Section 45(1A) - Capital Gains on Insurance Claim for damage to or destruction of Capital Asset

• Section 45(1A) of the Income Tax Act 1961, provides for taxability of capital gains on insurance claim received on account of damage or destruction of capital asset.

• Section 45(1) prescribes that capital gains is taxable in the year in which transfer took place. However, this section overrides section 45(1) and provides for taxability of capital gains in the year in which insurance claim is received.

• Where any money or other asset is received on account of damage to or destruction of a capital asset, on account of any of the following

• flood, typhoon, hurricane, cyclone, earthquake, or other convulsion of nature (act of God) or

• riot or civil disturbance, or

• accidental fire or explosion, or

• action by any enemy or action taken in combating an enemy

• Value of the money received or fair market value of other asset received shall be deemed to be the full value of consideration for the purposes of section 48, and taxable under the head Capital gains in the previous year in which such money or other asset is received by the assessee.

• Important to note here that if an asset is destroyed and no insurance claim is received, then loss arising on the asset destroyed shall not be allowed as a capital loss as this section is only applicable on receipt of insurance claim on destruction or damage of capital asset.

• For determining the nature of capital gains, whether short term or long term, the date of transfer of capital asset shall be the date of destruction of capital asset.

• The fair market value (FMV) on the date of receipt of the asset under insurance claim shall be the cost of acquisition of the said asset.