Jigar M. Patel
International Tax Attorney
It is commonly understood that capital gains tax liability arises only when an asset is transferred for money. Where there is no money or receipt of cash, taxpayers assume that there are no tax consequences to worry about. Unfortunately, this assumption can lead to unpleasant surprises.
The meaning of the term transfer under Section 2(47) of the Income-tax Act is fairly wide. Apart from conventionally understood ‘sale’, it also includes other modes of transfer, such as an exchange of a capital asset, relinquishment or extinguishment of a right in a capital asset etc.
What is Exchange of a Capital Asset?
In simple terms, an ‘exchange’ refers to a transaction in which an asset is transferred in return for another asset, instead of money. Under the provisions of the Income-tax Act, such a transaction, involving mutual transfer of ownership of capital assets, is treated as a transfer, resulting in capital gains tax consequences in the hands of both the respective taxpayers.
Tax Consequences of Exchange of Gold / Jewellery
Case Study: Shah exchanges his old gold ornament set with a jeweller for a new set of jewellery. The ornaments were acquired by him in 2020 for Rs. 10 lakhs, the current market value of which is around Rs. 30 lakhs. Since the exchange value of the new set is around Rs. 30 lakhs, the parties mutually agree that there would be no monetary transaction.
The transaction on the above facts, clearly involving an exchange, Shah would attract long-term capital gains (LTCG) tax liability at 12.5% on the difference of Rs. 20 lakhs between the current market value and the cost of acquisition.
Change in Form, whether Exchange?
It should be borne in mind that every alteration of an asset need not necessarily be treated as a taxable event. In a case where the taxpayer continues to retain ownership of the same asset, but merely improvises on its form or presentation, it does not involve any transfer. A common example of the above is when old gold jewellery is modified or improved by addition or alteration into a new form, involving payment of expenditure towards addition of metal or remaking charges.
Property Transactions under a Development Agreement
Case Study: Parikh owns a plot of land that was acquired in April, 2001 for Rs. 50 lakhs. In December, 2025, he enters into a joint development agreement with a real estate developer under which he transfers development rights enabling the developer to take up a construction project of high-end residential apartments. The mutually agreed market value of the land under the development agreement is 2.5 crores. Parikh agrees to receive by way of consideration, a spacious penthouse in the residential complex.
Since the transaction constitutes an exchange, it is a transfer in the hands of Parikh for purposes of capital gains. However, Parikh can plan to avail the benefit of exemption under Section 54F by fulfilling the necessary conditions in terms of time limits involved and contend that the consideration under the transfer by way of exchange, having been invested in the acquisition of a new residential apartment, no capital gains tax liability stands attracted in his case.
