Capital gains on distribution of assets by companies in liquidation
[As per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 68(1) of Income Tax Act 2025
68(1) Irrespective of anything contained in section 67, where the assets of a company are distributed to its shareholders on its liquidation, such distribution shall not be regarded as a transfer by the company for the purposes of the said section.
Section 68(2) of Income Tax Act 2025
68(2) If a shareholder, on the liquidation of a company, receives any money or other assets from the company, then,––
- (a) such shareholder shall be chargeable to income-tax under the head “Capital gains”, in respect of the money so received or the market value of the other assets on the date of distribution, as reduced by the amount assessed as dividend within the meaning of section 2(40)(c); and
- (b) the sum so arrived at shall be deemed to be the full value of the consideration for the purposes of section 72.
FAQs on Capital Gains on Distribution of Assets by Companies in Liquidation
1. What is the tax treatment of asset distribution by a company in liquidation under Section 68?
Under Section 68(1), any distribution of assets by a company to its shareholders during liquidation is not considered a transfer by the company. Hence, no capital gains tax arises in the hands of the company.
2. Is the shareholder liable to pay tax on receiving assets from a liquidating company?
Yes. As per Section 68(2), the shareholder is liable to pay tax under the head “Capital Gains” on the money or market value of assets received from the liquidating company.
3. How is the capital gain for the shareholder computed on such liquidation distribution?
Capital gain is computed as the amount or market value of assets received minus the amount assessed as dividend under Section 2(40)(c). The net amount is deemed the full value of consideration for Section 72.
4. What does “amount assessed as dividend” mean in this context?
It refers to any portion of the distribution that is treated as a dividend under Section 2(40)(c), which generally includes accumulated profits distributed to shareholders.
5. Will the distribution be taxable if it is entirely in the form of assets (not money)?
Yes. Even if the shareholder receives only assets, the market value of those assets on the date of distribution is considered for computing capital gains under Section 68(2).
6. Does the company pay capital gains tax on distributing its assets upon liquidation?
No. Section 68(1) explicitly provides that such distribution is not regarded as a transfer, and hence the company is not subject to capital gains tax.
7. When is the market value of assets determined for capital gains purposes?
The market value is determined on the date of distribution of the asset by the liquidating company to the shareholder.
8. Is indexation benefit available to the shareholder for computing capital gains?
Yes, subject to the type of asset and the holding period, indexation benefit may be available as per the applicable rules under Section 72.
9. What is the “full value of consideration” in the case of liquidation distributions?
The full value of consideration is the money received or market value of the asset minus the amount assessed as dividend under Section 2(40)(c).
10. Will the entire amount received by the shareholder be taxed as capital gains?
No. Only the net amount after deducting dividend component (assessed under Section 2(40)(c)) is taxed as capital gains.
11. If the shareholder receives both cash and assets, how is the gain computed?
The sum of cash and market value of assets received is considered, and then the dividend component is reduced to arrive at the capital gain amount.
12. Can the shareholder claim any exemption on such capital gains?
Yes. The shareholder may claim capital gains exemptions available under other provisions (like Sections 73 to 76), if eligible and applicable to the specific transaction.
13. Is the cost of acquisition of shares considered in the computation of capital gains under Section 68?
Yes. For final computation under Section 72, cost of acquisition of the original shares and other relevant deductions (like cost of improvement, if any) are considered.
14. Will this section apply to every kind of shareholder, including foreign investors?
Yes, Section 68 applies to all shareholders regardless of residency, subject to any DTAA (Double Taxation Avoidance Agreement) reliefs available to foreign investors.
15. Is the distribution to shareholders in kind (assets) treated differently from distribution in cash?
No. Both cash and in-kind distributions are treated similarly for taxation — market value is considered for assets, and actual amount for cash.
16. Are there any specific reporting requirements for shareholders under this section?
Yes, shareholders must report such receipts under the head ‘Capital Gains’ in their income tax returns and provide necessary valuation or supporting documents.
17. Is any tax deducted at source (TDS) by the company at the time of distribution?
Generally, TDS is not applicable on capital receipts, but dividend components may be subject to TDS, depending on the prevailing TDS provisions.
18. How is the fair market value of distributed assets determined?
The fair market value is determined as per valuation guidelines notified by the CBDT or based on recognized valuation methods accepted by tax authorities.
19. Can capital loss be claimed if the value received is less than the cost of acquisition of shares?
Yes. If the net consideration received (after dividend adjustment) is less than the cost of acquisition, the shareholder can claim a capital loss under the Act.
20. Does this provision apply to liquidations of private companies, public companies, and listed companies alike?
Yes. Section 68 applies uniformly to all types of companies undergoing liquidation, unless exempted under a special provision or scheme.
