Budget 2025 proposes to Amend Definition of 'Capital Asset'

The Budget 2025 has proposed key amendments to Section 2(14) of the Income-tax Act, refining the definition of ‘capital asset’ to provide clarity on taxation for investment funds and unit-linked insurance policies (ULIPs).

Clause 3 of the Bill proposes amendments to Section 2 of the Income-tax Act, specifically focusing on the definition of ‘capital asset’ under Section 2(14). The key changes relate to investment funds and unit-linked insurance policies (ULIPs), ensuring greater clarity in taxation.

Current Law: Definition of ‘Capital Asset’ (Section 2(14))

• Sub-clause (b): Under the existing law, securities held by a Foreign Institutional Investor (FII), which has invested by SEBI regulations, are treated as capital assets.
• Sub-clause (c): Currently, unit-linked insurance policies (ULIPs) are considered capital assets only if they do not qualify for exemption under Section 10(10D) (due to the fourth and fifth provisos).

Proposed Amendments in Clause 3

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1. Expansion of Sub-clause (b): Investment Funds to Be Included

• Current Provision: Only securities held by FIIs are explicitly treated as capital assets.
• Amendment: The phrase “or held by an investment fund specified in clause (a) of Explanation 1 to section 115UB” will be inserted after “Foreign Institutional Investor”.
• Impact: Investment funds (such as Alternative Investment Funds - AIFs) that invest in securities under SEBI regulations will now be explicitly considered as holding ‘capital assets’. Any income from the transfer of these securities will be taxed as capital gains, eliminating ambiguity over whether it could be classified as business income.

2. Amendment to Sub-clause (c): Simplification of ULIP Taxation

• Current Provision: A ULIP is treated as a capital asset if it does not qualify for exemption under Section 10(10D) due to the fourth and fifth provisos.
• Amendment: The wording will be simplified to state that any ULIP that does not qualify for exemption under Section 10(10D) will be a capital asset.
• Impact: Ensures that all non-exempt ULIPs are automatically classified as capital assets, providing a clear and standardized tax treatment.

Extract from the Budget

“Section 2(14) of the Act defines the term "capital asset" to include property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock-in-trade or personal assets as provided in the definition. The securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 (15 of 1992) are also defined as capital assets.

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There is some uncertainty in characterization of income arising from transactions in securities as to whether it is capital gain or business income for investment funds (specified in clause (a) of Explanation 1 to section 115UB in the Act).

With a view to providing certainty, it is proposed to amend the Act to provide that any security held by investment funds referred to in Section 115UB, which has invested in such security in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992, would be treated as a capital asset only, so that any income arising from the transfer of such security would be in the nature of capital gain.

This amendment will take effect from the 1st day of April, 2026, and shall accordingly apply in relation to the assessment year 2026-27 and subsequent assessment years.”

The amendments will take effect from April 1, 2026. They will be applicable for Assessment Year 2026-27 and subsequent years.

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