Section 2 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Clauses (22) to (35) of section 2 define "capital asset", "charitable purpose", the various officers, "company", "company in which the public are substantially interested", "co-operative society" and "demerger", among other terms. This article explains them as per the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026, in the order of the text. The capital asset test is the starting point of every capital gains calculation.
A capital asset is property of any kind held by an assessee, plus certain securities and certain unit linked insurance policies, but it does not include stock-in-trade, personal effects, most rural agricultural land in India and notified gold bonds or certificates. Clause (32), co-operative society, is as substituted by the Finance Act, 2026. Clause (35), demerger, lists seven conditions, all of which must be met. Section 2 was amended by section 35 of the Finance Act, 2026.
Where this article sits
Section 2 is split over several articles. This one covers clauses (22) to (35). Clauses (1) to (21) are in the first article on section 2; clauses (36) to (48) are in the next one. For the transfer of a capital asset, read the article on transfer, short-term capital asset and slump sale.
Clause (22): capital asset
A capital asset means:
- (a) property of any kind held by an assessee, whether or not connected with his business or profession;
- (b) any securities held by (i) a Foreign Institutional Investor that has invested in them in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992, or (ii) an investment fund specified in section 224(10)(a) that has invested in accordance with those regulations or the International Financial Services Centres Authority Act, 2019; and
- (c) any unit linked insurance policy to which the exemption under Schedule II (Table: serial number 2) does not apply.
It does not include:
- stock-in-trade (other than the securities in (b)), consumable stores or raw materials held for business or profession;
- personal effects;
- agricultural land in India, unless it falls in the municipal or distance tests below; and
- Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999, or deposit certificates under the Gold Monetisation Scheme, 2015, as may be notified by the Central Government. What has been notified is not in the text consulted.
Which agricultural land is a capital asset?
Agricultural land in India is excluded from "capital asset" unless it is situated (A) in an area within the jurisdiction of a municipality (by whatever name) or a cantonment board that has a population of not less than ten thousand, or (B) within the aerial distance from the local limits of such a municipality or cantonment board given in column C of the Table in the clause.
| Serial number | Population of municipality or cantonment board (column B) | Within distance, measured aerially, not being more than (column C) |
|---|---|---|
| 1 | More than 10000 and upto 100000 | Two kilometres |
| 2 | More than 100000 and upto 1000000 | Six kilometres |
| 3 | More than 1000000 | Eight kilometres |
"Population" means the population according to the last preceding census of which the relevant figures have been published before the first day of the tax year. The same area tests feed back into the definition of agricultural income in clause (5); see the first article.
Meanings used inside clause (22)
- Foreign Institutional Investor: the meaning in section 210(6)(a).
- Personal effects: movable property (including wearing apparel and furniture) held for personal use by the assessee or a dependent family member, but excluding jewellery (ornaments of gold, silver, platinum or any other precious metal or alloy, and precious or semi-precious stones, whether or not set or sewn into articles), archaeological collections, drawings, paintings, sculptures and any work of art.
- Property: includes any rights in or in relation to an Indian company, including rights of management or control or any other rights.
- Securities: the meaning in section 2(h) of the Securities Contracts (Regulation) Act, 1956. That is another law; check it.
For how gains on a capital asset are computed, see our post on Section 72 and capital gains computation.
Clause (23): charitable purpose
"Charitable purpose" includes relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife), preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility.
Clauses (24) to (27): officers and child
- Chief Commissioner (24): a person appointed to be a Chief Commissioner or a Director General of Income-tax or a Principal Chief Commissioner or a Principal Director General of Income-tax under section 237(1).
- Child (25): in relation to an individual, includes a step-child and an adopted child.
- Commissioner (26): a Commissioner, Director, Principal Commissioner or Principal Director of Income-tax under section 237(1).
- Commissioner (Appeals) (27): a Commissioner of Income-tax (Appeals) appointed under section 237(1).
Clause (28): company
"Company" means (a) any Indian company; (b) any body corporate incorporated under the laws of a country outside India; (c) any institution, association or body that is or was assessable or assessed as a company under the Income-tax Act, 1961, as it stood immediately before its repeal by this Act; or (d) any institution, association or body, incorporated or not, Indian or non-Indian, declared by order of the Board to be a company for the period specified in the declaration.
Clause (29): company in which the public are substantially interested
This clause has six limbs, (a) to (f):
| Limb | Company covered |
|---|---|
| (a) | Owned by the Government or the Reserve Bank of India, or at least 40 per cent of whose shares are held (individually or collectively) by the Government, the Reserve Bank or a corporation owned by that bank |
| (b) | Registered under section 8 of the Companies Act, 2013 |
| (c) | Having no share capital, if the Board by order declares it to be such a company for the period specified |
| (d) | A mutual benefit finance company declared by the Central Government under section 406 of the Companies Act, 2013 to be a Nidhi or Mutual Benefit Society |
| (e) | Shares carrying not less than 50 per cent of the voting power unconditionally allotted to or acquired by, and beneficially held throughout the relevant tax year by, one or more co-operative societies |
| (f) | A company that is not a private company as defined in the Companies Act, 2013 and meets either of two tests: its shares are listed in a recognised stock exchange in India on the last day of the tax year, or shares carrying not less than 50 per cent of the voting power are held throughout the tax year by the Government, a corporation established by an Act, or a company to which the clause applies (or its wholly held subsidiary) |
For limb (f) there is a proviso: for an Indian company whose business consists mainly in the construction of ships, the manufacture or processing of goods, mining, or the generation or distribution of electricity or any other form of power, "not less than 50 per cent" is read as "not less than 40 per cent". Shares entitled to a fixed rate of dividend are left out of these counts. The Companies Act, 2013 and the Securities Contracts (Regulation) Act, 1956 are separate laws; check them.
Clauses (30) to (34): shorter definitions
- Convertible foreign exchange (30): foreign exchange treated by the Reserve Bank of India as convertible for the purposes of the Foreign Exchange Management Act, 1999 and its rules, or any corresponding law.
- Co-operative bank (31): the meaning in Part V of the Banking Regulation Act, 1949.
- Co-operative society (32): a society registered under the Co-operative Societies Act, 1912, or the Multi-State Co-operative Societies Act, 2002, or under any other law in force in any State or Union territory for registering co-operative societies. This clause is as substituted by the Finance Act, 2026, with effect from 1 April 2026.
- Currency (33): the meaning in section 2(h) of the Foreign Exchange Management Act, 1999.
- Demerged company (34): the company whose undertaking is transferred, pursuant to a demerger, to a resulting company.
Clause (35): demerger
A demerger is the transfer, under a scheme of arrangement under sections 230 to 232 of the Companies Act, 2013, by a demerged company of one or more undertakings to a resulting company, in such a manner that all of these hold:
- All property of the undertaking becomes the property of the resulting company.
- All liabilities relatable to the undertaking become its liabilities.
- Property and liabilities are transferred at values appearing in the demerged company's books of account immediately before the demerger, except in compliance with the Indian Accounting Standards specified in the Annexure to the Companies (Indian Accounting Standards) Rules, 2015.
- The resulting company issues its shares to the shareholders of the demerged company on a proportionate basis, except where it is itself a shareholder of the demerged company.
- Shareholders holding not less than three-fourths in value of the shares in the demerged company (excluding shares already held by the resulting company, its nominee or its subsidiary) become shareholders of the resulting company.
- The transfer is on a going concern basis.
- The demerger meets the conditions, if any, notified under section 116(7) by the Central Government. What has been notified is not in the text consulted.
"Undertaking" includes a part of an undertaking, a unit, a division or a business activity taken as a whole, but not individual assets or liabilities. "Liabilities relatable to the undertaking" include liabilities from its activities, specific borrowings used solely for it, and an amount N of general or multipurpose borrowings computed as N = K x L / M, where K is the general or multipurpose borrowings of the demerged company, L the value of the assets transferred, and M the total value of the assets of the demerged company immediately before the demerger. Revaluation of assets is ignored when testing the values. Certain splits of statutory bodies, local authorities and public sector companies are deemed demergers if they meet conditions the Central Government may notify.
Example of the formula
Orchid Textiles Ltd (an invented company) has general borrowings (K) of Rs. 60,00,000, transfers assets valued at (L) Rs. 20,00,000 out of total assets (M) of Rs. 80,00,000. Then N = 60,00,000 x 20,00,000 / 80,00,000 = Rs. 15,00,000 of general borrowings are treated as relatable to the transferred undertaking.
Need help with a capital asset question?
Whether an item is a capital asset can decide whether a sale gives rise to a capital gain. If you want help with the calculation for a sale of land, shares or a business undertaking, see our capital gains calculation service.
Key takeaways
- A capital asset is any property held by an assessee, plus specified securities and unit linked insurance policies, with four listed exclusions.
- Rural agricultural land stays outside the definition only if it is outside the municipal and distance tests (two, six and eight kilometres by population band).
- "Charitable purpose" includes relief of the poor, education, yoga and medical relief.
- Clause (32) on co-operative society is as substituted by the Finance Act, 2026.
- A demerger needs all seven conditions, including three-fourths in value of shareholders.
- Notified conditions and notified bonds are not part of the text consulted.
Read next
- Section 2: accountant to business trust (clauses 1 to 21)
- Section 2: dividend, fair market value, firm and foreign company (clauses 36 to 48)
- Section 2: transfer, slump sale and virtual digital asset (clauses 101 to 112)
- Section 72: capital gains computation
Disclaimer: Based on the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026, as consulted on 2 October 2026. It explains the words of the Act only; the Income-tax Rules, 2026, notifications, circulars, later amendments and the way the tax authorities and courts apply these provisions should be checked. This article is general information, not legal advice; check the official text before acting.