Section 49 of the Income Tax Act is a crucial provision that outlines the rules for determining the cost of acquisition of capital assets in certain circumstances. It applies when a person acquires a capital asset by way of gift or inheritance, and the provision helps to calculate the capital gains tax liability on the transfer of the asset.
Conditions for Applicability of Section 49
As per Section 49, certain conditions must be met for the provision to apply. Firstly, the capital asset must have been acquired by the previous owner by way of purchase. This means that the previous owner must have paid for the asset out of their own funds. Secondly, the previous owner must have held the asset for more than 12 months immediately preceding the date of its transfer by way of gift or inheritance. This ensures that the previous owner held the asset as a long-term investment. Finally, the transfer must have taken place on or after April 1, 1981, when the provision came into effect.
Deemed Cost of Acquisition under Section 49
When the conditions for the applicability of Section 49 are met, the cost of acquisition of the asset for the current owner shall be deemed to be the cost of acquisition to the previous owner who acquired it by purchase. In other words, the cost of acquisition of the asset for the purpose of calculating capital gains tax will be taken as the cost at which the previous owner had acquired it.
Limitations on the Deemed Cost of Acquisition
It is essential to note that the deemed cost of acquisition determined under Section 49 cannot be enhanced by the current owner. This means that the current owner cannot use the fair market value of the asset at the time of its acquisition as the cost of acquisition. The deemed cost of acquisition can only be the cost at which the previous owner had acquired it.
Example of Application of Section 49
Let us take an example to understand the application of Section 49 better. Suppose that Mr. A purchases a piece of land for Rs. 10 lakhs in 2010 and holds it until 2022. In 2022, Mr. A gifts the land to his son, Mr. B. The fair market value of the land at the time of the gift is Rs. 50 lakhs. If Mr. B sells the land in 2023 for Rs. 60 lakhs, then the capital gains tax liability will be calculated as follows:
Sale Price: Rs. 60 lakhs
Less: Cost of acquisition (deemed under Section 49): Rs. 10 lakhs
Capital Gains: Rs. 50 lakhs
Here are some frequently asked questions (FAQs) related to Section 49 of the Income Tax Act:
Q: What is Section 49 of the Income Tax Act?
A: Section 49 of the Income Tax Act is a provision that outlines the rules for determining the cost of acquisition of capital assets when the asset has been acquired by way of gift or inheritance.
Q: What are the conditions for the applicability of Section 49?
A: The conditions for the applicability of Section 49 are as follows:
The asset must have been acquired by the previous owner by way of purchase.
The previous owner must have held the asset for more than 12 months immediately preceding the date of its transfer by way of gift or inheritance.
The transfer must have taken place on or after April 1, 1981.
Q: What is the deemed cost of acquisition under Section 49?
A: The deemed cost of acquisition under Section 49 is the cost of acquisition to the previous owner who acquired it by purchase. In other words, the cost of acquisition of the asset for the purpose of calculating capital gains tax will be taken as the cost at which the previous owner had acquired it.
Q: Can the deemed cost of acquisition be enhanced by the current owner?
A: No, the deemed cost of acquisition determined under Section 49 cannot be enhanced by the current owner. The deemed cost of acquisition can only be the cost at which the previous owner had acquired the asset.
Q: Why is Section 49 important?
A: Section 49 is important as it helps in determining the cost of acquisition of capital assets in cases where the current owner has acquired the asset by way of gift or inheritance. By using the cost of acquisition of the previous owner, the current owner can calculate the capital gains tax liability on the transfer of the asset.
Q: Does Section 49 apply to all types of capital assets?
A: Yes, Section 49 applies to all types of capital assets that have been acquired by way of gift or inheritance, provided that the conditions for the applicability of the provision are met
