Section 73 · Computation of total income
Section 73 of the Income-tax Act, 2025 — Cost with Reference to Certain Modes of Acquisition (Gift, Inheritance, Amalgamation, Demerger & More)
By CA Rajat Agrawal
Updated 04 Jul 2026
Chapter IV
📜 What the law says — Section 73, Income-tax Act 2025
73. (1) In the case of a capital asset specified in column B of the Table below,
the cost of acquisition of the asset shall be deemed to be the cost as mentioned
in column C of the said Table.
TABLE
Sl. No. Description of the capital asset Cost of acquisition
A B C
1. If the capital asset became the property The cost for which the previous
of the assessee— owner of the property acquired
(a) under a gift or will; or it, as increased by the cost of
any improvement incurred or
(b) by succession, inheritance or borne by the previous owner
devolution; or or the assessee.
(c) on any distribution of assets on
the liquidation of a company; or
(d) under a transfer to a revocable or
an irrevocable trust; or
(e) being a Hindu undivided family,
by the mode referred to in section
99(3) after the 31st December,
1969; or
(f) under any such transfer as is re-
ferred to in section 70(1)(a), (c),
(d), (e), (g), (h), (i), (j), (l), (m), (n),
(o), (t), (u), (v), (w), (zd), (ze) or (zf).
2. Capital asset, being a share or shares The cost of acquisition to him
in an amalgamated company which is of the share or the shares in the
an Indian company that became the amalgamating company.
property of the assessee in considera-
tion of a transfer referred to in sec-
tion 70(1)(f).
3. Capital asset being a share or debenture That part of the cost of
of a company, which became the debenture, debenture-stock,
property of the assessee in consideration bond or deposit certificate in
of a transfer referred to in section 70(1) relation to which such asset is
(z) or (za). acquired by the assessee.
4. Capital asset, being specified security Fair market value taken into
or sweat equity shares, referred to in account for the purposes of the
section 17(1)(d). said clause.
5.
In plain language
What Section 73 actually says
Section 73 of the Income-tax Act, 2025 lays down the "deemed cost of acquisition" for capital assets that a person did not buy in an ordinary purchase — for example, assets received by gift, will, inheritance, HUF partition, amalgamation, demerger, conversion of a firm/company/LLP, mutual-fund restructuring, ESOP/sweat equity, GDR redemption and similar special modes. It is the successor to Section 49 of the old Income-tax Act, 1961, and applies for Tax Year 2026-27 onwards (effective 1 April 2026).
The provision is built around a table: Column B lists the mode of acquisition and Column C tells you the cost you must adopt. The core rule for gifted/inherited assets is simple — you step into the shoes of the person who gave you the asset.
The central principle: cost of the previous owner
- Gift, will, inheritance, succession, HUF partition, trust settlement: the cost of acquisition is taken as the cost to the "previous owner", increased by any cost of improvement incurred by the previous owner or by you.
- "Previous owner" means the last owner who acquired the asset by a normal (taxable) mode — i.e. by actually buying or building it — not by any of the special modes in Column B. So if property passed grandfather → father (gift) → you (inheritance), the "previous owner" is the grandfather who originally bought it.
- Holding period and indexation date carry over. Because you inherit the previous owner's cost, you also effectively inherit their date of acquisition. This decides whether the gain is long-term or short-term and which year's Cost Inflation Index (CII) applies.
- Pre-1 April 2001 assets: if the previous owner acquired the asset before 1 April 2001, you may substitute the Fair Market Value (FMV) as on 1 April 2001 for the original cost (read with the cost-of-acquisition rules in Section 72).
Who does Section 73 apply to
- Individuals and HUFs who receive property by gift, will or inheritance.
- Shareholders in amalgamations, demergers, share conversions and business-trust unit swaps.
- Partners/members in firm-to-company or company-to-LLP conversions.
- Investors in mutual-fund scheme consolidations, segregated portfolios and preference-to-equity conversions.
- Employees holding ESOP/sweat-equity shares (cost = FMV taxed as perquisite at allotment).
Key entries in the Section 73 table
- Amalgamation: cost of new shares = cost of the shares held in the amalgamating company.
- Demerger: cost is split between original and resulting-company shares using the formula (A × B) ÷ C based on net book value of assets transferred.
- Conversion of debentures/preference shares into equity: cost of the new shares = that part of the cost of the original security.
- Sweat equity / specified securities (ESOPs): cost = the FMV that was charged to tax as a perquisite at the time of allotment.
- LLP conversion, GDR redemption, mutual-fund consolidation, segregated portfolio units, Electronic Gold Receipts, IDS 2016 assets: each has its own deemed-cost rule reflecting modern investment structures.
How it interacts with other sections
- Section 72 defines "cost of acquisition" and the 1-April-2001 FMV option — Section 73 sits on top of it for special modes.
- Capital-gains charging and computation sections use the Section 73 cost as the base to compute the taxable gain.
- Gift exemptions: a gift from a relative or on inheritance is not taxed as income when received; Section 73 only kicks in later, when you sell the asset.
Practical takeaway: Section 73 ensures you are taxed only on the appreciation that economically belongs to the whole chain of ownership — not double-taxed, and not let off scot-free. Keep the previous owner's purchase deed, cost records and improvement bills, because you will need them to prove the cost basis when you eventually sell.
💡 Example
Example 1 — Inherited house (previous owner bought after 2001). Ramesh's father bought a flat in June 2010 for ₹30,00,000. Ramesh inherits it on his father's death in 2024 and sells it in FY 2026-27 for ₹95,00,000. Under Section 73, Ramesh's cost of acquisition is the father's cost of ₹30,00,000, and the holding period runs from 2010 — so the gain is long-term. Applying indexation from the year the father acquired it, indexed cost works out to roughly ₹30,00,000 × (376 ÷ 167) ≈ ₹67,54,000. Taxable long-term capital gain ≈ ₹95,00,000 − ₹67,54,000 = about ₹27,46,000, taxed under the applicable LTCG rate. (CII figures are illustrative; use the notified index for the exact year.)
Example 2 — Pre-2001 inherited land. Sunita inherits agricultural-turned-residential land her grandfather bought in 1985 for ₹40,000. Because the previous owner acquired it before 1 April 2001, Section 73 read with Section 72 lets her adopt the FMV as on 1 April 2001, say ₹5,00,000 (from a registered valuer's certificate). If she sells for ₹60,00,000, her cost base is the indexed ₹5,00,000 — far better than the original ₹40,000 — sharply reducing her taxable gain.
A relatable story. When Meena received her mother's gold and a small shop by will, she panicked, thinking she would be taxed on the full ₹40 lakh value the day she inherited them. Her CA explained Section 73: inheritance itself is not taxed, and if she ever sells, she simply uses her mother's original cost plus any improvement — so she is taxed only on the true gain, not on decades of appreciation that happened in her mother's hands twice over. Relieved, Meena dug out the 2003 purchase deed and kept it safe.
| Mode of acquisition (Column B) | Deemed cost of acquisition (Column C) |
|---|
| Gift, will, inheritance, succession, HUF partition, trust settlement | Cost to the previous owner + cost of improvement by previous owner or assessee |
| Asset acquired by previous owner before 1 April 2001 | Option to take FMV as on 1 April 2001 (read with Section 72) |
| Shares in amalgamated company | Cost of shares held in the amalgamating company |
| Shares in resulting company on demerger | Proportionate cost using formula (A × B) ÷ C (net book value basis) |
| Debentures / preference shares converted to equity | Proportionate cost of the original security |
| Sweat equity / specified securities (ESOP) | FMV charged to tax as perquisite at allotment |
| Company-to-LLP conversion | Cost of shares immediately before conversion |
| Mutual-fund scheme consolidation | Cost of units in the consolidating scheme |
| Electronic Gold Receipt / GDR redemption | Cost of underlying gold / stock-exchange price on redemption date |
Related sections
Section 72 — Cost of acquisition and the 1 April 2001 FMV option Section 71 — Mode of computation of capital gains Section 67 — Capital gains chargeable to tax Section 70 — Transactions not regarded as transfer Section 74 — Cost of improvement of a capital asset Section 92 — Income from other sources: gifts received without consideration
Frequently asked questions
Do I pay tax when I inherit or receive a property as a gift?
No. Inheritance and gifts from relatives are not taxed as income when you receive them. Section 73 only matters later, when you sell the asset and need to compute capital gains.
What cost do I use when I sell an inherited asset?
You use the cost at which the previous owner (the last person who actually bought it) acquired it, plus any cost of improvement incurred by them or by you. Section 73 lets you 'step into their shoes'.
Will my inherited asset be long-term or short-term?
The holding period includes the period the previous owner held it. So an old inherited asset is usually long-term even if you sold it soon after inheriting, giving you the more favourable LTCG treatment.
The previous owner bought the property before April 2001 — what then?
You may substitute the Fair Market Value as on 1 April 2001 (supported by a registered valuer's certificate or circle rates) in place of the original cost, which usually reduces the taxable gain.
How is Section 73 different from Section 49 of the old 1961 Act?
The core 'cost of previous owner' principle is the same. Section 73 modernises it into a clear table and adds explicit rules for mutual-fund consolidations, segregated portfolios, business trusts, LLP conversions and Electronic Gold Receipts.
What is the cost of ESOP shares when I later sell them?
The cost is the Fair Market Value that was already taxed as a salary perquisite when the shares were allotted to you, so you are not taxed twice on the same value.
What records should I keep for an inherited or gifted asset?
Keep the previous owner's original purchase deed, cost proof, improvement bills, and any will, gift deed or succession document, plus a 1 April 2001 valuation report if the asset is old.
C
CA Rajat Agrawal
Chartered Accountant, EaseValue · Reviewed 04 Jul 2026
This explainer is prepared and reviewed by EaseValue's tax team, based on the text of the Income-tax Act, 2025 (as amended by the Finance Act, 2026).
Disclaimer: This page explains the law in general terms for education and is not professional advice. The Income-tax Act, 2025 takes effect from 1 April 2026; provisions, thresholds and interpretations may change. Please confirm your specific position with our team before acting.
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