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Section 71 Income Tax Act 2025: When Is Capital Gains Exemption Withdrawn?

Section 71, titled "Withdrawal of exemption in certain cases", explains when a previously tax-neutral transfer of assets or shares becomes chargeable to capital gains tax because statutory conditions are breached.

Current law: The Income-tax Act, 2025 generally applies from 1 April 2026. Section 71 corresponds broadly to Section 47A of the Income-tax Act, 1961. It should not be confused with Section 71 of the 1961 Act, which dealt with inter-head set-off of losses.

What does Section 71 provide?

Section 70 identifies specified transactions that are not regarded as transfers for capital gains purposes. Section 71 is a clawback provision: where the relevant conditions cease to be met, gains previously not charged under Section 67 may become taxable. The taxable person and tax year depend on the applicable subsection.

Section 71(1): Withdrawal within eight years

Where a capital asset was transferred without a capital gains charge by virtue of Section 70(1)(c) or (d), the original gain is deemed chargeable under the head "Capital gains" in the tax year of the original transfer if, before eight years expire from that transfer:

  • the transferee company converts the asset into, or treats it as, stock-in-trade of its business; or
  • the parent company, its nominees, or the holding company cease to hold the entire share capital of the subsidiary company.

The eight-year restriction and its retrospective tax-year consequence should be considered before changing the asset's use or the ownership structure.

Section 71(2): Breach of restructuring conditions

If conditions in Section 70(zd) or 70(zf) are not fulfilled, gains on the relevant capital asset or intangible asset that were previously excluded from capital gains taxation become chargeable in the hands of the successor company for the tax year in which the conditions are breached.

These cross-referenced provisions should be reviewed in full before a qualifying business reorganisation or conversion is undertaken.

Section 71(3): Conversion involving an LLP

If conditions in Section 70(ze) are not complied with, the gains on the relevant capital assets, intangible assets or shares previously not charged under Section 67 become taxable in the hands of the successor limited liability partnership or shareholder of the predecessor company, as applicable, in the tax year of non-compliance.

Relevant statutory concepts

Capital asset: Property or rights that fall within the capital asset definition under the Act, subject to statutory inclusions and exclusions.
Capital gains: Income arising from transfer of a capital asset and chargeable in accordance with Section 67 and related computation provisions.
Stock-in-trade: An asset held for sale or use as trading inventory in the course of business, as distinguished from an investment or other capital asset.
Holding company and subsidiary company: Corporate relationship terms relevant to the full-shareholding condition in Section 71(1), read with applicable company law.
Successor company / successor LLP: The entity succeeding to the relevant business or assets in a transaction covered by the conditions in Section 70.
Tax year: The period used under the Income-tax Act, 2025 for computing income and tax liability; the precise charge year is expressly specified by the relevant subsection of Section 71.

These explanations are summaries for understanding the provision; the precise legal scope is governed by the Act and cross-referenced clauses.

Practical illustrations

Example 1: Asset becomes trading stock

A qualifying intra-group asset transfer is initially not charged to capital gains tax under Section 70(1)(c) or (d). If the transferee treats the asset as trading stock within eight years, Section 71(1) can bring the previously exempt gain into charge for the original transfer tax year.

Example 2: Post-conversion condition fails

A company-to-LLP conversion initially satisfies Section 70(ze). If a prescribed condition is later breached, Section 71(3) may charge the previously excluded gain in the tax year of breach to the successor LLP or the relevant shareholder.

Compliance point: Keep the transfer agreement, valuation, shareholding history, asset classification records and evidence supporting each Section 70 condition. The consequences may differ between Section 71(1) and Sections 71(2)-(3).

Frequently asked questions

Is every exempt asset transfer subject to Section 71?

No. The section applies to transfers and conditions expressly cross-referenced in Section 71, not to every exemption under the Act.

Does Section 71 always tax gains in the year of breach?

No. Section 71(1) refers to the year of the original transfer, while Sections 71(2) and 71(3) refer to the year in which the relevant conditions are not complied with.

What is the corresponding provision under the Income-tax Act, 1961?

Section 47A of the Income-tax Act, 1961 broadly addresses withdrawal of exemption in specified cases. Section numbering changed under the 2025 Act.

Legislation and further reading

Read Section 71 together with Sections 67 and 70 and the applicable definitions and transitional provisions. The official consolidated text is available from the Income Tax Department.

Official Income-tax Act, 2025 (PDF)Income Tax Department Act 2025 resources

Updated: 10 November 2026. General legal information; review the enacted provisions and facts before taking action.