Capital Gains on Liquidation of a Company: How Shareholders Are Taxed (Income-tax Act, 2025)
When a company is wound up and pays its shareholders, the shareholder is taxed under section 68 of the Income-tax Act, 2025. The company is not treated as having made a transfer. The shareholder pays tax under "Capital gains" on the money received, or the market value of other assets on the date of distribution, reduced by the part that is already taxed as dividend. That net sum is the full value of consideration, from which cost of the shares is deducted under section 72.
This guide explains the two-step split (dividend first, capital gain second), how to compute the gain, and where the holding period and cost rules sit. Every provision cited is from the Act as amended by the Finance Act, 2026 (tax year 2026-27 onwards). It is general information, not advice on a specific liquidation.
Is the company taxed on assets it distributes in liquidation?
No, not under the capital gains charge. Section 68(1) says that, irrespective of section 67, a distribution of a company's assets to its shareholders on liquidation is not regarded as a transfer by the company for the purposes of section 67. So the company does not have a capital gain on the act of distributing. The tax event is at the shareholder's end, under section 68(2).
How is a shareholder taxed when a company is liquidated?
Section 68(2) applies when a shareholder, on the liquidation of a company, receives any money or other assets. It works in two parts.
- Dividend part. Under section 2(40)(c), "dividend" includes any distribution made to shareholders on liquidation to the extent it is attributable to the accumulated profits of the company immediately before liquidation, whether capitalised or not. That slice is assessed as dividend.
- Capital gains part. The money received, or the market value of other assets on the date of distribution, minus the amount assessed as dividend, is chargeable under "Capital gains" (section 68(2)(a)). This sum is deemed to be the full value of consideration for section 72 (section 68(2)(b)).
How do you compute the capital gain on a liquidation distribution?
Section 72(1) deducts from the full value of consideration (a) expenditure incurred wholly and exclusively in connection with the transfer and (b) the cost of acquisition of the asset and the cost of any improvement. For shares, the asset is your shareholding in the company being wound up.
| Step | What to do | Provision |
|---|---|---|
| 1 | Add up cash received plus market value of other assets on the date of distribution | Section 68(2)(a) |
| 2 | Find the part attributable to the company's accumulated profits immediately before liquidation | Section 2(40)(c) |
| 3 | Step 1 minus step 2 is the full value of consideration | Section 68(2) |
| 4 | Deduct transfer expenses and cost of acquisition | Section 72(1) |
| 5 | Classify as short-term or long-term using the holding period | Section 2(101), 2(67) |
Worked example 1: cash distribution (tax year 2026-27)
Assumptions. Meena holds 10,000 shares of Alpha Pvt Ltd, an unlisted company, bought years ago for Rs 100 each. The company is liquidated in 2026-27 and pays her Rs 18,00,000 in cash. Of this, Rs 6,00,000 is attributable to the company's accumulated profits immediately before liquidation. She pays Rs 5,000 of expenses connected with the distribution.
| Line | Rs |
|---|---|
| Cash received | 18,00,000 |
| Less: assessed as dividend under section 2(40)(c) | (6,00,000) |
| Full value of consideration | 12,00,000 |
| Less: cost of acquisition (10,000 x Rs 100) | (10,00,000) |
| Less: expenses | (5,000) |
| Capital gain | 1,95,000 |
Unlisted shares held for more than twenty-four months are not short-term (section 2(101)(a)), so this is a long-term capital gain (section 2(67)). Section 197(1)(b) taxes long-term capital gains at 12.5%, which on Rs 1,95,000 would be Rs 24,375. That is before the resident individual relief in section 197(2) and any other provision that applies to Meena, so treat the figure as indicative. The Rs 6,00,000 dividend portion is taxed separately as dividend.
Worked example 2: assets distributed in kind
Assumptions. Ravi holds shares costing Rs 30,00,000 in Beta Pvt Ltd. On liquidation he receives Rs 5,00,000 in cash and a plot of land whose market value on the date of distribution is Rs 40,00,000. Beta has no accumulated profits, so nothing is assessed as dividend. His expenses are nil.
- Money plus market value of other assets: Rs 5,00,000 + Rs 40,00,000 = Rs 45,00,000.
- Less dividend under section 2(40)(c): Rs 0.
- Full value of consideration: Rs 45,00,000.
- Less cost of shares: Rs 30,00,000.
- Capital gain: Rs 15,00,000.
The land is valued at its market value on the date of distribution, not at what Beta paid for it. Because Ravi was assessed under section 68 on the land, section 90(c) makes its cost of acquisition the fair market value on the date of distribution, so Rs 40,00,000 is his starting cost if he later sells the plot.
Real-life example: the shareholder who gets less than they invested
Sunita put Rs 8,00,000 into a family company that never made profits. At liquidation it returns Rs 3,00,000 to her. There are no accumulated profits, so no dividend part arises. Her full value of consideration is Rs 3,00,000 against a cost of Rs 8,00,000, which gives a capital loss of Rs 5,00,000 under the section 72 computation. Whether and how that loss can be set off or carried forward is governed by other provisions of the Act, which this article does not cover.
Real-life example: the bonus the shareholder did not expect
Kabir's company is wound up after years of profit. He assumes everything he receives is a capital receipt. The liquidator's statement shows that part of the payout comes from accumulated profits. That part is assessed as dividend under section 2(40)(c), and only the balance goes into the capital gains computation. Asking for the split from the liquidator or the company's CA before filing avoids a mismatch in the return.
How is the holding period counted for shares in a company in liquidation?
Under section 2(101), a short-term capital asset is one held for not more than 24 months before transfer, reduced to 12 months for listed securities, units of the Unit Trust of India, units of an equity-oriented fund and zero-coupon bonds. Section 2(101)(c)(A) adds a rule for this situation: for a share held in a company in liquidation, the period after the date on which the company goes into liquidation is excluded. The clock stops when liquidation starts.
Is there any special rule on what counts as accumulated profits?
Yes. Under the explanation to section 2(40), accumulated profits for a liquidation distribution include all profits of the company up to the date of liquidation. There is one exception: if the liquidation follows the compulsory acquisition of the company's undertaking by the Government or a Government-owned or controlled corporation, profits from before the three successive tax years immediately preceding the tax year of acquisition are not counted. Separately, section 2(40) excludes from dividend a liquidation distribution in respect of a share issued for full cash consideration where the holder is not entitled to participate in surplus assets on liquidation.
What must the liquidator do about the company's own tax?
Under section 322(1), a liquidator (or a receiver of the company's assets) must notify the Assessing Officer of the appointment within thirty days. The Assessing Officer then has three months from receiving that notice to tell the liquidator how much to provide for the company's tax (section 322(2)). Until notified, the liquidator cannot part with the company's assets without the leave of the Commissioner, and afterwards must set aside the notified amount (section 322(3)). If the liquidator fails, he becomes personally liable for the company's tax (section 322(5)). In practice this can delay payouts to shareholders.
Common mistakes
- Treating the whole payout as capital gain. The part attributable to accumulated profits is dividend first, and only the balance is capital gain.
- Using book value for assets in kind. Section 68(2)(a) uses market value on the date of distribution.
- Taxing the company as well. Section 68(1) says the distribution is not a transfer by the company for section 67.
- Counting the holding period up to the receipt date. Time after the company goes into liquidation is excluded for shares in a company in liquidation.
- Forgetting transfer expenses. Expenses wholly and exclusively connected with the transfer are deductible under section 72(1)(a).
Quick reference
| Question | Answer | Where |
|---|---|---|
| Is the company's distribution a transfer? | No, for section 67 | Section 68(1) |
| What is taxed in the shareholder's hands? | Money, or market value of assets on distribution date, less dividend part | Section 68(2)(a) |
| What is the full value of consideration? | The net sum above | Section 68(2)(b) |
| What is the dividend part? | Portion attributable to accumulated profits before liquidation | Section 2(40)(c) |
| Holding period cut-off | 24 months (12 for listed securities); period after liquidation starts is excluded | Section 2(101) |
| Long-term capital gains rate | 12.5% | Section 197(1)(b) |
For a CA firm, the hard part is usually collecting the liquidator's split between accumulated profits and capital, and holding it against each client's share cost and dates. Finexo's practice management software helps track client documents and filing tasks in one place. It does not compute the gain for you.
Where this is in the Act
- Section 68: capital gains on distribution of assets by companies in liquidation
- Section 67: charge of capital gains (not applied to the company's distribution)
- Section 72: computation of capital gains
- Section 2(40)(c) and the accumulated profits explanation: dividend on liquidation
- Section 2(101), 2(67), 2(68): short-term and long-term assets and gains
- Section 90(c): cost of an asset received on liquidation and taxed under section 68
- Section 322: liquidator's notice and tax set-aside
- Section 197: tax on long-term capital gains
See also: TDS on rent under the Income-tax Act, 2025.
Frequently Asked Questions
Under which section are capital gains on liquidation taxed?
Section 68 of the Income-tax Act, 2025. The shareholder is taxed on the money or market value of assets received, less the part assessed as dividend, and that net sum is the full value of consideration for section 72.
Does the company pay capital gains tax when it distributes assets on liquidation?
Under section 68(1), the distribution is not regarded as a transfer by the company for section 67, so the capital gains charge does not arise on the company's distribution.
Which part of a liquidation payout is dividend?
Under section 2(40)(c), the portion attributable to the company's accumulated profits immediately before liquidation. Only the remainder goes into the capital gains computation.
How are assets other than cash valued on liquidation?
At their market value on the date of distribution (section 68(2)(a)). That value, less any dividend part, is the full value of consideration.
How is the holding period of shares in a company in liquidation counted?
The period after the date on which the company goes into liquidation is excluded (section 2(101)(c)(A)). The 24-month test applies, or 12 months for listed securities.
What is the cost of an asset a shareholder receives on liquidation?
If the shareholder was taxed on it under section 68, section 90(c) treats the asset's fair market value on the date of distribution as its cost of acquisition.
What must a liquidator do about tax?
Notify the Assessing Officer within thirty days of appointment and set aside the amount the officer notifies for the company's tax (section 322). Failure makes the liquidator personally liable.