Section 90: meaning of cost of improvement and cost of acquisition

Cost of improvement

For goodwill, any intangible asset of a business, a right to manufacture/produce/process any article or thing, a right to carry on any business or profession, or any other similar right, the cost of improvement is taken as nil.

For any other capital asset, cost of improvement means capital expenditure on additions or alterations made on or after 1 April 2001 (where the asset became the property of the previous owner or the assessee before that date), or all capital expenditure on additions or alterations made after the asset became the assessee's property (or the previous owner's property, in cases of inherited/gifted assets) in any other case.

Cost of improvement does not include any expenditure that is already deductible while computing income under the heads "Income from house property", "Profits and gains of business or profession", or "Income from other sources" - to avoid double benefit.

Cost of acquisition for intangible rights

For goodwill of a business or profession, a trade mark or brand name associated with a business or profession, or other intangible assets/rights (right to manufacture, carry on business, tenancy rights, stage carriage permits, loom hours, etc.), the cost of acquisition is the purchase price if the assessee bought the asset from a previous owner, the previous owner's purchase price in certain inherited/gifted-asset cases, and nil in any other case.

If the asset is goodwill of a business or profession and the assessee had claimed depreciation on it under the old Income-tax Act, 1961 for a year before the tax year commencing 1 April 2020, the total depreciation claimed before that date is deducted from the purchase price.

Bonus and rights shares/securities

Where holding a financial asset (a share or security) entitles the assessee to subscribe to an additional financial asset, or leads to an allotment of an additional financial asset without payment, special cost rules apply:

Grandfathering: equity shares and units acquired before 1 February 2018

For a long-term capital asset that is an equity share, a unit of an equity-oriented fund, or a unit of a specified business trust, acquired before 1 February 2018, the cost of acquisition is the higher of: (a) the actual cost of acquisition, and (b) the lower of the asset's fair market value (as specifically defined for this purpose) and the full value of consideration received on transfer.

"Fair market value" for this grandfathering rule generally means the highest quoted price on a recognised stock exchange as on 31 January 2018 (or the nearest earlier trading date), the net asset value as on that date for an unlisted unit, or for shares that were unlisted on 31 January 2018 but later got listed, an amount computed with reference to the Cost Inflation Index for 2017-18 relative to the year the asset was first held (or 1 April 2001, whichever is later).

Assets acquired before 1 April 2001

For any other capital asset that became the assessee's property before 1 April 2001, the cost of acquisition (at the assessee's option) is either the actual cost, or the asset's fair market value as on 1 April 2001. The same option applies to assets inherited or gifted from a previous owner who acquired them before that date.

For land or building acquired before 1 April 2001, the fair market value as on 1 April 2001 used for this purpose cannot exceed the stamp duty value of the asset as on that date, wherever available.

If the cost to the previous owner cannot be ascertained, the cost of acquisition to the previous owner is taken as the fair market value on the date the asset became the previous owner's property.

Other special situations

Where an asset became the assessee's property on distribution of a company's assets on liquidation (and the assessee was already assessed to capital gains tax on that distribution), the cost of acquisition is the asset's fair market value on the date of distribution.

Where shares or stock became the assessee's property through consolidation, sub-division, conversion of shares into stock (or vice versa), or conversion of one kind of share into another, the cost of acquisition is computed with reference to the cost of the original shares/stock from which the new asset is derived.

For equity shares allotted to a stock exchange member under a Securities and Exchange Board of India-approved demutualisation or corporatisation scheme, the cost of acquisition is the cost of the member's original exchange membership; trading or clearing rights acquired under such a scheme are treated as having nil cost.

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