Section 55(2)(ac) of the Income Tax Act is an important provision that deals with the computation of the cost of acquisition of an asset. This provision has a significant impact on the calculation of capital gains and is, therefore, crucial for taxpayers who are subject to capital gains tax. In this blog post, we will explore the meaning and implications of section 55(2)(ac) in detail.
What is Section 55(2)(ac) of Income Tax Act?
Section 55(2)(ac) of the Income Tax Act provides for the computation of the cost of acquisition of an asset where the asset has been acquired by the assessee by way of a gift or will. According to this provision, where an asset is acquired by way of a gift or will, the cost of acquisition of the asset for the purpose of calculating capital gains will be the cost to the previous owner of the asset.
Implications of Section 55(2)(ac) of Income Tax Act
The implications of section 55(2)(ac) of the Income Tax Act can be significant for taxpayers who have acquired assets by way of a gift or will. Let us understand the implications of this provision in detail:
Cost of acquisition: As per section 55(2)(ac), the cost of acquisition of an asset acquired by way of a gift or will is the cost to the previous owner of the asset. This means that if the previous owner of the asset acquired it at a lower cost, the cost of acquisition for the current owner will also be lower. Similarly, if the previous owner acquired the asset at a higher cost, the cost of acquisition for the current owner will also be higher.
Capital gains tax: The cost of acquisition of an asset is an important factor in the calculation of capital gains tax. Capital gains tax is calculated as the difference between the sale price of an asset and its cost of acquisition. Therefore, the cost of acquisition as per section 55(2)(ac) will have a direct impact on the amount of capital gains tax payable by the taxpayer.
Valuation of asset: The value of an asset acquired by way of a gift or will is usually determined by the fair market value of the asset as on the date of acquisition. However, section 55(2)(ac) provides for a different method of valuation, which is based on the cost to the previous owner of the asset. This can have implications for taxpayers who have acquired assets that have appreciated significantly in value since they were acquired by the previous owner.
Let us delve deeper into the provisions of section 55(2)(ac) of the Income Tax Act and explore its various nuances.
- Gift or Will: The provisions of section 55(2)(ac) are applicable only when an asset is acquired by way of a gift or will. It is important to note that the provisions are not applicable in case of inheritance, as the legal heir is deemed to be the owner of the asset from the date of the previous owner’s demise.
- Computation of cost of acquisition: As per section 55(2)(ac), the cost of acquisition of the asset for the current owner will be the cost to the previous owner of the asset. This cost will be adjusted for inflation as per the provisions of the Income Tax Act. It is important to note that the cost of acquisition for the current owner cannot be higher than the fair market value of the asset as on the date of acquisition.
- Indexation benefit: Indexation benefit is available to the taxpayer while computing capital gains. Indexation benefit allows the taxpayer to adjust the cost of acquisition of the asset for inflation. The cost of acquisition as per section 55(2)(ac) is also adjusted for inflation, thereby providing the indexation benefit to the taxpayer.
- Transfer of asset by previous owner: The provisions of section 55(2)(ac) are also applicable when the previous owner has transferred the asset to the current owner by way of a gift or will. In such a case, the cost of acquisition for the current owner will be the cost to the previous owner adjusted for inflation.
- Sale of asset by previous owner: In case the previous owner of the asset has sold the asset before gifting or bequeathing it to the current owner, the cost of acquisition for the current owner will be the actual cost of acquisition by the previous owner adjusted for inflation.
Conclusion
Section 55(2)(ac) of the Income Tax Act is an important provision that provides for the computation of the cost of acquisition of an asset acquired by way of a gift or will. This provision has significant implications for the calculation of capital gains tax and the valuation of assets. Taxpayers who have acquired assets by way of a gift or will should be aware of the implications of this provision and ensure that they comply with its requirements while filing their tax returns.
Read more useful content:
- section 234e of income tax act
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Frequently Asked Questions (FAQs)
What is the significance of Section 55(2)(ac) of the Income Tax Act?
Section 55(2)(ac) of the Income Tax Act is significant as it helps in determining the cost of acquisition of an asset acquired by way of a gift or will for the purpose of calculating capital gains tax.
Does Section 55(2)(ac) apply only to gifts and wills?
Yes, Section 55(2)(ac) applies only to assets acquired by way of a gift or will.
What is the cost of acquisition as per Section 55(2)(ac)?
As per Section 55(2)(ac), the cost of acquisition of the asset for the current owner will be the cost to the previous owner of the asset adjusted for inflation.
Can the cost of acquisition for the current owner be higher than the fair market value of the asset?
No, the cost of acquisition for the current owner cannot be higher than the fair market value of the asset as on the date of acquisition.
Is indexation benefit available while computing capital gains as per Section 55(2)(ac)?
Yes, indexation benefit is available while computing capital gains as per Section 55(2)(ac).
Is Section 55(2)(ac) applicable in case of inheritance?
No, Section 55(2)(ac) is not applicable in case of inheritance, as the legal heir is deemed to be the owner of the asset from the date of the previous owner’s demise.
What is the implication of Section 55(2)(ac) on the valuation of the asset?
Section 55(2)(ac) provides for a different method of valuation, which is based on the cost to the previous owner of the asset. This can have implications for taxpayers who have acquired assets that have appreciated significantly in value since they were acquired by the previous owner.
What is the implication of Section 55(2)(ac) on the computation of capital gains tax?
Section 55(2)(ac) has a direct impact on the calculation of capital gains tax, as it helps in determining the cost of acquisition of the asset.
Is Section 55(2)(ac) applicable when the previous owner has transferred the asset to the current owner by way of a gift or will?
Yes, Section 55(2)(ac) is also applicable when the previous owner has transferred the asset to the current owner by way of a gift or will.
What is the implication of Section 55(2)(ac) when the previous owner has sold the asset before gifting or bequeathing it to the current owner?
In such a case, the cost of acquisition for the current owner will be the actual cost of acquisition by the previous owner adjusted for inflation.
