Virtually every country that taxes income imposes a capital gains tax only upon the realization of gains rather than on accrual. Though countries vary with respect to indexing for inflation and the relative tax rates on capital gains and ordinary income, the realization-based tax system sets capital gains taxation apart from other forms of taxation and is associated with a variety of economic distortions.

Capital gains tax refers to a type of tax that is levied on capital gains that are made by individuals or organizations. Capital gains are profits that an investor is able to make when he or she sells the capital asset under his or her ownership for a price that is more than the price at which it was purchased. To most investors, the tax levied on capital gains is viewed as a control measure to regulate the profits made by them.

Capital gains means profits or gains arising to the assesse from the transfer of a capital asset. Such capital gain is added to the total income of the previous year in which the transfer of the assets took place. Capital Gains is the fourth head of income. Section 45(1)[1]talks about any profits or gains arising from the transfer of a capital asset effected in the previous year. In C.I.T. V. H.H. Maharani Usha Devi[2] case the Supreme Court has made it clear that heirloom jewellery constitutes personal effects under section 2(14) and its sale would not give rise to any taxable capital gains.

Thus, the essential elements of capital gains are:-

(A) Capital Asset.

(B) Transfer of Capital Asset,

(C) Computation of Capital gain.

In C.I.T V. D.P. Sandu Brothers[3] case it was held that the value or income from transfer of capital asset can be taxed only under the head “Capital Gain” and if it cannot be taxed under this head, then it cannot be taxed at all. Such income cannot be taxed under the head “Income from other sources”.