Capital gain on transfer by way of compulsory acquisition of an asset

• Chargeability: It is a transfer u/s 2(47) chargeable to tax under the head Capital Gains.
• Taxability of Normal/Original Compensation [Section 45(5)(a)]
• Normal or original compensation Is taxable in the previous year in which it is first received.
• Whole of the compensation is taxable even if a portion of the amount is received.
• Capital Gain = Whole of the normal compensation Less Cost or Indexed cost of Acquisition.
• Indexation shall be applied for the year in which the asset is compulsorily acquired.
• Taxability of Enhanced Compensation [Section 45(5)(b)]
• Enhanced compensation shall be taxable in the previous year in which it is received.
• The Cost of acquisition and the cost of improvement shall be taken as ‘NIL’.
• Capital Gain = Enhanced Compensation received Less Expenses on Receipt of Enhanced Compensation
• Compensation received by Legal Heirs: The Compensation received subsequent to the death of the
assessee is taxable in the hands of his legal heirs.
• Reduction of Compensation: Where normal compensation / enhanced compensation is reduced by
Court or Tribunal, then the Capital Gain shall be recomputed accordingly.
• Interest on enhanced compensation on account of compulsory acquisition is chargeable under the head
“Income from other sources”.

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