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Cost of acquisition is what you spend to obtain an asset, a business or a customer. For an asset, it is the purchase price plus the costs directly attributable to bringing the asset to the location and condition in which you can use it. For a customer, it is your sales and marketing spend divided by the number of new customers. For capital gains tax, it is the amount deducted from the sale value; for an inherited or gifted asset, it is generally the cost to the previous owner.
Measure How it is worked out Cost of an asset in your books Purchase price plus directly attributable costs Customer acquisition cost Sales and marketing spend ÷ number of new customers Inherited or gifted asset Cost to the previous owner Indexation for transfers from 23 July 2024 Not available when computing the capital gain, subject to the stated land/building tax cap
What is the cost of acquisition?
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Cost of acquisition refers to the total expense incurred to obtain an asset, investment or business. It may include the purchase price and costs such as delivery, legal fees, installation, import duties and non-refundable purchase taxes, where the applicable accounting or tax rules allow them. The items included depend on whether the term is being used for accounting, capital gains tax, a business combination or marketing.
Acquisition cost for assets, tax, and customers
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Where it is used What counts as the cost Source / rule Accounts: machinery, vehicles or other property, plant and equipment Purchase price, including import duties and non-refundable purchase taxes, less trade discounts and rebates, plus directly attributable costs of bringing the asset to its location and condition for use. Ind AS 16 Buying a business Acquisition-related costs are expensed when incurred, except costs of issuing debt or equity securities, which are covered by other standards. Ind AS 103 Income tax on the sale of a capital asset Cost deducted from sale value; for certain inherited or gifted assets, the previous owner’s cost may apply. Sections 48 and 49, Income-tax Act, 1961 Marketing: acquiring a customer Total sales and marketing expenditure divided by the number of new customers acquired. Customer acquisition cost (CAC) formula
Acquisition cost formula
For an asset, the cost of acquisition is its purchase price plus every cost directly attributable to bringing it to the location and condition in which it can be used.
Cost of acquisition = Purchase price (including import duties and non-refundable purchase taxes, less trade discounts and rebates) + Directly attributable costs
Directly attributable costs include:
- Site preparation.
- Delivery to the place of use.
- Installation and assembly.
- Testing that the asset works properly.
- Professional fees.
The cost does not include the costs of opening a new facility; introducing a new product or service, including advertising and promotion; conducting business in a new location or with a new class of customer, including staff training; or administration and other general overheads.
For a customer, the formula is different: Customer acquisition cost = Total sales and marketing expenditure ÷ Number of new customers acquired.
Calculation examples with figures
The examples use illustrative amounts and are not quotes or actual figures.
Example: Cost of a machine under Ind AS 16
| Item | Amount (Rs.) | Part of the cost? |
| Price on supplier’s invoice | 10,00,000 | Yes |
| Trade discount | (50,000) | Deducted from price |
| Delivery to factory | 30,000 | Yes |
| Installation | 20,000 | Yes |
| Testing before use | 10,000 | Yes |
| Staff training | 15,000 | No |
| Cost of acquisition | 10,10,000 | Price less discount, plus delivery, installation, and testing |
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Examples of cost of acquisition
Cost of acquisition varies by asset, investment or customer. Examples include:
- A commercial property, including eligible stamp duty and registration charges.
- Machinery for a factory, including import duty and installation charges.
- A vehicle for business use, including applicable non-refundable taxes, registration and transport costs.
- Software licences, including implementation fees where they qualify as directly attributable costs.
- Marketing expenditure used to acquire a customer.
- A franchise, including entry fees and set-up expenses where applicable.
Common mistakes in measuring cost of acquisition
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Businesses can miscalculate acquisition costs by omitting eligible costs or including expenses that should be recognised separately. Common mistakes to avoid include:
- Leaving out directly attributable costs, such as delivery, installation and professional fees, or adding costs excluded by Ind AS 16, such as staff training and general overheads.
- Adding day-to-day servicing and maintenance to an asset’s cost. Ind AS 16 recognises these costs in profit or loss as incurred.
- Using an incorrect timeframe and excluding delayed costs.
- Failing to consider legal, insurance and compliance-related charges where relevant.
- Not factoring in currency conversion or bank transaction fees in global purchases where applicable.
- Relying solely on the purchase invoice without reviewing the full cost cycle.
- Treating recurring servicing charges as part of acquisition cost rather than period expenses.
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What is the purpose of using the cost of acquisition?
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The cost of acquisition supports accounting, tax calculations and business decisions. It helps businesses:
- Record assets accurately for accounting purposes.
- Calculate capital gains when a capital asset is sold.
- Evaluate the efficiency of acquiring customers or assets.
- Identify high-cost areas and improve procurement.
- Assess pricing and profitability.
- Improve financial forecasts and investment decisions.
- Evaluate returns over an asset’s lifecycle.
Cost of acquisition for capital gains tax
When you sell a capital asset, section 48 of the Income-tax Act, 1961 deducts the cost of acquisition, cost of improvement and expenses on transfer from the sale consideration to calculate capital gains. The applicable cost depends on how you acquired the asset.
| How the asset came to you | Cost of acquisition | Rule cited in the source document |
| You bought it | The amount paid for it | Section 48 |
| You received it by gift, will, succession, inheritance or devolution | Cost to the previous owner, plus the cost of improvements | Section 49(1) |
| You received it on a partition of a Hindu undivided family | Cost to the previous owner, plus the cost of improvements | Section 49(1) |
| You acquired it before 1 April 2001 | At your option, actual cost or fair market value on 1 April 2001. For land and buildings, the value cannot exceed the stamp duty value on that date, where available. | Section 55 |
| You bought listed equity shares before 1 February 2018 | The higher of actual cost and the lower of the fair market value on 31 January 2018 and sale value. | Section 55(2)(ac) |
| You built up goodwill yourself | Nil; goodwill bought from a previous owner is costed at the price paid. | Section 55(2)(a) |
Strategies to minimise cost of acquisition
- Conduct market research, obtain multiple quotes and negotiate supplier terms.
- Review timing, promotional offers and bulk-buying opportunities where they suit the business.
- Compare outright purchase with leasing or financing. Financing can reduce the initial cash outflow but may increase total costs through interest.
- Evaluate total cost of ownership, including installation, operation, maintenance and disposal costs, while keeping accounting acquisition cost separate from later operating expenses.
Conclusion
The cost of acquisition helps businesses record assets accurately, assess customer acquisition efficiency and calculate capital gains. The costs included depend on the context and the applicable accounting or tax rules. Keep clear supporting records and seek professional advice where tax treatment is uncertain. A business loan may help manage upfront acquisition costs, subject to eligibility and loan terms.
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Frequently Asked Questions
Overview
How is the cost of acquisition calculated?
For an asset, add the purchase price, including eligible taxes and duties, to directly attributable costs such as delivery, installation and professional fees, then deduct trade discounts and rebates. The applicable accounting or tax rules determine which costs qualify.
What is the formula for cost per acquisition?
Cost per acquisition, or CPA, is the cost of a specific campaign action divided by the number of those actions.
CPA = Total campaign cost ÷ Number of acquisitions
The action counted can be an app install or a form submission, so it is not always a new paying customer. Customer acquisition cost is different: it divides sales and marketing spend by the number of new customers.
What is required for acquisition cost?
To calculate an asset’s acquisition cost, record its base price and eligible related expenses, such as delivery, installation, legal fees, customs duty and non-refundable taxes. Keep invoices and supporting records to substantiate the amount for accounting and tax purposes.
What if the cost of acquisition is not available?
For an asset acquired before 1 April 2001, the Income-tax Act, 1961 allows the fair market value on that date to be used instead of actual cost. For other assets, rebuild the figure using invoices, bank or broker statements, deeds and previous-owner records, and consult a chartered accountant.
What is the difference between acquisition cost and customer acquisition cost?
Acquisition cost is the amount spent to obtain an asset, business or investment. For an asset, it includes the purchase price and directly attributable costs. Customer acquisition cost (CAC) is a marketing metric: sales and marketing expenditure divided by the number of new customers acquired in the same period.
How do I calculate customer acquisition cost accurately?
Choose a period, such as a month or quarter, and add sales and marketing expenses, including advertising, sales-team salaries, software subscriptions and agency fees. Count first-time paying customers acquired during the same period, divide the total spend by that number, and compare the result with revenue and gross margin per customer.
What is a good acquisition cost for a D2C business in India?
No single figure is suitable for every direct-to-consumer (D2C) business. Compare customer acquisition cost with customer lifetime value, revenue per customer and gross margin. A lifetime value three times CAC is a target used by many subscription businesses, not a universal rule.
How does SaaS acquisition cost differ from e-commerce acquisition cost?
The formula is the same: sales and marketing spend divided by the number of new customers. Software-as-a-service (SaaS) businesses compare CAC with subscription revenue and margin over the customer relationship, while e-commerce businesses compare it with the margin from the first order and repeat purchases.
Can I include ad spend in my customer acquisition cost?
Yes. Advertising spend is part of CAC, alongside relevant sales salaries, marketing software, agency fees, creative production, sales commissions, promotional campaigns and event expenses. Include expenditure and first-time paying customers from the same period; spending aimed only at existing customers should be excluded.
How is the cost of acquisition worked out for an inherited property?
For property received by gift, under a will or by inheritance, the cost of acquisition is generally the cost to the previous owner, plus eligible improvement costs. Section 49(1) of the Income-tax Act, 1961 also covers specified cases of succession and devolution. Keep supporting records and consult a chartered accountant.
What is the cost of acquisition of an asset bought before 1 April 2001?
At your option, you can use the actual cost or the fair market value on 1 April 2001. For land and buildings, the fair market value cannot exceed the stamp duty value on that date, where one is available. Consult a chartered accountant to confirm the applicable rule.
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