Capital Gains on transfer of Capital assets by partners to partnership

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This query is : Resolved

mohamed ali & co (Querist)

27 November 2025 Two Individuals formed a partnership firm. They transferred their property to the firm to carry on a business of running these properties as lodging house. Does this transfer attracts any capital gains tax? If the firm transfers these capital assets to the partners after a few years will it attract capital gains. Please give the details required.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)

28 November 2025 The transfer of property by individuals to a partnership firm as capital contribution for business purposes does not attract capital gains tax immediately if the book value recorded in the firm's accounts matches the individuals' original cost; any gain (book value minus indexed cost) is taxable in the individuals' hands under Section 45(3) of the Income Tax Act, 1961. The full value of consideration is deemed to be the amount recorded in the firm's books of account, not market value or stamp duty value under Section 50C, making tax liability dependent solely on that recorded figure.
If the firm later transfers these capital assets to the partners (e.g., on dissolution, retirement, or reconstitution involving distribution), it attracts capital gains tax in the firm's hands under Section 45(4). The full value of consideration is the fair market value (FMV) of the assets on the transfer date, with the firm's original cost basis (book value from individuals' contribution) used for gain computation; tax arises only on actual distribution, not mere reconstitution without asset handover.

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