of the General Clauses Act, 1897 applies with regard to the effect of repeal. | Covers situations not specifically listed in sub-section (2) (CBDT FAQ Q1.16). |
Computing the Gain on an FY 2025-26 Transfer
The computation follows the 1961 Act as it stood for FY 2025-26, including the Finance (No. 2) Act, 2024 changes that apply to transfers on or after 23 July 2024.
Holding period
Under Section 2(42A), an asset is short-term if held for not more than 24 months before transfer. The limit is 12 months for a security listed on a recognised stock exchange in India, a unit of the Unit Trust of India, a unit of an equity oriented fund and a zero coupon bond. Where an asset was received on a partition, gift, will, inheritance or a Section 47 transfer covered by Section 49(1), the cost is the previous owner’s cost under Section 49(1), and Explanation 1(i)(b) to Section 2(42A) adds the previous owner’s holding period.
Rates for transfers on or after 23 July 2024
| Gain | Section | Rate |
|---|---|---|
| Short-term gain on equity shares, units of an equity oriented fund or units of a business trust, where the sale is chargeable to securities transaction tax | 111A | 20 per cent |
| Long-term gain on the same assets, where the securities transaction tax conditions in Section 112A(1)(iii) are met | 112A | 12.5 per cent on the gain exceeding Rs 1.25 lakh |
| Other long-term gains | 112 | 12.5 per cent. Indexation under the second proviso to Section 48 applies only to transfers before 23 July 2024. |
| Long-term gain on land or building acquired before 23 July 2024, in the hands of a resident individual or HUF | Second proviso to Section 112(1)(a) | 12.5 per cent, but any excess over the tax computed under the law as it stood before the Finance (No. 2) Act, 2024 (20 per cent with indexed cost) is ignored. |
Reinvestment Exemptions Claimed for AY 2026-27
An exemption for a FY 2025-26 transfer is claimed in the AY 2026-27 return and is governed by the 1961 Act conditions throughout, even where the reinvestment window or lock-in runs past 1 April 2026.
| Section | Original asset and reinvestment | Key limits | Condition that can withdraw the exemption |
|---|---|---|---|
| 54 | Individual or HUF; long-term residential house. One residential house in India purchased 1 year before or 2 years after the transfer, or constructed within 3 years. | Two houses may be chosen, once only, if the capital gain does not exceed Rs 2 crore. Cost of the new asset above Rs 10 crore is ignored. | Transfer of the new house within 3 years: its cost is reduced by the exempt gain (or taken as nil) when computing the gain on that transfer. |
| 54EC | Long-term land or building. Investment within 6 months in bonds redeemable after five years issued on or after 1 April 2018 by NHAI, REC or other notified issuers. | Rs 50 lakh in a financial year, and Rs 50 lakh in total across the year of transfer and the following year. | Transfer or conversion into money within 5 years of acquisition. A loan against the bonds is treated as conversion. |
| 54F | Individual or HUF; any long-term asset other than a residential house. One residential house in India, with the same purchase and construction windows as Section 54. | Exemption in the ratio of cost of new house to net consideration. Not available if the assessee owns more than one other residential house on the date of transfer. Cost above Rs 10 crore is ignored. | Transfer of the new house within 3 years, or purchase of another house within 2 years or construction within 3 years. |
Under Sections 54(2) and 54F(4), an amount not used before the return is filed must be deposited under the Capital Gains Account Scheme no later than the due date under Section 139(1). If the deposit is not used within the period, the unused amount (for Section 54F, the proportionate part of the exempt gain) is taxed in the previous year in which three years from the date of transfer of the original asset expire.
Section 54GB does not apply to a transfer of residential property made after 31 March 2017, or after 31 March 2022 for investment in an eligible start-up (Section 54GB(5)). It cannot be claimed for a FY 2025-26 transfer. It matters only for earlier claims whose five-year holding condition on the shares or the new asset (three years for computers or software of an eligible start-up) is still running.
When a Condition Is Breached On or After 1 April 2026
Section 536(2)(h) deals with the case where a gain was not taxed for a year before 1 April 2026 because conditions were met, and the 1961 Act would have taxed it in a later year when the conditions were broken. The sum is deemed income of that later tax year and is included under the same head of income as under the 1961 Act.
The CBDT FAQs apply this to capital gains. Q8.27 explains that where exemption was claimed under Sections 54, 54B, 54F or similar provisions and the new asset is transferred after 1 April 2026 within the lock-in, the gain is taxed in the year of violation under the Income-tax Act, 2025, but the triggering condition and the amount are determined under the 1961 Act provision. Its example is a house bought in March 2025 as the new asset and sold in May 2027: the earlier exempted gain is taxed in Tax Year 2027-28. Q8.28 treats unutilised Capital Gains Account Scheme deposits the same way: for a transfer in June 2024 with the deposit unutilised until June 2027, the amount is taxable in Tax Year 2027-28, computed under the old exemption structure.
Illustration (Section 54F)
This is an illustration only. A resident individual sells unlisted shares held since 2019 on 5 August 2025. Net consideration is Rs 1.20 crore and the long-term capital gain is Rs 90 lakh. On 20 January 2026 she buys a residential house for Rs 80 lakh. On the date of sale she owns one other house.
- Exempt gain under Section 54F(1)(b): Rs 90 lakh x 80 / 120 = Rs 60 lakh.
- Taxable long-term capital gain for AY 2026-27: Rs 90 lakh less Rs 60 lakh = Rs 30 lakh.
- Tax under Section 112 at 12.5 per cent: Rs 3,75,000, before surcharge and cess.
- If she sells the new house in November 2027, within three years of purchase, Section 54F(3) would treat the Rs 60 lakh as long-term capital gains of the year of that sale. Under Section 536(2)(h), it becomes income of Tax Year 2027-28 under the Income-tax Act, 2025, under the capital gains head. The gain on the sale of the new house itself is a separate computation under the Income-tax Act, 2025, because that transfer happens after 1 April 2026.
Section 47 Transfers and Conversions
Section 536(2)(q) preserves the clawback attached to certain Section 47 exemptions:
- Section 47(iv) and (v) transfers between a company and its wholly owned subsidiary (under clause (iv) the subsidiary, and under clause (v) the holding company, must be an Indian company): under Section 47A(1), if within eight years the transferee converts the asset into stock-in-trade, or the parent ceases to hold the whole share capital of the subsidiary, the gain becomes taxable. Section 536(2)(q)(A) deems it capital gains income for the tax year in which the transfer took place.
- Conversions under Section 47(xiii), (xiiib) and (xiv) (firm to company, private or unlisted public company to LLP, proprietary concern to company): if the conditions in those clauses are not complied with, Section 536(2)(q)(B) deems the gain capital gains income for the tax year of non-compliance. CBDT FAQ Q8.29 confirms that the repeal does not end these post-conversion conditions.
For a company converted into an LLP, the proviso to Section 47(xiiib) includes these continuing conditions: the aggregate profit sharing ratio of the former shareholders must not fall below 50 per cent at any time in the five years from conversion, and no amount may be paid to any partner out of accumulated profits standing on the date of conversion for three years. The eligibility tests look back at the three previous years before conversion: turnover not exceeding Rs 60 lakh and book value of assets not exceeding Rs 5 crore in any of those years.
Brought-Forward Capital Losses
Section 536(2)(n) allows long-term and short-term capital losses under Section 74 of the 1961 Act, brought forward from years before 1 April 2026, to be set off against capital gains computed under the Income-tax Act, 2025, in the manner provided in the 1961 Act (CBDT FAQ Q8.5). Under Section 74, a short-term capital loss can be set off against any capital gain, while a long-term capital loss can be set off only against long-term capital gains. The carry-forward limit is eight financial years after the year in which the loss was first computed. The loss return must have been filed within the due date under Section 139(1) (CBDT FAQ Q3.22).
Frequently Asked Questions
I sold a property in March 2026 but part of the price will be paid after April 2026. Which Act applies?
The 1961 Act. Section 45(1) deems the gain to be income of the previous year in which the transfer took place, which is previous year 2025-26 (AY 2026-27). Receiving part of the price later does not move the gain into Tax Year 2026-27.
I used the two-house option under Section 54 in an earlier year. Can I use it again under the Income-tax Act, 2025?
The second proviso to Section 54(1) of the 1961 Act allows the option only once, and Section 82(6) of the Income-tax Act, 2025 has the same once-only bar for the option in Section 82(5). Section 536(2)(f) deems an option exercised under the 1961 Act, and in force immediately before 1 April 2026, to be exercised under the corresponding provision of the new Act; CBDT FAQ Q8.17 and Q8.24 add that this works only where a corresponding provision exists. Neither Act nor the CBDT FAQs expressly deal with a two-house option used in an earlier year under Section 54, so a second claim under Section 82 should be reviewed on the facts before it is made.
My AY 2026-27 capital gains are picked for scrutiny after 1 April 2026. Which Act governs the assessment?
The 1961 Act. Section 536(2)(c) keeps the 1961 Act and its procedure for assessments and other proceedings relating to any tax year beginning before 1 April 2026, whenever initiated. CBDT FAQ Q3.19 gives the same answer for a notice under Section 143(2).
Related Posts
- Reassessment of pre-April 2026 years under the 1961 Act
- ITR forms for AY 2026-27: filing FY 2025-26 returns under the 1961 Act
- Depreciation and unabsorbed allowances across the April 2026 transition
Need a Review of Your Capital Gains Transition Position?
If you transferred a capital asset before 1 April 2026 or hold a 1961 Act exemption whose conditions are still running, and want the tax treatment reviewed, talk to an expert from the Tax Update India team.
Sources: Income-tax Act, 2025 (Sections 82 and 536); Income-tax Act, 1961 as amended by the Finance Act, 2026 (Sections 2(42A), 45, 47, 47A, 48, 49, 54, 54EC, 54F, 54GB, 74, 111A, 112 and 112A); CBDT, FAQs on Interplay and Transition from the Income Tax Act, 1961 to the Income Tax Act, 2025 (updated 2 April 2026).
Disclaimer: This article is for general information only and does not constitute legal or tax advice. Tax positions depend on the facts of each case. Section numbers refer to the Income-tax Act, 1961 unless otherwise stated. Consult a qualified professional before acting on any information here.