Section 68 of the Income-tax Act, 2025 — Capital Gains on Distribution of Assets by Companies in Liquidation

In plain language

What Section 68 is about

Section 68 of the Income-tax Act, 2025 deals with what happens, tax-wise, when a company is wound up (liquidated) and its remaining assets — cash, land, shares, machinery, anything — are handed out to its shareholders. It answers two separate questions: (1) is the company taxed on capital gains when it hands out those assets? and (2) is the shareholder taxed when he receives them? This is the exact re-enactment of the old Section 46 of the Income-tax Act, 1961, carried into the new 2025 Act with updated cross-references.

The company is NOT taxed on the distribution

• No "transfer" for the company: Section 68(1) says that where a company distributes its assets to shareholders on liquidation, that distribution is not regarded as a transfer by the company for the purposes of Section 67 (the charging/deemed-transfer section for capital gains). Since capital gains tax needs a "transfer", and here there is none, the company escapes capital gains tax on the mere act of distributing.
• Why: a liquidating company is winding up, not selling in the ordinary sense. The law shifts the tax point to the shareholder instead of the dead company.

The shareholder IS taxed — under "Capital gains"

Section 68(2) says that when a shareholder receives money or other assets on liquidation, he is chargeable under the head "Capital gains". The mechanics are:

• Full value of consideration = money received + market value of any other assets on the date of distribution.
• Less: deemed dividend — the portion already assessed as dividend under Section 2(40)(c) of the 2025 Act (the equivalent of old Section 2(22)(c)). This is the part representing the company's accumulated profits, taxed as dividend, not capital gains, to avoid double taxation.
• The net figure (consideration minus deemed dividend) is deemed to be the full value of consideration for the capital gains computation under Section 72 (the computation section, equivalent to old Section 48).
• Less: cost of acquisition of the shares (indexed for long-term, where applicable) to arrive at the capital gain.

Two layers of tax on the same receipt

A single amount received on liquidation is split into two:

• Deemed dividend (accumulated profits) — taxed as dividend income in the shareholder's hands.
• Balance — treated as capital gains consideration and taxed under Section 68 read with Section 72.

Cost of acquisition for a later sale of the received asset

• If the shareholder later sells an asset (say, land) he received in the liquidation, his cost of acquisition of that asset is its market value on the date of distribution — the value that was already used to compute his capital gains at the liquidation stage. This prevents the same value being taxed twice.

Who it applies to

• All shareholders of a company that goes into liquidation — individuals, HUFs, firms, other companies.
• Applies whether the company is in voluntary liquidation or ordered into liquidation (including under insolvency proceedings).
• Applies to receipt of cash and/or assets in kind.

Practical implications

• The date of distribution matters — market value is fixed on that date, and the holding period of the shares up to that date decides long-term vs short-term.
• Deemed dividend is deducted first; only the balance is capital gains. Getting this split wrong leads to over- or under-taxation.
• Because the distribution is not a transfer by the company, the company files no capital gains on the distribution itself — but any earlier sale of assets by the liquidator before distribution can still trigger capital gains for the company.