Section 47: Transfers Not Regarded as Transfer for Capital Gains (Complete Guide)

Section 47: Transfers Not Regarded as Transfer for Capital Gains

When you transfer a capital asset, capital gains tax applies on the difference between the sale consideration and the cost of acquisition. But certain transactions are carved out by law as not being "transfers" at all. Section 47 of the Income Tax Act, 1961 enumerates these transactions.

The distinction matters. Under Sections 54, 54F, or 54EC, a transfer occurs but the resulting gain is exempt if you reinvest within specified timelines. Under Section 47, no transfer is deemed to have occurred in the first place. There is no gain to compute, no exemption to claim, and no reinvestment condition to meet.

This guide covers every major clause of Section 47 applicable for AY 2026-27, with conditions and worked examples.

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Section 47 vs Section 70 (New Act)

The Income Tax Act, 2025 replaced the Income Tax Act, 1961 with effect from April 1, 2026. The provision on "transactions not regarded as transfer" has moved from Section 47 (old Act) to Section 70 (new Act).

The substantive provisions are identical. All clauses, conditions, and the concept of "not regarded as transfer" carry over unchanged. If your transaction occurs in FY 2025-26 or earlier, Section 47 of the 1961 Act applies. For FY 2026-27 onwards, Section 70 of the 2025 Act applies.

This guide uses the original Section 47 clause numbering, which remains the standard reference in practice and case law.

Section 47 vs Section 54/54F: The Core Distinction

Before diving into individual clauses, understand the structural difference:

Comparison

Section 47 vs Section 54/54F/54EC

Parameter	Section 47 (Not a Transfer)	Section 54/54F/54EC (Exempt Gain)
What happens	Transaction is not treated as a transfer at all	Transfer occurs, but gain is exempt if conditions are met
Capital gains computation	No computation required	Gain is computed, then exempted
Reinvestment condition	None	Must reinvest in specified asset within time limit
ITR disclosure	Not reported as a capital gains transaction	Reported in Schedule CG with exemption claimed
Cost to transferee	Transferee inherits original cost and holding period	Buyer has their own cost (purchase price)
If conditions not met	Entire transaction becomes a taxable transfer	Exemption reversed, gain becomes taxable

For a detailed guide on Section 54/54F/54EC exemptions, see our capital gains exemption guide.

Clause (i): HUF Partition

Any distribution of capital assets on the total or partial partition of a Hindu Undivided Family (HUF) is not regarded as a transfer.

When an HUF is partitioned (either totally or partially, whether by agreement or court decree), the assets distributed to individual members are not treated as having been transferred. No capital gains arise for the HUF.

Conditions

• The partition must be genuine and recognized under Hindu law
• The distribution must be of capital assets of the HUF to its members
• Partial partitions are also covered

Cost to the Recipient Member

The member who receives the asset takes over the cost of acquisition that the HUF originally paid. The holding period also begins from the date the HUF acquired the asset.

Worked Example

An HUF purchased a house property in 2010 for Rs 25 lakh. In 2026, the family partitions the HUF, and the house is allotted to son A. No capital gains arise for the HUF. When son A eventually sells the house, his cost of acquisition is Rs 25 lakh (with indexation from FY 2010-11), and his holding period begins from 2010.

Clause (iii): Gift, Will, or Irrevocable Trust

Any transfer of a capital asset under a gift, will, or irrevocable trust is not regarded as a transfer.

This is the most commonly used clause. When you gift a property, shares, or any capital asset to a family member (or anyone), no capital gains arise for the donor/testator.

Conditions (Post Finance Act 2024 Amendment)

• From AY 2025-26, this clause applies only to transfers by an individual or HUF
• Transfers under gift by companies, firms, LLPs, and AOPs are no longer covered under Clause (iii) and are treated as taxable transfers
• Transfers under a will (inheritance) remain exempt regardless of who the testator is
• The trust must be irrevocable as defined under Section 63

Cost to the Donee/Heir

The donee or heir inherits the cost of acquisition of the previous owner (Section 49(1)). The holding period of the previous owner is also tacked on.

Gift Tax Implications for the Donee

While no capital gains arise for the donor, the donee may face income tax under Section 56(2)(x) if the aggregate value of gifts received exceeds Rs 50,000 in a year, unless the gift is from a "relative" as defined under the Act, or on the occasion of marriage, or under a will/inheritance.

Worked Example

Father buys shares of Reliance in 2015 for Rs 5 lakh. In 2026, he gifts the shares (now worth Rs 18 lakh) to his daughter. No capital gains for the father. When the daughter sells the shares, her cost is Rs 5 lakh, and her holding period starts from 2015. If she sells in 2027 for Rs 20 lakh, her LTCG = Rs 20 lakh minus Rs 5 lakh = Rs 15 lakh (subject to indexation rules for equity shares post July 2024).

Clause (iv): Company to Wholly-Owned Indian Subsidiary

Any transfer of a capital asset by a holding company to its wholly-owned Indian subsidiary is not regarded as a transfer.

Conditions

• The subsidiary must be an Indian company
• The holding company (or its nominees) must hold the entire share capital of the subsidiary
• The asset must be a capital asset

Cost to the Subsidiary

The subsidiary inherits the cost of acquisition at which the holding company acquired the asset.

Lock-in: Section 47A

If the subsidiary transfers the asset to any person (other than back to the holding company) within 8 years from the date of transfer, or if the subsidiary ceases to be a wholly-owned subsidiary within 8 years, the original exemption is withdrawn. The transfer is retrospectively treated as a taxable transfer in the hands of the holding company in the year the condition is violated.

Clause (v): Subsidiary to Holding Company

Any transfer of a capital asset by a wholly-owned Indian subsidiary to its holding company is not regarded as a transfer.

This is the reverse of Clause (iv). The same conditions and the same 8-year lock-in under Section 47A apply.

Clause (vi): Amalgamation (Amalgamating Company to Amalgamated Company)

In a scheme of amalgamation, any transfer of a capital asset by the amalgamating company to the amalgamated company is not regarded as a transfer, provided the amalgamated company is an Indian company.

Key Points

• The amalgamated (surviving) company must be an Indian company
• Applies to all capital assets transferred as part of the amalgamation scheme approved by the NCLT
• The amalgamated company takes over the cost of acquisition and holding period from the amalgamating company

Clause (vii): Shareholder's Share Exchange on Amalgamation

When a shareholder of the amalgamating company exchanges shares for shares in the amalgamated company under a scheme of amalgamation, the exchange is not treated as a transfer.

Conditions

• The amalgamated company must be an Indian company
• The shareholder must receive shares (not cash or other consideration) in the amalgamated company
• Applies to shares held as capital assets (not stock-in-trade)

Cost to the Shareholder

The cost of the new shares in the amalgamated company equals the cost of the old shares in the amalgamating company. The holding period of the old shares tacks on to the new shares.

Worked Example

Amit held 1,000 shares of Company A, purchased in 2018 for Rs 2 lakh. Company A amalgamates with Company B in 2026 under an NCLT-approved scheme, and Amit receives 1,500 shares of Company B. No capital gains arise for Amit. His cost for the 1,500 Company B shares is Rs 2 lakh, and his holding period begins from 2018.

Clauses (via) and (vib): Demerger

In a scheme of demerger, any transfer of a capital asset by the demerged company to the resulting company is not regarded as a transfer, provided the resulting company is an Indian company.

Similarly, shareholders who receive shares in the resulting company in exchange for their shareholding in the demerged company are not treated as having transferred their shares.

Conditions

• The resulting company must be an Indian company
• The demerger must be in accordance with the conditions specified in Section 2(19AA)
• For shareholders, the cost of shares in the resulting company is allocated in proportion to the net book value of assets transferred

Clauses (viia) to (viic): Specific Exemptions

Clause (viia): Foreign Company Shares in Indian Company

Transfer of shares of an Indian company by a foreign company to another foreign company in a scheme of amalgamation, where both foreign companies are incorporated under the laws of a country outside India. Conditions include reciprocal capital gains exemption in the foreign country.

Clause (viib): Demerger of Foreign Company

Transfer of shares held in an Indian company by a demerged foreign company to a resulting foreign company under a demerger scheme. Similar reciprocal exemption conditions apply.

Clause (viic): Sovereign Gold Bond Redemption

Redemption of Sovereign Gold Bonds (SGBs) by the original subscriber is not treated as a transfer.

This is significant for individual investors. If you subscribed to SGBs and hold them to maturity (8 years) or exercise the premature redemption option (after 5 years), the capital gains on redemption are fully exempt. No LTCG applies.

However, if you sell SGBs on the secondary market (stock exchange) before maturity, Section 47(viic) does not apply. The sale is a transfer, and LTCG at 12.5% applies (for listed securities held over 12 months).

Worked Example

You subscribed to SGBs in 2018 at Rs 3,200 per gram. In 2026, the bonds mature and the redemption price is Rs 7,800 per gram. The gain of Rs 4,600 per gram is fully exempt under Section 47(viic). No capital gains tax.

If instead you sold the same bonds on NSE in 2025 at Rs 7,500, the gain is taxable as LTCG at 12.5% (after July 23, 2024 rates).

Clause (xiii): Conversion of Firm/Sole Proprietorship to Company

Transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by the company is not regarded as a transfer.

Conditions (All Must Be Met)

• All the assets and liabilities of the firm become assets and liabilities of the company
• All partners of the firm become shareholders of the company in the same proportion as their capital accounts
• The partners receive no consideration other than shares in the company
• The partners collectively hold not less than 50% of the voting power in the company, and continue to hold it for at least 5 years from the date of succession

Section 47A Withdrawal

If any of the above conditions are violated within 5 years (e.g., a partner sells their shares bringing collective holding below 50%), the exemption is withdrawn retrospectively.

Clause (xiiib): Conversion of Company to LLP

Transfer of a capital asset or intangible asset by a company to an LLP as a result of conversion of the company into an LLP is not regarded as a transfer.

Conditions (All Must Be Met)

• Total turnover of the company in any of the preceding 3 financial years does not exceed Rs 60 lakh (note: this threshold was originally Rs 60 lakh; check the latest Finance Act for any proposed revision)
• The total value of assets as appearing in the books does not exceed Rs 5 crore
• All shareholders of the company become partners of the LLP in the same proportion as their shareholding
• No consideration other than profit-sharing ratio/capital contribution in the LLP is received
• The erstwhile shareholders hold not less than 50% of the profit-sharing ratio for at least 5 years from the date of conversion

This clause is primarily used by small private limited companies converting to LLPs for operational flexibility and reduced compliance burden.

Worked Example

A private limited company with annual turnover of Rs 45 lakh and total assets of Rs 2 crore converts into an LLP. The two shareholders (50:50) become partners in the LLP with the same 50:50 ratio. All assets transfer from the company to the LLP. No capital gains arise. If one partner reduces their share below 50% collectively within 5 years, the exemption is reversed.

Clause (xiv): Conversion of Bonds/Debentures to Shares

Conversion of bonds or debentures, debenture-stock, or deposit certificates of a company into shares or debentures of that company is not regarded as a transfer.

This covers situations where a company converts its existing debt instruments into equity. The bondholder is not treated as having transferred the bond. The cost of the resulting shares equals the cost of the original bonds/debentures.

Other Notable Clauses

Summary: All Section 47 Clauses at a Glance

Practical Tips

1. Document the conditions at the time of transaction. Section 47 exemptions are condition-dependent. Keep board resolutions, NCLT orders, partnership deeds, share transfer documents, and SGB subscription confirmations on file. If assessed later, you must prove the conditions were met.

2. Track the inherited cost basis. The transferee inherits the transferor's cost. Maintain a clear record of the original purchase date and cost, because the transferee will need it when they eventually sell the asset.

3. Watch the lock-in periods. Clauses (iv), (v), (xiii), and (xiiib) have post-transfer conditions (5 to 8 years). Violating them retrospectively converts the exempt transaction into a taxable one.

4. SGB investors: hold to maturity for full exemption. Secondary market sales are taxable. Redemption by the original subscriber is not.

5. Gifts by companies are no longer exempt. Post Finance Act 2024, only individuals and HUFs can use Clause (iii). Companies gifting assets face capital gains.

Frequently Asked Questions

Does Section 47 apply if I gift a property to my spouse?

Yes. Under Clause (iii), a gift by an individual to any person (including spouse) is not regarded as a transfer. No capital gains arise for the donor. However, the clubbing provisions of Section 64 may apply: income from the gifted asset may still be clubbed in the donor's return. The capital gains exemption and the clubbing rule are independent provisions.

Is the entire capital gain on SGB exempt, or only up to a limit?

The entire capital gain is exempt under Section 47(viic) if you are the original subscriber and the bonds are redeemed (at maturity or premature redemption after 5 years). There is no monetary limit on the exemption.

What is the difference between Section 47 and Section 10?

Section 10 lists incomes that are wholly exempt from tax (like agricultural income, or dividends up to certain limits in older years). Section 47 does not exempt income. It says that the transaction is not a transfer in the first place, so no capital gains computation arises. If a transaction is covered by Section 47, you do not even reach the stage of computing a gain.

Can Section 47 be used for international restructuring?

Clauses (viia) and (viib) cover cross-border amalgamation and demerger involving foreign companies holding shares of Indian companies. The condition is that the foreign country must have a reciprocal capital gains exemption arrangement. These clauses are narrow and should be evaluated with professional advice.

What happens if the conditions of Section 47 are violated after the transfer?

Section 47A provides the withdrawal mechanism. If conditions (such as the 8-year holding for subsidiary transfers or the 5-year holding for firm-to-company conversions) are violated, the original exemption is withdrawn. The transfer is treated as taxable in the year it originally occurred, and the transferor's income for that year is recomputed with the capital gains included.

Does Section 47 apply to the new Income Tax Act, 2025?

Yes. Section 70 of the Income Tax Act, 2025 replaces Section 47 of the 1961 Act with effect from April 1, 2026. The clauses and conditions are substantively identical. For transactions in FY 2025-26 and earlier, cite Section 47. For FY 2026-27 onwards, the governing provision is Section 70.

Is transfer of agricultural land covered under Section 47?

Agricultural land that is not a capital asset (rural agricultural land as defined in Section 2(14)) is already outside the scope of capital gains. Section 47 is not needed for such transfers. For agricultural land that qualifies as a capital asset (urban agricultural land), Section 47 clauses apply to the extent the specific conditions of each clause are met.

Can a partnership firm gift an asset and claim Section 47(iii)?

No. After the Finance Act 2024 amendment, Clause (iii) applies only to transfers by an individual or HUF. A partnership firm gifting a capital asset cannot use this clause. The transfer by the firm would be taxable.

Sources and Verification

This guide was verified against the following primary sources:

• Section 47, Income Tax Act 1961 (bare text from incometaxindia.gov.in) as amended by the Finance Act 2024
• Section 70, Income Tax Act 2025 (Clause 70 of the Income Tax Bill, 2025 as enacted)
• Section 47A for withdrawal of exemption on condition violation (holding-subsidiary, firm-to-company, company-to-LLP)
• Section 49(1) for cost of acquisition to the transferee in Section 47 transactions
• ClearTax, SortingTax, TaxManagementIndia reference guides on Section 47 clauses
• Finance Act 2024 amendment to Section 47(iii) restricting gifts to individuals and HUFs
• CBDT circulars on SGB taxation confirming Section 47(viic) exemption for original subscribers on redemption
• NCLT amalgamation and demerger reporting guidance for conditions under Clauses (vi), (vii), (via), (vib)

Section numbers, conditions, and thresholds have been cross-verified against the official Income Tax Department portal and the CBDT concordance table mapping 1961 Act to 2025 Act, as of June 2026.