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Income-tax Act, 1961 · Chapter IV: Computation of Total Income · E.—Capital gains

Section 55: Meaning of —adjusted‖, —cost of improvement‖ and —cost of acquisition‖

The Income-tax Act, 1961 was repealed by the Income-tax Act, 2025 from 1 April 2026. The text is kept here because the judgments below apply it.

In plain words

Section 55 explains how to work out the adjusted cost, cost of improvement and cost of acquisition of a capital asset for sections 48 and 49, with different rules based on the asset type and the time it was acquired.

  • For goodwill or a right to carry on a business the cost of improvement is taken as nil.
  • For other assets the cost of improvement includes all capital‑nature expenditure on additions or alterations after the asset became the assessee’s property, but excludes any amount that is deductible under other heads of income.
  • Cost of acquisition for goodwill, trademarks, brand names, certain rights and similar assets is the purchase price if the asset was bought, otherwise it is taken as nil.
  • For financial assets the cost of acquisition is the amount actually paid for the original asset; any right to subscribe that is renounced is taken as nil.
  • For other assets that became the assessee’s property before the 1st day of April 1981, the cost of acquisition is either the actual cost to the assessee or the fair‑market value on that date, at the assessee’s option.
  • If the asset was acquired by a mode specified in section 49 and the previous owner held it before the 1st day of April 1981, the cost may be the previous owner’s cost or the fair‑market value on that date, at the assessee’s option.
  • When the previous owner’s cost cannot be ascertained, it is deemed to be the fair‑market value on the date the previous owner acquired the asset.

Example: A taxpayer acquires a machine before the 1st day of April 1981. They may choose the purchase price or the fair‑market value on that date as the cost of acquisition. Any later capital‑nature additions to the machine are added to the cost of improvement, but any amount claimed as a deduction under profits and gains of business is not included.

A simplified explanation, prepared with AI assistance from the official text below and checked automatically against it for numbers and cross-references. The official text is the law and prevails over this summary. Not legal advice.

Official text

adjusted‖, —cost of improvement‖ and —cost of acquisition‖.—(1) For the purposes of [sections 48 and 49],— * * * * * [(b) —cost of any improvement‖,—

(1) in relation to a capital asset being goodwill of a business [or a right to manufacture, produce or process any article or thing] [or right to carry on any business [or profession]] shall be taken to be nil ; and

(2) in relation to any other capital asset,—]

(i) where the capital asset became the property of the previous owner or the assessee before the [1st day of April, [1981]], *** means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset on or after the said date by the previous owner or the assessee, and

(ii) in any other case, means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset by the assessee after it became his property, and, where the capital asset became the property of the assessee by any of the modes specified in [sub-section (1) of section 49], by the previous owner, but does not include any expenditure which is deductible in computing the income chargeable under the head —Interest on securities‖, —Income from house property‖, —Profits and gains of business or profession‖, or —Income from other sources‖, and the expression —improvement‖ shall be construed accordingly.

(2) [For the purposes of sections 48 and 49, —cost of acquisition‖,— [(a) in relation to a capital asset, being goodwill of a business [or a trade mark or brand name associated with a business][or a right to manufacture, produce or process any article or thing][or right to carry on any business [or profession]], tenancy rights, stage carriage permits or loom hours,—

(i) in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price; and

(ii) in any other case [not being a case falling under sub-clauses (i) to (iv) of sub-section (1) of section 49], shall be taken to be nil ;

(aa) [in a case where, by virtue of holding a capital asset, being a share or any other security, within the meaning of clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) (hereafter in this clause referred to as the financial asset), the assessee— (A) becomes entitled to subscribe to any additional financial asset; or (B) is allotted any additional financial asset without any payment, then, subject to the provisions of sub-clauses (i) and (ii) of clause (b),—

(i) in relation to the original financial asset, on the basis of which the assessee becomes entitled to any additional financial asset, means the amount actually paid for acquiring the original financial asset;

(ii) in relation to any right to renounce the said entitlement to subscribe to the financial asset, when such right is renounced by the assessee in favour of any person, shall be taken to be nil in the case of such assessee;

(iii) in relation to the financial asset, to which the assessee has subscribed on the basis of the said entitlement, means the amount actually paid by him for acquiring such asset; [(iiia) in relation to the financial asset allotted to the assessee without any payment and on the basis of holding of any other financial asset, shall be taken to be nil in the case of such assessee;] and

(iv) in relation to any financial asset purchased by any person in whose favour the right to subscribe to such asset has been renounced, means the aggregate of the amount of the purchase price paid by him to the person renouncing such right and the amount paid by him to the company or institution, as the case may be, for acquiring such financial asset;] [(ab) in relation to a capital asset, being equity share or shares allotted to a shareholder of a recognised stock exchange in India under a scheme for [demutualisation or corporatisation] approved by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), shall be the cost of acquisition of his original membership of the exchange: capital asset,—‖ (w.e.f. 1-4-1988).

[Provided that the cost of a capital asset, being trading or clearing rights of the recognised stock exchange acquired by a shareholder who has been allotted equity share or shares under such scheme of demutualisation or corporatisation, shall be deemed to be nil;]

(b) in relation to any other capital asset,—]

(i) where the capital asset became the property of the assessee before the [1st day of April, [1981]], means the cost of acquisition of the asset to the assessee or the fairmarket value of the asset on the [1st day of April, [1981]], at the option of the assessee;

(ii) where the capital asset became the property of the assessee by any of the modes specified in [sub-section (1) of section 49], and the capital asset became the property of the previous owner before the [1st day of April, [1981], means the cost of the capital asset to the previous owner or the fairmarket value of the asset on the [1st day of April, [1981]], at the option of the assessee;

(iii) where the capital asset became the property of the assessee on the distribution of the capital assets of a company on itsliquidation and the assessee has been assessed to income-tax under the head —Capital gains‖ in respect of that asset under section 46, means the fairmarket value of the asset on the date of distribution; * * * * * [(v) where the capital asset, being a share or a stock of a company, became the property of the assessee on—

(a) the consolidation and division of all or any of the sharecapital of the company into shares of larger amount than its existing shares,

(b) the conversion of any shares of the company into stock,

(c) the re-conversion of any stock of the company into shares,

(d) the sub-division of any of the shares of the company into shares of smaller amount, or

(e) the conversion of one kind of shares of the company into another kind, means the cost of acquisition of the asset calculated with reference to the cost of acquisition of the shares or stock from which such asset is derived.]

(3) Where the cost for which the previous owner acquired the property cannot be ascertained, the cost of acquisition to the previous owner means the fair market value on the date on which the capital asset became the property of the previous owner.

Source: India Code (Legislative Department), the text of the Act as it stood before its repeal. Words in square brackets [ ] were inserted or substituted by later amending Acts, and *** marks words omitted by an amendment. The amendment footnotes are not reproduced here. Official text on India Code.

Supreme Court judgments citing the section 55