Exchange
Mutually swapping one asset for another, neither side being money — one of the modes of transfer under Section 2(47), and therefore ordinarily a taxable capital-gains event.
In plain language
A sale involves money changing hands for an asset. An exchange does not. Under the Transfer of Property Act, an exchange happens when two people mutually swap the ownership of one thing for another, and neither of those two things is money.
Swap a plot of land for another plot, or receive shares of a new company in place of shares of an old one during a corporate reconstruction, and that is an exchange.
The Income Tax Act treats an exchange as a transfer, under Section 2(47), which means it can attract capital gains tax exactly as a sale would — even though no cash ever changed hands.
How it works
The legal source is Section 118 of the Transfer of Property Act, 1882: an exchange is when two people mutually transfer the ownership of one thing for the ownership of another thing, and neither thing (nor both things) is money.
Because Section 2(47) of the Income Tax Act defines "transfer" to include exchange, the ordinary capital gains computation applies: full value of consideration, less cost of acquisition, less cost of improvement, less transfer expenses. For an exchange, the full value of consideration is normally the fair market value of the asset received in return, since no cash price is agreed.
A named worked case in the workbook: when a company undergoes a reconstruction, a shareholder may receive shares of a new or amalgamated company in exchange for their shares in the old one. Unless that specific transaction is separately excluded from "transfer" under Section 47 (as several categories are), the receipt of the new shares in exchange for the old ones is a taxable exchange.
A worked example
Mr Ghosh owns a residential plot in Pune worth Rs 60,00,000, bought for Rs 20,00,000 several years ago. He swaps it directly with a relative for a flat in Mumbai, valued at Rs 65,00,000, with no cash changing hands on either side.
Full value of consideration (FMV of the flat received) = Rs 65,00,000
Less: Cost of acquisition of the plot given up = Rs 20,00,000
Capital gain = Rs 45,00,000
Even though Mr Ghosh never received a rupee in cash, this exchange is a transfer under Section 2(47), and the Rs 45,00,000 gain is taxable exactly as if he had sold the plot for Rs 65,00,000 in cash and separately bought the flat.
Why NISM asks about it
Chapter 8 (Capital Gains), section 8.4, "Transfer of Capital Asset," lists exchange as one of several modes of transfer alongside sale, relinquishment, extinguishment of rights, and maturity of zero-coupon bonds. Expect a question that asks whether a given non-cash swap counts as a transfer, or one that asks how the full value of consideration is computed when no cash price exists.
Common exam traps
- An exchange is a transfer under Section 2(47) — it is not automatically exempt just because no cash changed hands. Barter and swap transactions are still taxable events unless specifically excluded.
- The full value of consideration in an exchange is the fair market value of what was received, not the original cost of what was given up.
- Not every "exchange" is excluded from transfer — only specific transactions Section 47 names (such as converting preference shares into equity shares, covered separately) escape capital gains treatment; a plain barter of two unrelated assets does not.
- Do not confuse this general definition with Exchange as transfer, which covers the specific statutory exclusion for preference-to-equity share conversions.
Check yourself
1.An individual sells Sovereign Gold Bonds on the stock exchange after holding them for four years. How is the gain taxed?
- a)Exempt, because section 47 excludes SGB disposals by individuals
- b)Taxable as a long-term capital gain at 12.50 per cent, because the exemption covers redemption only
- c)Taxable at slab rates as income from other sources
- d)Exempt only if the bonds were bought in the primary issue
Show the answer
Answer: (b) Taxable as a long-term capital gain at 12.50 per cent, because the exemption covers redemption only
The workbook is explicit: EVEN AN INDIVIDUAL SHALL BE LIABLE TO PAY TAX ON CAPITAL GAINS ARISING ON TRANSFER OF SGBs AS EXEMPTION HAS BEEN PROVIDED ONLY IN CASE OF REDEMPTION AND NOT ON TRANSFER. Held more than 12 months, the gain is long term at 12.50 per cent plus surcharge and cess, and the taxability remains the same in case of off-market transactions. Only redemption by an individual escapes under section 47.
2.What is the standard deduction available against salary income under the new tax regime?
- a)Rs 40,000
- b)Rs 50,000
- c)Rs 75,000
- d)Not available under the new regime
Show the answer
Answer: (c) Rs 75,000
The standard deduction is Rs 50,000 under the old tax regime and Rs 75,000 under the new tax regime. Along with the larger 80CCD(2) limit of 14 per cent for private sector employees, this is one of the only two concessions the new regime offers in exchange for the loss of HRA, LTA, 80C and 80CCD(1B).
3.By when must Securities Transaction Tax collected during a calendar month be paid to the Central Government?
- a)By the last day of the same calendar month
- b)By the 7th day of the month immediately following
- c)By the 15th day of the following month
- d)Within seven days of each transaction
Show the answer
Answer: (b) By the 7th day of the month immediately following
The workbook states that STT collected during a calendar month is required to be paid to the Central Government by the 7TH DAY OF THE MONTH IMMEDIATELY FOLLOWING the said calendar month. STT is collected by the recognised stock exchange, the trustee of a mutual fund, or the lead merchant banker in the case of an IPO, and it is levied on securities other than debt securities or debt mutual funds.
Where this is taught
Free preparation for NISM Series X-BRelated terms
- Exchange as transferConverting preference shares into equity shares of the same company meets the definition of an exchange, yet Section 47(xb) specifically excludes it from capital gains — cost and holding period simply carry over.
- Extinguishment of rightsWhen a person's rights in a capital asset are legally extinguished, that counts as a transfer — but if the asset itself is simply lost or destroyed, no capital loss arises, because that is not "extinguishment of rights."
- Full value of considerationThe amount received or receivable for transferring a capital asset — usually the actual sale price, but replaced by fair market value in specific situations the Act names, such as unquoted shares sold below value.
- Expenditure in connection with transferCosts incurred wholly and exclusively to complete a transfer — brokerage, stamp duty, registration and legal fees — deductible from capital gains, but STT and CTT are specifically barred.
- Fixed Maturity Plan rolloverExtending an FMP's tenure by CBDT-approved rollover is not treated as a transfer, so no capital gains arise on the extension — though the workbook flags this exemption as now largely academic.
- Nil cost ruleThe tax principle that certain rights or shares received without payment are given a cost of acquisition of nil, so the whole sale proceeds, not just a profit margin, become the taxable gain.