Section 49 of the Income Tax Act: Cost of Acquisition in Special Cases
Section 49 explains how to determine the acquisition cost of a capital asset obtained through inheritance, gift, partition, amalgamation, demerger and other specified transactions. It often carries forward an earlier owner's cost instead of treating the new owner's cost as zero.
What does Section 49 mean?
For certain transfers that are not immediately taxed as capital gains, the law prescribes a deemed cost of acquisition. This avoids treating a gift, inheritance or tax-neutral reorganisation as a fresh purchase at market value merely because ownership changed.
Previous owner generally means the last owner in the chain who acquired the asset by a mode other than the specified tax-neutral modes. Cost of improvement refers to eligible capital expenditure on improving the asset, subject to the applicable rules. Fair market value (FMV) is a valuation determined under the relevant statutory provision, not necessarily the current selling price.
Capital gains are computed under Section 48 after applying the cost rules under Section 49 and any special provisions. Where the asset was acquired before 1 April 2001, a permitted option to use its FMV as of that date may be relevant under Section 55, subject to statutory limits and asset type.
Section 49 explained: important subsections
The following preserves the substantive coverage of the original article while presenting the rules in a usable format. Exact clause references, exceptions and amendments should be checked against the statutory text for the relevant year.
| Provision | Cost of acquisition rule |
|---|---|
| 49(1) | Gift, will, inheritance, HUF partition, qualifying trusts and specified tax-neutral reorganisations The previous owner's cost is generally carried forward, with eligible improvements. For inherited assets, establish the last owner who acquired the asset by a non-specified mode. |
| 49(2) | Shares received on qualifying amalgamation The cost of shares in the amalgamated Indian company generally carries over from shares held in the amalgamating company. |
| 49(2A) | Shares or debentures on conversion Allocate the original cost of the convertible bond, debenture, debenture-stock or deposit certificate to the securities received. |
| 49(2AA) and (2AB) | Employee stock options and sweat equity Use the relevant fair market value previously recognised as a taxable employment perquisite or under the historical fringe-benefit provisions, as applicable. |
| 49(2AAA) | Partner rights on company-to-LLP conversion Cost of the relevant partner rights generally follows the cost of shares held immediately before the qualifying conversion. |
| 49(2ABB) | Shares obtained on redemption of GDRs Special valuation rule for a non-resident receiving shares on redemption of qualifying Global Depository Receipts. |
| 49(2AC), (2AD), (2AE), (2AF) | Business trusts, mutual fund consolidation and preference-share conversion Carry-over or allocated cost rules apply to qualifying exchanges of SPV shares for business trust units, consolidations of mutual fund schemes or plans, and conversion of preference shares to equity. |
| 49(2C), (2D), (2E) | Demerger and cooperative-bank reorganisations Allocate the cost between resulting-company shares and the original shares; corresponding rules extend to specified cooperative-bank business reorganisations. |
| 49(3) | Withdrawal of exemption for intra-group transfers Where section 47A claws back the exemption on a parent-subsidiary transfer, a special rule determines the transferee company's acquisition cost. |
| 49(4) | Property previously taxed as income from other sources The value taken into account for specified section 56(2) tax treatment generally becomes acquisition cost on subsequent transfer. |
| 49(5) to (9) | Special asset valuation situations Specific rules address assets declared under the 2016 income declaration scheme, certain land-related compensation assets, property received under development agreements, assets subject to accreted-income tax, and specified business-to-capital conversions. |
Important historical and special cases
Section 49(1) also covers distributions on total or partial partition of a Hindu undivided family; specified distributions on dissolution of a firm, body of individuals or association of persons before 1 April 1987; liquidation distributions; certain trust transfers; and qualifying transfers referred to in Section 47. Certain historic provisions are relevant only for older transactions.
Subsections (2ABB), (2AC), (2AD), (2AE), (2AF), (2C), (2D), (2E) and (3) through (9) apply only when their detailed statutory conditions are met. In particular, a tax-neutral transfer can cease to qualify if requirements are breached under Section 47A.
Illustrative calculations
Example 1: Property received by inheritance
A parent bought land for Rs. 8,00,000 and incurred Rs. 2,00,000 of eligible improvement costs. The child inherits the land and later sells it for Rs. 35,00,000. Subject to the applicable statutory rules, the carried-over acquisition and improvement cost totals Rs. 10,00,000. The unadjusted gain before eligible transfer expenses, any permissible valuation substitution, and other tax adjustments is Rs. 25,00,000. The sale-date law determines the final taxable gain and any indexation relief.
Example 2: Share-cost allocation on demerger
An investor originally acquired shares in a demerged company for Rs. 5,00,000. If the statutory net-book-value-to-net-worth ratio attributable to the demerged undertaking is 30%, Section 49(2C) generally assigns Rs. 1,50,000 as cost of shares received in the resulting company; under Section 49(2D), the original shares retain Rs. 3,50,000 as their adjusted cost. This is a simplified illustration, not a valuation opinion.
Section 73 under the Income-tax Act, 2025
Section 73 restates the special cost-of-acquisition framework in a tabular structure. It includes carry-over costs for gifts, wills, inheritance, certain liquidation distributions, trust transfers and qualifying reorganisations, as well as rules for conversions and reorganised securities. The correspondence is Section 49 (1961 Act) to Section 73 (2025 Act).
For assets transferred on or after 23 July 2024, changes to capital-gains rates and indexation under the 1961 Act may affect the eventual taxable gain. A limited grandfathering comparison can apply to certain resident individuals or Hindu undivided families transferring land or buildings acquired before that date. These are computation rules, distinct from identifying the original acquisition cost under Section 49.
Keep purchase deeds, succession certificates or wills, gift deeds, improvement invoices, employer ESOP statements, demerger cost-allocation statements and relevant valuation reports. A tax-neutral receipt does not necessarily mean a later sale is tax-free.
Frequently asked questions
Does an inherited property have a zero acquisition cost?
No. Section 49(1) generally carries over the previous owner's cost, subject to applicable statutory rules, including the 1 April 2001 fair-market-value option where available.
Is a gift of property automatically subject to capital gains tax?
A qualifying gift is generally not treated as a transfer under section 47, but subsequent sale by the recipient may produce taxable capital gains using the cost rules in section 49. Separate income-tax rules can apply to receipt of gifts.
How is the cost of shares allocated in a demerger?
Section 49(2C) allocates the original share cost in proportion to the net book value of assets transferred relative to the demerged company's net worth. Section 49(2D) reduces the cost of the original shares accordingly.
What is the corresponding section in the Income-tax Act, 2025?
Section 73 deals with cost with reference to certain modes of acquisition for the 2025 Act regime commencing on 1 April 2026.
Official legal sources
- Income Tax Department: Section 49, Income-tax Act, 1961
- Income Tax Department: Income-tax Act, 2025 as amended by Finance Act, 2026 (Section 73)
- Income Tax Department: Section correspondence / navigator
Legal information updated for October 2026. Tax consequences depend on the date, asset and facts of each transaction.