Chapter IV - Computation of Total Income
Section 81
Section 81: advance money received
Section 81 deals with money an assessee received and kept (forfeited) from an earlier round of negotiations to sell a capital asset, where that particular deal later fell through. It reduces the cost of acquisition of the asset when it is eventually sold - unless the forfeited amount was already taxed separately as income from other sources.
On this page
Need advice on Section 81?
This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
Where any capital asset was, on any previous occasion, the subject of negotiations for its transfer, any advance or other money received and retained by the assessee in respect of such negotiations— (a) shall be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition; (b) shall not be deducted from the said cost, where such advance or other money has been included in the total income of the assessee for any tax year as per the provisions of section 92(2)(h) of this Act or section 56(2)(ix) of the Income-tax Act, 1961 (43 of 1961).
Introduction
A retained advance from a failed earlier sale negotiation affects the capital asset's cost calculation when that asset is later transferred. The decisive check is whether the same amount was already included in taxable income under the specified provision.
Key takeaways
Forfeited transfer advance
Advance or other money received and retained from earlier negotiations to transfer a capital asset generally reduces its cost of acquisition when it is later transferred.
Previously taxed amount
The cost is not reduced where that retained amount was already included in total income under the specified other-sources provision of the 2025 Act or its 1961 predecessor.
How the forfeited advance is treated
Where a capital asset was, on an earlier occasion, the subject of negotiations for its transfer, any advance or other money the assessee received and retained (kept) in connection with those negotiations is:
- Deducted from the cost for which the asset was acquired, or from its written down value or fair market value (as applicable), when computing the cost of acquisition for a later transfer; but
- Not deducted from that cost if the advance/money has already been included in the assessee's total income for any tax year under Section 92(2)(h) of this Act, or under Section 56(2)(ix) of the Income-tax Act, 1961.
Check the earlier transaction
The earlier negotiation must concern the same capital asset, and the assessee must have received and retained the advance or other money. Keep the cancelled agreement and forfeiture evidence with the later sale records.
Prevent duplicate recognition
Trace whether the retained amount was included in total income under Section 92(2)(h), or Section 56(2)(ix) of the 1961 Act. If so, Section 81(b) blocks a second adjustment to cost.
Step-by-step flow for applying Section 81
- 1
Was the capital asset, on an earlier occasion, the subject of negotiations for its transfer?
- No: Section 81 does not apply.
- Yes: Go to the next step.
- 2
Did the assessee receive and retain any advance or other money from those negotiations?
- No: No adjustment.
- Yes: Go to the next step.
- 3
Was that amount included in total income under Section 92(2)(h) of this Act or section 56(2)(ix) of the Income-tax Act, 1961?
- Yes: Do not deduct it from cost (Section 81(b)).
- No: Deduct it from the cost, written down value or fair market value, as the case may be (Section 81(a)).
Practical checklist
Do
- Match the earlier failed negotiation to the asset now sold and quantify the amount retained.
- Check the relevant earlier return and tax computation for prior inclusion before adjusting acquisition cost.
Avoid
- Do not reduce cost merely because an advance was received if it was not retained.
- Do not reduce cost again where the specified other-sources taxation already occurred.
Illustrative example
Worked example: two failed deals before the final sale
Hypothetical facts (illustration only, not a real taxpayer): Ms. Nair bought a plot for ₹50,00,000. In an earlier failed negotiation she kept an advance of ₹3,00,000, which was never included in her total income for any tax year. In a later failed negotiation she kept ₹2,00,000, which was included in her total income under Section 92(2)(h). She now sells the plot.
First advance
₹3,00,000 was received and retained and not taxed earlier, so Section 81(a) requires it to be deducted from cost.
Second advance
₹2,00,000 was already included in total income under Section 92(2)(h), so Section 81(b) bars deducting it from cost.
Cost of acquisition
₹50,00,000 − ₹3,00,000 = ₹47,00,000.
Outcome
- Cost of acquisition for computing the capital gain is ₹47,00,000.
- The ₹2,00,000 already taxed is not taxed again through a lower cost.
Glossary
- Retained advance
- Money kept by the assessee after earlier negotiations to transfer the asset.
- Cost of acquisition
- The cost base used in computing the later capital gain, subject to Section 81's adjustment.
Frequently asked questions
What happens to a forfeited advance from a deal that fell through when I later sell the asset?
It reduces the cost of acquisition used to compute capital gains on the eventual sale, per Section 81(a) - unless that amount was already taxed separately as income from other sources.
Can the same forfeited advance be taxed twice?
No - Section 81(b) prevents double taxation by not reducing the cost of acquisition where the advance was already included in total income under Section 92(2)(h) of this Act or Section 56(2)(ix) of the old 1961 Act.
Need help applying this provision to your situation?
Get expert help on capital gains cost computationLast updated 9 October 2026