Capital gains on insurance compensation arise when a destroyed capital asset is covered by specified contingencies and paid out by insurer.

Insurance compensation received for damage or destruction of a capital asset is chargeable as capital gains only where the loss results from specified events such as natural calamity, riot, accidental fire or explosion, or enemy action. The insurance money or the fair market value of any asset received is treated as the full value of consideration, and the gain is taxed in the year of receipt. If no claim is received, no capital gain arises; stock-in-trade is excluded from this treatment.

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