Capital gains notices are among the easiest for the department to raise. The Sub-Registrar reports property sales, depositories and brokers report share sales, and the Annual Information Statement (AIS) puts the full sale value next to whatever the return shows. Any gap becomes a query, an adjustment, or a reopening.

Most of these notices fall into three groups: the stamp duty value of a property (Section 50C), a denied exemption for reinvestment (Sections 54, 54F, 54B), and a listed-share gain that does not match the AIS (Section 112A). This guide covers what the department is checking in each, and how to reply.

Section numbers are from the Income-tax Act, 1961, which governs assessment year 2026-27 and earlier. For tax year 2026-27 onwards, the Income-tax Act, 2025 equivalents are in the table at the end.

Where the notice comes from

Trigger	What you receive	Reply route
AIS shows a sale not in the return, or a higher sale value	A compliance query on the portal, or an intimation under Section 143(1) where the gap falls within the adjustments that section allows	Rectification under Section 154 or a response on the portal; see our AIS mismatch guide
Return selected for scrutiny on capital gains	Notice under Section 143(2), then Section 142(1) questionnaires	Detailed reply with documents
Sale not offered at all, or exemption claimed with no return filed	Show cause notice under Section 148A; after your reply, an order under Section 148A deciding whether a Section 148 notice should issue	See our Section 148A guide

Whatever the route, the facts you need are the same: the sale deed or contract notes, the purchase cost and its proof, the date of each step, and the proof of reinvestment.

Section 50C: stamp duty value of land or building

What the section does. Where the sale consideration for land or building (held as a capital asset) is less than the value adopted or assessable by the stamp valuation authority, that value is deemed to be the full value of consideration under Section 48.

What the department checks. The AIS shows the stamp duty value from the registration. If the return used a lower figure, expect an addition of the difference.

Your defences, in order:

The tolerance band (third proviso to Section 50C(1)). If the stamp duty value does not exceed 110% of the actual consideration, the actual consideration is taken. The band was 105% when introduced by the Finance Act, 2018 (from assessment year 2019-20) and was raised to 110% by the Finance Act, 2020 (from assessment year 2021-22). Several Tribunal benches have treated the band as a curative amendment and applied it to earlier years; check the view of your jurisdictional bench.
The agreement date. Where the consideration was fixed by an agreement before registration, and at least part of it was received by account payee cheque, account payee bank draft, electronic clearing through a bank account or another prescribed electronic mode on or before the agreement date, the stamp duty value on the date of the agreement can be used instead of the date of registration.
Reference to the Valuation Officer (Section 50C(2)). If the stamp duty value exceeds the fair market value, and that value has not been disputed in an appeal or revision or referred to another authority or court, ask the AO in writing to refer the valuation to the Valuation Officer. If the Valuation Officer's figure is higher than the stamp duty value, the stamp duty value still applies (Section 50C(3)), so the reference can only help.

In Avisaa Trading Pvt. Ltd. v. ITO (Madras High Court, 10/11/2022), the assessee sold land for Rs 4.90 crore against a guideline value of about Rs 10.49 crore, and asked during reassessment for a reference under Section 50C(2). The AO decided the valuation himself without dealing with the request. The Court held that once the assessee seeks a reference under Section 50C(2), the AO must make it; it set aside the order and remanded the case for a reference to the District Valuation Officer.

Reply checklist for a 50C notice:

Sale deed, stamp duty valuation, and the computation of the percentage difference.
Agreement to sell with the bank entries for the advance, if relying on the agreement date.
A written request for reference to the Valuation Officer, with a registered valuer's report and the reasons the property is worth less (shape, access, encumbrance, distress sale, litigation).
The buyer side mirrors this: where a property is bought below stamp duty value, the difference is generally taxed in the buyer's hands under Section 56(2)(x) if it exceeds the higher of Rs 50,000 and 10% of the consideration, subject to that section's exclusions (for example, property received from a relative).

Section 54 and 54F: exemption for buying a house

Section 54 (sale of a residential house) and Section 54F (sale of any other long-term capital asset) give relief for reinvestment in a residential house in India. Section 54 measures the investment against the capital gain; Section 54F against the net sale consideration.

Condition	Section 54	Section 54F
Asset sold	Long-term residential house	Any long-term capital asset other than a residential house
Who	Individual or HUF	Individual or HUF
Amount to invest	The capital gain	The net sale consideration (exemption is proportionate if less is invested)
New house	Purchased within 1 year before or 2 years after the transfer, or constructed within 3 years after	Same
Other houses	No restriction	On the date of transfer, the assessee must not own more than one residential house (other than the new one) whose income is chargeable under "Income from house property", and must not buy another house within 1 year or build one within 3 years after the transfer (otherwise there is no exemption at all; see the lock-in row for later purchases)
Cap	Cost of the new house above Rs 10 crore is ignored (from AY 2024-25)	Same
Two houses	Option to invest in two houses where the gain does not exceed Rs 2 crore, once in a lifetime	Not available
Unutilised amount	Amount not used before filing the return must be deposited in the Capital Gains Accounts Scheme before filing it, and in any case by the due date under Section 139(1)	Same
Lock-in	If the new house is sold within 3 years, the exempted gain is reduced from its cost when computing the gain on that sale	The exempted gain is taxed as long-term capital gain of the year of sale; the same happens if another house is bought within 2 years, or built within 3 years, of the original transfer

Why the exemption is usually denied, and the answer:

"The house was not registered or not completed within the period." The condition is purchase or construction within the time, and courts often look at the substance (payment, allotment, possession) rather than the registration date alone. In Sudhakar Reddy Mettu v. ACIT (Telangana High Court, 08/07/2026), the assessee had given land under a joint development agreement and was to receive a villa, which the developer had not completed or handed over within the period. The Court held that denying the exemption was bad in law where the delay was due to factors beyond the assessee's control, and allowed the appeal. Keep the agreement, payment trail, allotment letter and developer correspondence.
"The gain was not deposited in the Capital Gains Accounts Scheme." If the amount was actually invested in the house before the return was filed (and within the Section 139(1) due date), no deposit was needed for that part. Show the dates; for investment made after that, check the view of your High Court.
"The assessee owns more than one house" (54F only). Check ownership on the date of transfer. A commercial property, a plot, or a house owned jointly with others is argued differently; collect the title documents.
"Investment exceeds Rs 10 crore." The cap limits the exemption; it does not deny it. Recompute rather than accept a full denial.
"Two houses claimed." Only Section 54, only if the gain is Rs 2 crore or less, and only once.

Section 54B (agricultural land): for an individual or HUF, gain on transfer of agricultural land used for agricultural purposes by the assessee, a parent or the HUF in the two years immediately before the transfer is exempt to the extent invested in other agricultural land within two years, with the same Capital Gains Accounts Scheme rule. (Rural agricultural land outside Section 2(14)(iii) is not a capital asset at all, so no gain arises and no exemption is needed; check the location first.) The usual dispute is whether the land was really used for agriculture; produce sale bills, land revenue records and crop entries answer it.

Section 112A: listed shares and equity funds

What the section does. It taxes long-term capital gains on equity shares, equity-oriented fund units and business trust units at a concessional rate above a threshold. For equity shares, securities transaction tax must have been paid on both acquisition (subject to notified exceptions) and transfer; for the units, on transfer. Transfers on a recognised exchange in an IFSC for foreign-currency consideration are exempt from the transfer-side condition.

Transfer date	Rate
Up to 22/07/2024	10%
On or after 23/07/2024	12.5%

The yearly exemption is Rs 1,00,000 up to FY 2023-24 and Rs 1,25,000 from FY 2024-25, applied once for the whole year (including gains on transfers before 23/07/2024 in FY 2024-25).

From 23/07/2024, short-term gains on these assets under Section 111A are taxed at 20% (15% earlier), and an asset is long-term if held for more than 12 months (listed securities and equity-oriented fund units) or more than 24 months (most other assets). Section 50AA treats gains on certain assets (such as market-linked debentures and specified debt fund units) as short-term whatever the holding period.

Grandfathering. For shares and eligible units acquired on or before 31/01/2018, the cost is the higher of the actual cost and the lower of (a) the fair market value on 31/01/2018 and (b) the sale value (Section 55(2)(ac)). No indexation applies.

Why 112A notices arise:

AIS shows the full sale value; the return shows only the gain. That is not a mismatch if Schedule 112A has the scrip-wise sale value and cost. Reply with the reconciliation: AIS sale value, less cost (with the 31/01/2018 value where used), equals the gain returned.
Grandfathered cost not shown scrip-wise. For holdings acquired on or before 31/01/2018, the return asks for the fair market value on that date, scrip by scrip. If the cost was in the return and the CPC ignored it, apply for rectification under Section 154; if the cost was never reported, a revised return (if still in time) or an appeal is the route.
Sales split across the two rates in FY 2024-25. Check that transfers on or after 23/07/2024 were taxed at 12.5% and earlier ones at 10%, and that the threshold was applied only once.
Penny stock gains. Where the department treats a large long-term gain on a thinly traded share as an accommodation entry, it adds the sale proceeds as unexplained under Section 68. In Pr. CIT v. Swati Bajaj (Calcutta High Court, 14/06/2022), the Court allowed the department's appeals and restored the additions made by the AOs, holding that the Tribunal had erred in setting them aside. Such cases turn on evidence beyond the contract notes: the company's financials, the price movement, how the shares were bought, and who the counterparties were. See our Section 68 burden of proof guide.

Land and building sold on or after 23/07/2024

For transfers on or after 23/07/2024, long-term gains are taxed at 12.5% without indexation. For land or building acquired before 23/07/2024, a resident individual or HUF can still compute the gain with indexation at 20%, and pay the lower of the two. If the notice computes tax only at 12.5% without indexation (or applies indexation where the seller is not eligible), recompute both ways.

Income-tax Act, 2025 equivalents

1961 Act	2025 Act	Subject
45	67	Charge of capital gains
48	72	Mode of computation
50C	78	Stamp duty value as full value of consideration
54	82	Sale of residential house
54B	83	Agricultural land
54EC	85	Investment in specified bonds
54F	86	Sale of other long-term asset, investment in house
55A	91	Reference to Valuation Officer
111A	196	Short-term gains on listed equity
112	197	Long-term capital gains
112A	198	Long-term gains on listed equity

How to structure the reply

Reconcile first. Put the AIS figure, the return figure and the difference in one table, item by item.
Concede what is genuinely wrong and recompute, so the dispute narrows to the real issue.
Take each disputed item with its section and its document: tolerance band and agreement date for 50C, dates and payment trail for 54/54F, scrip-wise cost for 112A.
Ask for what the law gives you: the Valuation Officer reference under Section 50C(2), and the opportunity the procedure provides before an addition (a response to a proposed Section 143(1) adjustment; in a faceless scrutiny under Section 144B, a show cause notice on the proposed variation and a personal hearing by video on request).
Keep penalty in view. Where every fact was disclosed in the return and the explanation is bona fide, say so now: it supports the exclusion in Section 270A(6) and answers any allegation of misreporting later.

Frequently asked questions

What is the tolerance limit under Section 50C?

110% from assessment year 2021-22: if the stamp duty value is not more than 110% of the actual consideration, the actual consideration is accepted. It was 105% for assessment years 2019-20 and 2020-21.

Is a Section 50C(2) reference to the Valuation Officer mandatory?

Where the assessee claims before the AO that the stamp duty value exceeds the fair market value (and that value has not been disputed in an appeal or revision or referred elsewhere), the Madras High Court in Avisaa Trading held that the AO must make the reference rather than decide the valuation himself.

Can I claim Section 54 if the builder has not handed over the flat in time?

In Sudhakar Reddy Mettu (Telangana High Court, 08/07/2026), the developer had not completed or handed over the villa within the period, and the Court held that denying the exemption was bad in law because the delay was beyond the assessee's control. Keep proof of payment, allotment and the developer's correspondence.

Why does the AIS show a higher capital gain than my return?

The AIS usually shows the gross sale value, not the gain. Reply with a scrip-wise or property-wise reconciliation of sale value, cost and gain.

Received a capital gains notice or an AIS adjustment? Upload it to TaxNoticeAI for a draft reply with the reconciliation and the section-wise defences. Every draft is for professional review before filing.

Capital Gains Notice: 50C, 54/54F and 112A Mismatch Replies