Section 49 Income Tax Act

Section 49 of Income Tax Act defines how to calculate acquisition cost for inherited/gifted assets.
EXPLORE FUNDS
What is Section 49 Income Tax Act
EXPLORE FUNDS
3 min
19-September-2024
Efficiently planning your finances requires thoroughly understanding the tax laws and their applicability. Section 49 of the Income Tax Act deals with how a capital asset’s cost of acquisition is determined if you receive the asset through a mode not regarded as a transfer, like a gift or an inheritance. In this article, we discuss the specifics of section 49 of the Income Tax Act, its applicability, how it operates, what conditions affect it, and its implications for taxpayers.

What is Section 49 of the Income Tax Act?

Section 49 of the Income Tax Act of 1961 outlines provisions for the calculation of the cost of acquisition of capital assets received under certain circumstances. This cost of acquisition is crucial to computing the capital gains tax applicable to the transfer of the said asset. In simple words, section 49 pertains to capital assets acquired through family inheritance, gifts, or other modes listed under the Act. This ensures that the original cost and holding period borne by the person transferring the asset are also considered for tax purposes.

Also Read: Section 195 of income tax act

Conditions for applicability of Section 49

Section 49 is applicable if the transfer meets the eligibility criteria listed under this section. In other words, it is applicable only if the asset acquisition is made through the modes specified under the section, such as inheritance, will, or gift. Section 49 also applies to assets transferred through dissolution of a partnership firm, partition of a Hindu Undivided Family (HUF), or transfers to a revocable or irrevocable trust. Provisions of this section are also applicable when you acquire an asset through a mode not regarded as transfer u/s 47 of the Income Tax Act.

According to the provisions of section 49, the capital asset must be purchased by its previous owner. In other words, the previous asset owner must have used their own funds to pay for the asset. Additionally, the previous owner must hold the asset as a long-term investment. That is, the previous owner must have held the asset for more than 12 months before the date of transfer (via gift/inheritance). Lastly, provisions of section 49 are applicable only on eligible transfers that happen on or after the 1st of April, 2001 (post-amendment in 2017).

Deemed cost of acquisition under Section 49

Section 49(1) deals with the ‘deemed cost of acquisition’ which is a crucial variable when computing capital gains taxes. If the asset acquisition meets the eligibility conditions outlined under section 49, the asset’s deemed cost of acquisition is considered equal to the previous owner’s acquisition cost. In simple words, the cost of acquisition for the new owner will be the same as the cost the previous owner paid to acquire the asset when it was purchased.

For instance, if your father (previous owner) purchased a capital asset for Rs. 2 lakhs and eventually gifted it to you, your deemed cost of acquisition will also be Rs. 2 lakhs. It is important to note that if a capital asset has multiple previous owners, the last previous owner will be the one who acquired the asset in a way other than the modes listed in subclauses (i), (ii), and (iii). In other words, the previous owner must have acquired the asset by purchasing the same rather than an acquisition through a gift, inheritance, or partition of a HUF.

Also Read: Section 194Q of income tax Act

Limitations on the deemed cost of acquisition

Section 49 of the Income Tax Act offers the specific conditions and parameters for calculating the deemed cost of acquisition of a qualifying capital asset. However, it specifies certain limitations on how it is computed. Firstly, the deemed cost of acquisition of the asset cannot be enhanced by the current owner. In other words, the asset's current fair market value (FMV) cannot be quoted as its cost of acquisition by the current owner.

Example of Application of Section 49

Let’s take an example to better understand the application of section 49 in computing tax liabilities. Suppose your parents bought a piece of land worth Rs. 5 lakhs in 1990. They decided to gift you this land as an inheritance in 2023 when the fair market value of the land was Rs. 60 lakhs. Now, if you decide to sell the land for Rs. 70 lakhs in 2024, your tax liability will be computed under section 49. In this case, your capital gains will be equal to:

Selling price - Cost of acquisition

Rs. 70 lakhs - Rs. 5 lakhs

Capital gains = Rs. 65 lakhs

In other words, the original price paid by your parents to buy the land in 1990 will be used as your cost of acquisition, although the current fair market value of the land is much higher.

Conclusion

Section 49 of the Income Tax Act is vital for computing tax liabilities on capital assets received through gifts, inheritance, or dissolution of a partnership firm. It plays a crucial role in maintaining a sense of fairness in the assessment of capital gains on such assets. If a transfer meets the conditions of the section, the capital gains on the asset transfer are calculated on the basis of the asset’s cost of acquisition, which remains the same as that of the previous owner.

If you have inherited assets that qualify under section 49, you can use the same to compute capital gains when you sell them. However, if you have received cash inheritance or gift, you might want to consider investing in mutual funds through the Bajaj Finserv Mutual Fund Platform. On this smart platform, you can start investing in mutual funds seamlessly, comparing 1000+ mutual fund schemes, reviewing past performance, and more. Moreover, with the SIP calculator and lumpsum calculator tools, you can easily estimate the future value of your investments to curate a long-term strategy.

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Frequently asked questions

What is the 49 section of the income-tax?
Section 49 of the Income Tax Act deals with the computation of capital gains tax through the determination of the cost of acquisition of an asset. This is provided the asset is acquired according to the conditions prescribed in the section, such as gift or inheritance. In such cases, the cost of acquisition of the said asset is deemed to be the cost at which the previous owner purchased it.

Why is Section 49 important?
Section 49 is important because it helps determine the cost of the acquisition of an asset when it has been transferred by way of inheritance or succession without the taxpayer directly purchasing it from its owner. It helps maintain fairness as well as consistency in calculating capital gains tax.

When does Section 49 of the Income Tax Act apply?
It applies when an asset is acquired in a specific way, such as inheritance, gift, will, succession, distribution of trust, dissolution of a partnership firm, or in any way outlined u/s 47. It is relevant only when the taxpayer has not directly purchased said asset but only acquired it through one of the specified transfer modes.

How does Section 49 affect the calculation of capital gains or losses?
Section 49 allows the taxpayer to use the cost of acquisition and the cost of improvement that the previous owner incurred as the basis for calculating capital gains. The capital gains tax is, therefore, based on actual gains from the transfer of the asset rather than its current market value.

What is the cost of acquisition under Section 49?
The cost of acquisition is a sum total of the cost at which the previous owner purchased the asset and any costs of improvement incurred by the previous owner. This deemed cost of acquisition is used to calculate capital gains when the asset is eventually sold by the assessee.

Does Section 49 apply to all types of capital assets?
Yes. Section 49 applies to immovable property, company shares, and securities when acquired by way of transfers mentioned in the Act. Certain exceptions and provisions might apply depending on the nature and date of acquisition of the asset.

How does Section 49 handle capital assets received as gifts?
When a capital asset is received as a gift, Section 49 says that the cost of acquisition will be the same as the cost at which the previous owner acquired the said gift. If the previous owner incurred any additional costs for the improvement of the asset, then those costs are also added to this. This helps make sure that the person receiving the gift is not taxed on the entire value of the capital asset but only on the gains when she/he sells the gift.

What if the cost of acquisition cannot be determined under Section 49?
If the asset was acquired before 1st April 2001, then the cost of acquisition cannot be determined under Section 49. In this case, the Act allows the taxpayer to consider the Fair Market Value (FMV) of the capital asset as of 1st April 2001 (post-amendment in 2017).

Can Section 49 be applied retroactively?
Yes, it can be applied retroactively by considering the historical costs of acquisition and improvements incurred by the previous owner, even though they occurred in the distant past. Hence, the entire history of the asset is taken into consideration when capital gains tax is computed.

Are there any exceptions or special provisions under Section 49?
Yes, some exceptions and special provisions exist under Section 49. For example, if the asset was acquired before 1st April 2001, the taxpayer can use the FMV of the asset as of 1st April 2001 instead of the original acquisition cost. Other special provisions apply to assets acquired by way of inheritance, gift, will or distribution from a trust.

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