Cost of Acquisition and Cost of Improvement for Computation of Capital Gains
Introduction
The cost of acquisition includes the purchase price and expenses incurred to acquire a capital asset. Special provisions apply to determine the cost in certain scenarios.
How to Calculate the Cost of Acquisition
- In General
- The 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.
- Assets Acquired Before 01-04-2001
- The cost of acquisition can be either the actual purchase price or the fair market value (FMV) as on 01-04-2001, at the assessee’s option.
- For land/building, FMV cannot exceed stamp duty value as on 01-04-2001.
- FMV option is not availablefor intangible assets or rights
- House Property
- Includes the cost of land and construction but excludes interest deductions claimed under Sections 24, 80EE , or 80EEA .
- Goodwill and Intangible Assets
- Purchased goodwill and other intangible assets: Cost is the purchase price. However, if depreciation on goodwill was claimed before AY 2021-22, such depreciation must be reduced from the purchase price of goodwill to determine the actual cost.
- Self-generated goodwill and other intangible assets: Cost is deemed to be nil.
- Securities
- Original Shares: If original shares were acquired before 01-04-2001, the cost can be the actual price or FMV as on 01-04-2001, at the option of the assessee. For shares acquired on or after 01-04-2001, cost is the actual purchase price.
- Listed Securities (equity shares or units of equity oriented mutual fund or unit of business trust) Acquired on or Before 31-01-2018:Cost is the higher of the cost of acquisition or the lower of FMV on 31-01-2018 and sale value.
- Sweat Equity Shares:the cost of acquisition of sweat equity shares is taken at the FMV on the date on which the option is exercised by the assessee.
- Demat Accounts:FIFO method applies for cost determination.
- Right Shares:Cost shall be the price paid by the shareholder for share acquisition. If there is a right renunciation, then the cost shall be nil. 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.
- 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 and sold on or after 01-04-2018, the cost of acquisition of such shares shall be lower of the following:
- Cost of acquisition (‘Nil’ if shares are issued on or after 01-04-2001); or
- Lower of the fair market value of such shares as on 31-01-2018 or full value of consideration as a result of transfer.
- Restructuring Events
o Amalgamation: If shares are received in an Indian amalgamated company, their cost is taken as the price paid for original shares in the amalgamating company.
o Shares Acquired in Resulting Co.: The cost of acquisition of shares in the resulting company is determined by proportionately allocating the cost of shares held in the demerged company. This is done based on the ratio of the net book value of assets transferred to the resulting company to the net worth of the demerged company immediately before the demerger.
o Shares in Demerged Co. : 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.
- Conversion of Securitise
o Conversion of Debentures into Shares: No capital gain arises on conversion. When converted shares are sold, their cost is taken as the price paid for the original debentures.
o Conversion of Preference Shares into Equity Shares: Cost of preference shares is deemed to be the cost of equity shares.
o Consolidation or Conversion of Shares: In cases of sub-division, consolidation, or conversion of shares (e.g., one kind to another), cost of the new shares is the same as the original shares.
- Acquisition by Operation of Law (Section 49)
- If the assessee has acquired the property not by way of purchase but by way of operation of law (e.g., gift, will, inheritance or any other mode), the cost to the previous owner is deemed to be the cost to the assesse.
Note: If the cost at which the previous owner acquired the asset is not ascertainable, the cost of acquisition is deemed to be the fair market value on the date the asset became the property of the previous owner.
- Conversion of Stock into Capital Asset:
- FMV on the conversion date is taxed as business income and is treated as the cost of acquisition of the capital asset.
- Cost of Capital Assets received on Liquidation:
- If a capital asset is received upon the liquidation of a company, its cost of acquisition is deemed to be the fair market value on the date of distribution.
- Demutualisation of Stock Exchange:
- Shares received on demutualisation are valued at the cost of original stock exchange membership. Cost of trading or clearing rights received is taken as nil.
- Cost of Improvement
- General Rule: Cost of improvement includes capital expenditure incurred on or after 01-04-2001 by the assessee or previous owner for additions/alterations to the asset.
- Exclusions: Expenses deductible under “Income from House Property,” “Profits and Gains of Business,” or “Other Sources,” and interest claimed under Section 24(b), 80EE , or 80EEA , are not considered.
- Assets Acquired Before 01-04-2001: Only improvements made on or after 01-04-2001are allowed; earlier costs are ignored.
- Assets from Previous Owner (Section 49(1)): Includes capital improvements made by the previous owner or assessee on or after 01-04-2001.
- Intangible Assets:Cost of improvement for goodwill, business rights, or any other intangible assets or rights is not allowed and is treated as nil.