Cost of acquisition for computation of capital gains

See also: Cost of improvement for computation of capital gains

The cost of acquisition is determined as per provisions of Section 90 or Section 73. If the capital asset is acquired by the assessee himself and there is no change in the ownership (like due to succession, amalgamation, etc.) and the form (like conversion of preference shares into equity shares, etc.), the cost of acquisition of such capital asset shall be computed as per Section 90. If there is any change in the ownership or the form of the capital asset, its cost of acquisition shall be computed as per Section 73. The cost of acquisition shall be calculated as follows:

2.1. In general

Cost of acquisition of an asset is the value for which it was acquired by the assessee. It is reasonable to include in the actual cost of a capital asset all the expenses which are incurred by the assessee to acquire it.

2.2. Cost of acquisition of capital asset acquired before 01-04-2001

If the capital asset became the property of the assessee before April 1, 2001, the cost of acquisition, at the option of the assessee, may either be its purchase price or fair market value as on April 1, 2001. However, in case of a capital asset, being land or building or both, fair market value as on 01-04-2001 shall not exceed the stamp duty value

However, the option to assume fair market value as the cost of acquisition is not available in respect of the following capital assets:

(a) Goodwill;

(b) Route permits;

(c) Loom hours;

(d) Tenancy rights;

(e) License or right to manufacture, produce or process any article or thing;

(f) Trademark or brand name;

(g) Any other intangible asset; and

(h) any other right.

2.3. Cost of acquisition of house property

The cost of acquisition of a house property includes all the expenses incurred by the assessee to acquire it. Where an assessee purchases a house property, its purchase price is the cost of acquisition. When a house property is constructed, the aggregate of the cost of land and the construction cost is the cost of acquisition.

However, the interest claimed under Section 22(1)(b) or Chapter VIII shall not be considered part of the cost of acquisition of a house property.

2.3-1. Which interest shall be disregarded?

Where a deduction is claimed for the following interest payments, they shall not be considered in the cost of acquisition/improvement of the capital asset:

(a) Deductions claimed under Section 22(1)(b)

Interest paid or payable on the amount borrowed for purchase, construction, repair, renovation or reconstruction of a house property is allowed as a deduction while computing income under the head of house property. A full deduction is allowed for interest paid or payable on borrowed capital if the house property is let out or deemed to be let-out out. However, in the case of self-occupied house properties, the deduction is limited to Rs. 30,000 or Rs. 200,000, as the case may be.

(b) Deductions under Section 130

The deduction under this provision is allowed for the interest payable on a loan sanctioned in the tax year 2016-17 for acquiring a residential property. Deduction under this provision is limited to Rs. 50,000 in a tax year.

(c) Deduction under Section 131

This section allows an additional deduction of up to Rs. 1,50,000 in respect of interest payable on the housing loan (sanctioned between 01-04-2019 and 31-03-2022) to acquire a residential property. This deduction is available to an individual assessee, whether resident or non-resident.

For example, in April 2019, Mr. A took a housing loan of Rs. 7 lakhs to purchase a house of Rs. 43 lakhs. He claimed deductions under Section 22(1)(b) and Section 123 for the interest payment and principal repayment, respectively as under:

He sold the house for Rs. 60 lakhs. He paid Rs. 50,000 to the agent for facilitating the sale of the property. Compute the long-term capital gains if the house is sold on 01-04-2026.

2.4. Cost of acquisition of goodwill

Main article: Computation of capital gains on transfer of goodwill

If goodwill of a business or a profession has been acquired/purchased by the assessee, the consideration paid would be regarded as cost of acquisition in the hands of the purchaser. In any other case, the cost of acquisition of goodwill shall be nil.

With effect from tax year 2020-21, no depreciation is allowed on the purchased goodwill

2.5. Cost of acquisition of other intangible assets

The cost of acquisition of following intangible assets will be computed as per the special provisions provided under the Act:

(a) Tenancy Rights;

(b) Route Permits;

(c) Loom Hours;

(d) Right to manufacture, produce, or process any article or thing;

(e) Trademark or Brand name associated with business or profession;

(f) Right to carry on any business or profession;

(g) Any other intangible asset; and

(h) Any other right.

If these assets are acquired/purchased by the assessee and he has paid certain amount of consideration for that, the consideration so paid would be regarded as cost of acquisition in the hands of the purchaser. In any other case, the cost of acquisition of such intangible assets shall be nil.

2.6. Cost of acquisition of securities

2.6-1. Original Shares

Where original shares were acquired before 01-04-2001, the cost of acquisition of such shares may be taken either the price actually paid for the acquisition of shares or fair market value on as 01-04-2001, whichever is higher. If original shares were acquired on or after April 1, 2001, the cost of acquisition of shares is always the price paid for their acquisition.

2.6-2. Listed securities acquired on or before 31-01-2018

With effect from Tax Year 2018-19, the capital gains arising from transfer of long-term listed securities (equity shares or units of equity oriented mutual fund) are charged to tax under Section 198. If the shares or units were acquired on or before 31-01-2018, the cost of acquisition of such shares or units shall be higher of the following:

(a) Cost of acquisition; or

(b) Lower of fair market value of such shares or units as on 31-01-2018 or full value of consideration as a result of transfer.

2.6-3. Right shares

Where shareholder acquires right shares in a company, the cost of acquisition of such right shares is the price paid by the shareholder for their acquisition. If he renounces his rights entitlement in favour of another person, the cost of acquisition of rights entitlement is nil.

If a person buys right shares on basis of rights entitlements of original shareholder, the cost of acquisition of the rights shares so acquired shall be aggregate of amount paid by him to renouncer (original shareholder) and the amount paid by him to the company/institution for acquiring such rights shares.

It is to be noted that if the right shares were acquired prior to 01-04-2001, the cost of acquisition may be taken as fair market value of such shares as on April 1, 2001.

2.6-4. Bonus shares

If bonus shares are issued to the assessee prior to 01-04-2001, the cost of acquisition of such shares is the fair market value as on 01-04-2001. Where bonus shares are issued on or after 01-04-2001, the cost of acquisition is taken as nil.

However, if the bonus shares were allotted on or before 31-01-2018, the cost of acquisition of such shares shall be higher of the following:

(a) Cost of acquisition ('Nil' if shares are issued on or after 01-04-2001); or

(b) Lower of the fair market value of such shares as on 31-01-2018 or full value of consideration as a result of transfer.

2.6-5. Sweat equity shares

Where capital gain arises from the transfer of securities allotted under an Employees' Stock Option Plan (ESOP) or sweat equity shares, the cost of acquisition of such security or shares is taken at the fair market value on the date on which the option is exercised by the assessee.

2.6-6. Securities held in Demat form

The Dept. has clarified

2.7. Cost of acquisition of units of business trust

2.7-1. In general

Where units of business trust were acquired before 01-04-2001, the cost of acquisition of such units may be taken either the price actually paid for the acquisition of units or fair market value on as 01-04-2001, whichever is higher. If units were acquired on or after April 1, 2001, the cost of acquisition of units is always the price paid for their acquisition.

2.7-2. Listed units acquired on or before 31-01-2018

With effect from Tax Year 2018-19, the capital gains arising from transfer of long-term listed units of business trust are charged to tax under Section 198. If the units were acquired on or before 31-01-2018, the cost of acquisition of such units shall be higher of the following:

(a) Cost of acquisition; or

(b) Lower of fair market value of such units as on 31-01-2018 or full value of consideration as a result of transfer.

2.7-3. Units received in lieu of shares of special purpose vehicle (SPV)

Where units of a business trust became the property of the assessee in consideration of any transfer of share of an Indian company (special purpose vehicle) in which the business trust holds controlling interest, it is not treated as transfer. In such a case, the cost of acquisition of such unit is deemed to be the cost of acquisition of such share to him.

2.7-4. Adjustment of sum received from business trust

The cost of acquisition of a unit of a business trust shall be reduced and shall be deemed to have always been reduced by any sum received by a unit holder from the business trust with respect to such unit, if such sum:

(a) is not in the nature of income as referred to in Schedule V [Table S. No. 3] or Schedule V [Table S. No. 4]; and

(b) is not chargeable to tax in hands of the unit holder under Section 92(2)(k); and

(c) is not chargeable to tax in hands of the business trust under Section 223.

In simple words, if any sum received by a unit holder from a business trust in respect to a unit is neither chargeable to tax in the hands of unit holder nor in the hands of business trust then such sum shall be reduced from the cost of acquisition of such unit.

It is to be noted that where assessee has received unit of business trust under a transaction which is not regarded as "transfer", the cost of acquisition of such unit shall be reduced by the sum received from the business trust by the assessee and the previous unit holder provided such sum was not charged to tax either in the hands of the assessee, the previous unit holder and the business trust.

2.8. Cost of acquisition of converted securities

2.8-1. Conversion of debentures into shares

Any transfer by way of conversion of bonds, debentures, debenture stocks, or deposit certificates in any form into shares or debentures of that company is not treated a transfer. Thus, no capital gain arises at the time of conversion. Capital gain arises when the shares or debentures received on such conversion are transferred. For computing capital gain, the cost of converted shares or debentures is taken at the price paid for the acquisition of original bonds, debentures or debenture certificate.

2.8-2. Redemption of GDRs

Where a non-resident assessee acquires the shares of a company on redemption of 'Global Depository Receipts' held by him, the cost of acquisition of such shares is calculated on the basis of price of such share prevailing on any recognized stock exchange on the date on which a request for such redemption was made.

2.8-3. Conversion of preference shares into equity shares

Where preferences shares in a company are converted into equity shares of that company, it is not treated as transfer. In such cases, the cost of acquisition of preference shares shall be deemed to be the cost of acquisition of equity shares.

2.8-4. Consolidation or conversion of shares

Where a share or a stock of a company, became the property of the assessee by any of the following specified modes, the cost of acquisition of such asset shall the cost of acquisition of the shares or stock from which such asset is derived.

(a) Consolidation and division of all or any of the share capital of the company into shares of larger amount than its existing shares;

(b) Conversion of any share of the company into stock;

(c) Re-conversion of any stock of the company into shares;

(d) Sub-division of any of the shares of the company into shares of smaller amount; and

(e) Conversion of one kind of shares of the company into another kind.

2.8-5. Consolidation scheme of Mutual Fund

Any transfer of units held by unit holder in the consolidating scheme (including consolidation plan) of a mutual fund in consideration of allotment of units in the consolidated scheme of the mutual fund is not treated as transfer. In such a case, the cost of acquisition of units held in consolidating scheme of the mutual fund is deemed to be the cost of acquisition of the units allotted in the consolidated scheme.

2.8-6. Segregation of mutual fund

Mutual Funds generally hold debts and money market instruments of different companies and NBFC's. Recent downgrade event

Thus, where a mutual fund segregated its total portfolio into main portfolio and segregated portfolio, the cost of acquisition of the units in the segregated portfolio shall be computed as under:

Further, cost of acquisition of units in the segregated portfolio shall be reduced from the cost of acquisition of units held in main portfolio.

2.9. Cost of acquisitions of shares acquired on business restructuring

Any transfer of a capital asset under a scheme of business restructuring such as amalgamation, demerger, consolidation etc. is not regarded as transfer if the specified conditions in respect thereof are satisfied. On such business restructuring, the successor company (including co-op. bank) allots shares to the shareholders in lieu of their rights in the predecessor company. The cost of acquisition of such shares allotted in the successor co. and shares remaining in the predecessor co., if any, shall be computed as per the following provision:

2.9-1. Shares in amalgamated co.

Where the shareholders of amalgamating company (transferor) are issued shares in amalgamated company (transferee), which is an Indian company, the cost of such shares in the amalgamated company is deemed to be the price paid for the acquisition of original shares in the amalgamating company.

2.9-2. Shares acquired in resulting co.

The cost of acquisition of shares, acquired in resulting company in a scheme of demerger, is determined by apportioning the cost of acquisition of shares held by the assessee in demerged company in proportion the net book value of assets transferred in demerger bear to the net worth of the demerged company, immediately before the specified date of demerger.

"Net worth" means the aggregate of paid-up share capital and general reserves as appearing in the books of account of the demerged company, immediately before demerger.

2.9-3. Shares in demerged company

After demerger, the cost of acquisition of the shares held by the shareholders in the demerged company is reduced by the cost of acquisition of shares, acquired from resulting company as determined above.

2.10. Cost of acquisition of asset acquired in transaction between holding & subsidiary co.

Any transfer of a capital asset by a holding company to its subsidiary company or vice-versa is not regarded as transfer provided the specified conditions are satisfied. The cost of acquisition of asset acquired by a holding co. or a subsidiary co., as the case may be, in such a transaction, shall be computed as per the following provision:

2.10-1. Asset acquired by holding co.

Where a capital asset is transferred by a parent company to its wholly-owned Indian subsidiary co. and the transferor company is not charged to tax due to fulfilment of conditions specified in Section 70, the cost of acquisition of such capital asset to the subsidiary company is the cost for which such asset was acquired by the parent company.

2.10-2. Asset acquired by subsidiary co.

Where a capital asset is transferred by a wholly-owned subsidiary to its Indian parent company and transferor company is not charged to tax due to fulfilment of conditions specified in Section 70, the cost of acquisition of such capital asset in the hands of the parent company is the cost for which such asset was acquired by the subsidiary company.

2.10-3. On withdrawal of exemption

The exemption from the capital gain tax in respect of transfer of a capital asset by a holding co. to its subsidiary co. or vice-versa is withdrawn in the following scenarios:

(a) If such capital asset is converted by the transferee co. into or is treated by it as stock-in-trade of its business before expiry of 8 years from the date of transfer of the capital asset; or

(b) If holding co. ceases to hold the whole of the share capital of the subsidiary co. at any time before expiry of 8 years from the date of transfer.

In the event of withdrawal of exemption, the cost of acquisition of a capital asset to the transferee company is the cost for which such asset was acquired by it.

2.11. Cost of acquisition of right acquired on conversion of co. into LLP

Any transfer of a capital asset on conversion of Private Company or unlisted Public Company into a Limited Liability Partnership ('LLP') or transfer of shares by the shareholder on such conversion is not treated a 'transfer', if the specified conditions are satisfied. On such conversion, the partner gets a right to share the profit and loss of Limited Liability Partnership (LLP) in lieu of shares in the company. In such a case, the cost of acquisition of such share in the company immediately before its conversion is deemed to be the cost of acquisition of such right in LLP.

2.12. Cost of acquisition of asset acquired by operation of law

In the following scenarios, if assessee has acquired the property not by way of purchase but by way of operation of law, the cost to the previous owner is deemed to be the cost to the assessee:

(a) On partition of HUF;

(b) Under a Gift or Will from an Individual or HUF

(c) By succession, inheritance or devolution;

(d) Distribution of assets on dissolution of the firm, body of individuals, or other association of persons;

(e) Distribution of assets on liquidation of a company;

(f) Under a transfer to a revocable or an irrevocable trust;

(g) Transfer of a capital asset by a subsidiary to its holding and vice-versa if conditions specified in Section 70(1)(c)/(d)are satisfied;

(h) Transfer a capital asset in a scheme of amalgamation as defined in Section 70(1)(e)/(g)/(i)/(h) ;

(i) Transfer of a capital asset during demerger as defined in Section 70(1)(j)/(l)/(m) ;

(j) Transfer of a capital asset in business reorganization as defined in Section 70(1)(n)/(o) ;

(k) Transfer of a capital asset by a firm to a company as a result of its succession by that company as defined in Section 70(1)(zd);

(l) Transfer of a capital asset by a private company or unlisted public company to a LLP on its conversion as defined in Section 70(1)(ze);

(m) Transfer of a capital assets by a sole proprietorship concern to the company on its succession that company as defined in Section 70(1)(zf));

(n) Transfer at the time of relocation of the original fund to the resulting fund in IFSC as specified in Section 70(1)(t)/(u);

(o) Transfer of property by a member to his HUF.

The previous owner of the property means the last previous owner who acquired the property by means other than those discussed above.

The similar provisions shall apply to an intangible asset acquired by the assessee in the modes specified above if the previous owner has purchased such asset from any third party.

2.13. Cost of acquisition in joint development agreement

Joint development agreement is an arrangement in which a person owning land or building, agrees to allow another person to develop a real estate project on such land or building, in consideration of a share, being land or building, in such project, whether with or without payment of part of the consideration in cash.

In such a case, the cost of acquisition of the share acquired in the developed project shall be the stamp duty value, on the date of issue of completion certificate, as increased by cash consideration, if any.

2.14. Cost of acquisition of enhanced compensation

If a capital asset is compulsorily acquired by the Government, and the owner of the capital asset is not satisfied with the amount of compensation, he can approach the judicial authorities to enhance it. When compensation is enhanced, the capital gains computed originally shall not be re-computed. The capital gains shall be computed separately for the enhanced compensation part only and it shall be taxable on receipt basis. In this case, the cost of acquisition shall be taken as nil. In other words, entire enhanced compensation received by the assessee as reduced by the legal expenses, if any incurred to claim the compensation, shall be taxable as capital gains.

2.15. Cost of acquisition of stock converted into capital asset

If inventory of a business is converted into a capital asset, its fair market value as on the date of its conversion shall be taxable as business income. Accordingly, such fair market value on the date of conversion shall be deemed to be the cost of acquisition of the converted asset.

2.16. Cost of acquisition in case of accreted income of Non-profit Organisation (NPO)

A Non-Profit Organisation (NPO) is liable to pay additional income-tax on the accreted income, which arises on its conversion into an organisation not qualifying as an NPO or where its assets are transferred to another entity upon dissolution.

Where capital gain arises from the transfer of an asset in respect of which accreted income has been computed and the tax has been paid thereon, the cost of acquisition of such asset shall be deemed to be the fair market value of the asset which has been taken into account for computation of accreted income as on the specified date.

2.17. Cost of acquisition in case of land pooling scheme

Land Pooling is a concept where small chunks of land are owned by group of owners who assemble for the development of infrastructure. After the development of the land, the Land Pooling agency redistributes the land after deducting some portion as compensation towards infrastructure costs. This is done to develop and bring out the potential of housing and infrastructure to reduce the load on the existing congested and saturated areas. In Land pooling scheme, the compensation in the form of reconstituted plot or land is provided to landowners. The exemption is provided under Schedule III [Table S. No. 38D] in respect of a land transferred under Andhra Pradesh Land Pooling Scheme, 2015.

Where reconstituted plot or land, received under land pooling scheme, is transferred after the expiry of two years from the end of the tax year in which the possession of such plot or land was handed over to the assessee, the cost of acquisition of such plot or land shall be deemed to be its stamp duty value on the last day of the second tax year after the end of tax year in which the possession of such asset was handed over to the assessee.

2.18. Cost of acquisition in case of transfer of depreciable asset

As per Section 74, if the capital asset is a depreciable asset, the computation of capital gain shall be done in two situations, first, if on the last day of the tax year, written down value of the block of asset is nil and second, if the block of asset ceases to exist due to due to transfer of all assets falling in block. In such cases, for computation of capital gains, the cost of acquisitions of the block of depreciable asset shall be aggregate of opening balance of the block of assets on the first day of the tax year and actual cost of the assets acquired during the year which fall within the same block of assets.

Where an assessee, engaged in generation of power or generation and distribution of power, had claimed depreciation on tangible assets under straight line method, the cost of acquisition of such assets shall be its written down value minus terminal depreciation plus balancing charge, if any.

2.19. Cost of acquisition in case of slump sale

Slump sale means the transfer of one or more undertaking by any means for a lump-sum consideration without being values assigned to the individual assets and liabilities in such transfer. Any profit and gains, arising from slump transfer, is chargeable to tax as capital gains under Section 77 in the tax year in which undertaking is transferred.

For computation of the capital gains, the net worth of such undertaking or division is deemed as the cost of acquisition. The benefit of indexation shall not be available even if the undertaking transferred under the slump sale is deemed as long-term capital asset.

For computing net worth, depreciable assets are taken at written down value and non-depreciable asset at book value but capital asset which are fully allowed as deduction under Section 46 are taken at nil value. The net worth is computed in the following manner:

The assessee shall furnish a report of Chartered accountant in Form No. 28 indicating the computation of net worth of the undertaking and certifying that the net worth of the undertaking has been correctly computed.

2.20. Cost of acquisition in case of liquidation of company

Where the assets of a company are distributed to the shareholders on its liquidation, such distribution is not regarded as transfer by the company. However, the shareholders are liable to pay tax on the capital gains arising in their hands. In this case, the cost of acquisition of the equity shares held by the shareholder in the company in liquidation shall be computed as per general provisions.

2.21. Cost of acquisition in case of forfeiture of advance money

As an industry practice, advance money paid in the course of negotiation of transfer of a capital asset is forfeited by the owner if the negotiation becomes infructuous or the other party does not fulfill its part of obligation. Previously, such forfeited amount had to be deducted from the cost of acquisition of the capital asset under negotiation. Now the money so forfeited is charged to tax in the hands of recipient under Section 92(2)(h) under the head Income from other sources in the tax year in which advance money is forfeited. Thus, it shall not be deducted from the cost of acquisition of such capital asset.

2.22. Cost of acquisition in case of deemed income

Deemed income arises under Section 92(2)(m) if any person receives gifts or acquires an immovable property or specified moveable assets without consideration or for inadequate consideration. The cost of acquisition of such immovable property or specified moveable asset to the recipient shall be deemed to be the value which has been taken into account for computation of deemed income under Section 92(2)(m).

2.23. Cost of acquisition of gold converted into Electronic Gold Receipt (EGR) or vice versa

When a person receives an Electronic Gold Receipt (EGR) from a Vault Manager after exchanging gold, the cost of gold shall be considered as the cost of such EGR. Similarly, receiving gold by transferring an EGR to Vault Manager, the cost of EGR shall be considered as the cost of acquiring such gold

2.24. Cost of acquisition of shares received in exchange of interest in joint venture by a public company

Where a public company transfers its interest in a joint venture in exchange of shares of a foreign company incorporated by the Government of a foreign State, the cost of acquisition of such shares shall be deemed to be the cost of acquisition of the interest in the joint venture

References

Stamp duty value means the value adopted for the purpose of payment of stamp duty in respect of an immovable property.

Circular No. 768, Dated June 24, 1998

Downgrade Event means a party's or party's guarantor's credit rating fails to meet the ratings limit.

Transfer of capital assets by persons (other than individuals or HUFs) under a gift, will, or irrevocable trust is taxable as such a transaction is outside the purview of Section 70(1)(b). However, Section 73(1) [Table S. No. 1] still applies the previous owner's cost to all gifts or wills. To align both provisions, Section 73(1) [Table S. No. 1] should be amended to apply the previous owner's cost only to gifts or wills received from individuals or HUFs

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.