Cost of acquisition for capital gains tax purposes: Clause 73 of the Income Tax Bill, 2025 vs. Section 49 of the Income Tax Act, 1961

Clause 73 Cost with reference to certain modes of acquisition.

Income Tax Bill, 2025

Introduction

The Income Tax Bill, 2025 introduces Clause 73, which addresses the cost of acquisition of capital assets with reference to certain modes of acquisition. This clause is pivotal in determining the tax implications for capital gains, as it establishes the deemed cost of acquisition for various scenarios. The existing Section 49 of the Income Tax Act, 1961, serves a similar purpose, providing guidelines for calculating the cost of acquisition in specific situations. This article delves into the detailed provisions of Clause 73, comparing and contrasting them with Section 49 of the Income Tax Act, 1961, to understand the legislative intent, practical implications, and potential areas for reform.

Objective and Purpose

The primary objective of Clause 73 in the Income Tax Bill, 2025 is to provide a clear framework for determining the cost of acquisition of capital assets acquired through various modes, such as gifts, inheritance, or corporate restructuring. This clarity is essential for calculating capital gains tax accurately. The legislative intent is to ensure consistency and fairness in tax treatment, preventing any undue advantage or disadvantage to taxpayers based on the mode of acquisition of their assets.

Section 49 of the Income Tax Act, 1961, serves a similar purpose by outlining the cost of acquisition for assets obtained through specific modes, ensuring that the tax liability is computed fairly and uniformly. Both provisions aim to address the complexities involved in determining the cost basis of assets acquired through non-traditional means, thereby streamlining the capital gains tax calculation process.

Detailed Analysis

Clause 73 of the Income Tax Bill, 2025

Clause 73 introduces a comprehensive table listing various scenarios under which capital assets may be acquired, along with the corresponding deemed cost of acquisition. The clause covers a wide range of acquisition modes, including inheritance, company liquidation, trust transfers, and more. Key highlights include:

• For assets acquired through gifts, will, inheritance, or similar means, the cost of acquisition is deemed to be the cost incurred by the previous owner, adjusted for any improvements.
• In cases of corporate restructuring, such as amalgamations or demergers, the cost is linked to the original shares or assets involved in the restructuring.
• Special provisions are made for units in mutual funds, business trusts, and segregated portfolios, with specific formulas provided to calculate the cost of acquisition.
• For assets declared under the Income Declaration Scheme, 2016, the fair market value at the time of declaration is used as the cost of acquisition.

Section 49 of the Income Tax Act, 1961

Section 49 outlines the cost of acquisition for assets acquired through various modes, focusing on ensuring that the tax liability reflects the true economic gain. Key provisions include:

• Similar to Clause 73, Section 49 deems the cost of acquisition for inherited or gifted assets as the cost incurred by the previous owner, plus improvements.
• The section also addresses corporate restructuring scenarios, aligning the cost of acquisition with the original assets involved.
• Specific provisions exist for assets acquired through the dissolution of firms or associations, with historical cut-off dates impacting the applicable rules.
• For assets acquired through certain tax-exempt transfers, the cost basis is adjusted to reflect the fair market value or assessed value at the time of acquisition.

Practical Implications

The introduction of Clause 73 in the Income Tax Bill, 2025, aims to provide greater clarity and uniformity in the calculation of capital gains tax. By explicitly defining the cost of acquisition for a wide range of scenarios, taxpayers can better anticipate their tax liabilities, reducing the potential for disputes and litigation. This clarity is particularly beneficial for complex transactions involving corporate restructuring or asset transfers through trusts.

For businesses, the alignment of tax treatment with the economic substance of transactions can lead to more strategic decision-making regarding mergers, acquisitions, and other corporate actions. Individual taxpayers, particularly those receiving assets through inheritance or gifts, can also benefit from a clearer understanding of their tax obligations.

Comparative Analysis

Comparing Clause 73 with Section 49 of the Income Tax Act, 1961, reveals several similarities and differences:

• Both provisions aim to standardize the cost of acquisition for capital gains tax purposes, ensuring consistency and fairness.
• Clause 73 expands on the scenarios covered by Section 49, introducing new categories such as electronic gold receipts and units in segregated portfolios.
• The legislative approach in Clause 73 reflects an effort to modernize and adapt to contemporary financial instruments and transactions, which may not have been fully addressed in the 1961 Act.
• While both provisions rely on the cost incurred by previous owners as a basis, Clause 73 incorporates more specific formulas and references to external guidelines, such as SEBI circulars, to enhance precision.

Conclusion

Clause 73 of the Income Tax Bill, 2025 represents a significant evolution in the legislative framework governing the cost of acquisition for capital gains tax purposes. By expanding the scope of scenarios and incorporating modern financial instruments, the clause aims to provide greater clarity and consistency for taxpayers. The comparison with Section 49 of the Income Tax Act, 1961, highlights the ongoing efforts to adapt tax legislation to contemporary economic realities.

Future developments may focus on further refining these provisions to address any ambiguities or emerging financial products, ensuring that the tax system remains equitable and efficient. Stakeholders, including businesses and individual taxpayers, should remain informed about these changes to navigate their tax obligations effectively.

Full Text:

Clause 73 Cost with reference to certain modes of acquisition.

Dated: 12-3-2025