Chapter IV - Computation of Total Income
Section 68
Section 68: capital gains on distribution of assets by companies in liquidation
Section 68 clarifies the capital gains treatment when a company in liquidation distributes its assets to shareholders - the company itself does not face a capital gains charge on the distribution, but the shareholder does, on the value received in excess of what is already taxed as deemed dividend.
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) Irrespective of anything contained in section 67, where the assets of a company are distributed to its shareholders on its liquidation, such distribution shall not be regarded as a transfer by the company for the purposes of the said section.
(2) If a shareholder, on the liquidation of a company, receives any money or other assets from the company, then,— (a) such shareholder shall be chargeable to income-tax under the head “Capital gains”, in respect of the money so received or the market value of the other assets on the date of distribution, as reduced by the amount assessed as dividend within the meaning of section 2(40)(c); and (b) the sum so arrived at shall be deemed to be the full value of the consideration for the purposes of section 72.
Introduction
Liquidation treats the two parties differently. The company's distribution is not its Section 67 transfer, but the shareholder can have a capital-gains charge on what is received after removing the assessed dividend element.
Key takeaways
Company liquidation
Distribution of a company’s assets to its shareholders on liquidation is not treated as a transfer by the company for Section 67.
Shareholder amount
The shareholder’s money received or market value of assets at distribution, reduced by the amount assessed as dividend, is deemed consideration for computing the shareholder’s capital gain.
No transfer at the company level
Section 68(1) provides that where the assets of a company are distributed to its shareholders on liquidation, that distribution is not regarded as a "transfer" by the company for the purposes of Section 67 (the capital gains charging section).
Taxation in the shareholder's hands
Section 68(2) taxes the shareholder instead: if a shareholder receives money or other assets from the company on liquidation, the shareholder is chargeable to capital gains tax on the money received, or the market value of the other assets on the date of distribution, reduced by the amount already assessed as deemed dividend under Section 2(40)(c). That resulting figure is treated as the full value of consideration for purposes of Section 72 (mode of computing capital gains).
Separate company and shareholder results
Record the money and market value of other assets received by each shareholder on the distribution date.
Exclude from the shareholder's capital-gains consideration the part already assessed as dividend under Section 2(40)(c), then compute the gain under Section 72.
Step-by-step flow for applying Section 68
- 1
Are a company's assets being distributed to its shareholders on liquidation?
- No: Section 68 does not apply.
- Yes: Go to the next step.
- 2
Company level
The distribution is not a transfer by the company for Section 67, so the company has no capital gain on it (Section 68(1)).
- 3
Shareholder level: what was received?
Take the money received plus the market value of other assets on the date of distribution.
- 4
Reduce by the deemed dividend
Subtract the amount assessed as dividend under Section 2(40)(c).
- 5
Compute the capital gain
The balance is the full value of consideration for Section 72. Compute the gain against the cost of the shares under that section.
Practical checklist
Do
- Keep the liquidator's distribution statement and valuation of non-cash assets on the distribution date.
- Reconcile the dividend-assessed amount separately before computing shareholder consideration.
Avoid
- Do not tax the same distribution as a company transfer under Section 67 and a shareholder gain under this section.
- Do not include the dividend element twice in shareholder capital-gains consideration.
Illustrative example
Worked example: cash and land received on liquidation
Hypothetical facts (illustration only, not a real taxpayer): A company in liquidation distributes ₹5,00,000 in cash and a plot of land to a shareholder. The land's market value on the date of distribution is ₹15,00,000. Assumed: ₹6,00,000 of the distribution is assessed as dividend under Section 2(40)(c), and the shareholder's cost of the shares is ₹8,00,000.
Company
Handing over the land is not a transfer by the company for Section 67, so there is no capital gain in the company's hands.
Total received
₹5,00,000 + ₹15,00,000 = ₹20,00,000.
Less deemed dividend
₹20,00,000 - ₹6,00,000 = ₹14,00,000. This is the full value of consideration under Section 68(2)(b).
Capital gain
₹14,00,000 - ₹8,00,000 (cost of shares) = ₹6,00,000, subject to the rest of the Section 72 computation.
Outcome
- The shareholder's capital gain is ₹6,00,000. The ₹6,00,000 dividend portion is taxed as dividend, not as capital gain.
- The company itself has no capital gain on the distribution.
Glossary
- Liquidation distribution
- Money or assets transferred by a winding-up company to its shareholders.
- Deemed consideration
- The shareholder amount computed under Section 68(2) for the Section 72 gain calculation.
Frequently asked questions
Does a company pay capital gains tax when it distributes assets on liquidation?
No - Section 68(1) says such a distribution is not treated as a "transfer" by the company for capital gains purposes.
How is a shareholder taxed when a company in liquidation distributes assets?
The shareholder is taxed on capital gains equal to the money received, or the market value of other assets received on the distribution date, reduced by the amount already treated as deemed dividend under Section 2(40)(c), per Section 68(2).
Why is the deemed dividend deducted from the amount received?
Section 68(2)(a) reduces the money and market value received by the amount assessed as dividend under Section 2(40)(c). This means that portion is not taxed again as capital gains.
Need help applying this provision to your situation?
Get expert help on liquidation and shareholder tax treatmentLast updated 9 October 2026