Section 49 specifies how the cost of acquisition of a capital asset is determined when it is acquired through certain non-purchase modes, such as inheritance, gift, will, distribution on liquidation, or transfer under a revocable/irrevocable trust.
Key Provisions of Section 49
1. Assets Acquired Without Direct Purchase [Section 49(1)]
When a capital asset is acquired in any of the following ways, the cost of acquisition is taken as the cost to the previous owner:
- By inheritance(from a legal heir or successor).
- By gift(from relatives or others).
- Under a will or through succession.
- By distribution of assets on liquidation of a company.
- Under a revocable/irrevocable transfer(e.g., family trust).
- On any distribution of assets under a partition of HUF (Hindu Undivided Family).
- Under a transfer covered under Section 47(iv), (v), (vi), or (via)](e.g., transfer to a partnership firm, LLP, or amalgamation).
Example:
- If your father bought a property for ₹20 lakh in 2005 and gifted it to you in 2020, your cost of acquisition= ₹20 lakh (indexed for inflation if held long-term).
2. Indexation Benefit [Section 49(2A)]
- If the asset was held long-termby the previous owner, the cost can be indexed from the year of acquisition by the previous owner.
Indexation formula:
(CII = Cost Inflation Index)
Example:
- If the previous owner bought a property in 2005-06 (CII = 117)for ₹20 lakh and you sell it in 2024-25 (CII = 348), the indexed cost = ₹20 lakh × (348/117) ≈ ₹59.48 lakh.
3. Special Cases
(a) Assets Acquired Before 1st April 2001 [Section 49(1) + Section 55(2)(b)]
- The taxpayer can choose between:
- Actual cost to the previous owner, or
- Fair Market Value (FMV) as of 1st April 2001(whichever is higher).
(b) Self-Generated Assets (Goodwill, Trademarks, etc.) [Section 55(2)(a)]
- Deemed cost = Nil(unless purchased).
(c) Bonus/Rights Shares [Section 55(2)(aa)]
- Bonus shares issued after 1st April 2001: Cost = Nil.
- Bonus shares issued before 1st April 2001: Can use FMV as of 1st April 2001.
(d) Depreciable Assets (Section 50)
- Deemed cost = Written Down Value (WDV)of the asset block.
- Tax Treatment: Always short-term capital gains (STCG).
4. Importance of Section 49
- Prevents double taxationby considering the original owner’s cost.
- Ensures fair computationof capital gains in cases of inheritance/gifts.
- Allows indexation benefitto account for inflation.
