Section 73 of the Income-tax Act, 2025 deems the cost of acquisition for assets acquired by gift, will, succession, inheritance, liquidation distribution, trust transfer or specified section 70 transfers to be the previous owner's cost, increased by improvements.
What section 73 does
Section 73 is the companion to section 70 — the successor to section 49 of the Income-tax Act, 1961. Where section 70 says a transaction is not a transfer, section 73 answers the next question: what cost does the recipient take?
The answer for the main category is the previous owner's cost. Serial 1 of the table covers assets that became the assessee's property under a gift or will; by succession, inheritance or devolution; on distribution of assets on liquidation of a company; under a transfer to a revocable or irrevocable trust; by an HUF through the mode in section 99(3) after 31 December 1969; or under the specified transfers listed in section 70(1).
For all of those, the cost is the cost for which the previous owner acquired it, as increased by the cost of any improvement incurred or borne by the previous owner or the assessee. The gain therefore accumulates across the change of hands rather than being reset.
The Income-tax Act, 2025 takes effect from 1 April 2026 and applies from tax year 2026-27. The Income-tax Act, 1961 continues to govern every year up to 31 March 2026, including assessments, appeals and penalties for those years, because of the repeal and savings provision in section 536. Figures quoted here are the amounts written into the Act as enacted (with the Gazette corrigenda of 3 September 2025); the annual Finance Act can change rates and thresholds.
Old Act and new Act, side by side
The table below shows what the Income-tax Act, 1961 did and where the same ground is covered in the Income-tax Act, 2025.
| Income-tax Act, 1961 | What it did | Income-tax Act, 2025 |
|---|---|---|
| 49(1) | Previous owner's cost for gifts, inheritance and specified transfers | 73(1) — Table serial 1 |
| 49(2) | Shares in an amalgamated company | 73(1) — Table serial 2 |
| 49(2A) | Shares or debentures on conversion | 73(1) — Table serial 3 |
| 49(2AA) | Specified security or sweat equity shares | 73(1) — Table serial 4 |
| 47 | Transactions not regarded as transfer | 70 |
| 55(2)(b) | 1 April 2001 fair market value option | 90(9)(b) |
| 2(42A), Explanation | Holding period includes the previous owner's | Read with the capital asset definitions |
Section 73 sub-section by sub-section
Read this alongside the bare text — each heading below is a sub-section of the section as enacted.
Serial 1 — the previous owner's cost
Where the capital asset became the assessee's property (a) under a gift or will; (b) by succession, inheritance or devolution; (c) on any distribution of assets on the liquidation of a company; (d) under a transfer to a revocable or irrevocable trust; (e) being an HUF, by the mode in section 99(3) after 31 December 1969; or (f) under a specified transfer listed in section 70(1) — the cost is the cost for which the previous owner acquired it, increased by the cost of any improvement incurred or borne by the previous owner or the assessee.
Which section 70 transfers are covered
Serial 1(f) lists the section 70(1) clauses by letter — including (a) HUF partition, (c) and (d) holding-subsidiary transfers, (e) amalgamation, and a long list of further reorganisation clauses. Note that clause (b) — gift, will and irrevocable trust — is separately covered by items (a) and (d) of serial 1, so the whole ground is covered.
Serial 2 — shares in an amalgamated company
Where the asset is a share in an amalgamated company which is an Indian company, acquired in consideration of a transfer under section 70(1)(f), the cost is the cost of the shares in the amalgamating company. The shareholder's original investment carries across the merger.
Serial 3 — conversion of debentures into shares
Where a share or debenture became the assessee's property in consideration of a transfer under section 70(1)(z) or (za), the cost is that part of the cost of the debenture, debenture-stock, bond or deposit certificate in relation to which the asset was acquired.
Serial 4 — ESOPs and sweat equity
For a capital asset being a specified security or sweat equity shares, the table fixes the cost by reference to the fair market value already taxed as a perquisite under section 17. This prevents the same value being taxed twice — once as salary on exercise and again as capital gain on sale.
How section 73 works with section 90
Where the previous owner acquired the asset before 1 April 2001, section 90(9)(b) allows the assessee to substitute the fair market value on 1 April 2001 for the previous owner's cost — capped, for land and building, by the stamp duty value of that date under section 90(10). And where the previous owner's cost cannot be ascertained, section 90(11) takes the fair market value on the date it became the previous owner's property.
Worked example
An individual sells an inherited flat in tax year 2026-27 for ₹1,80,00,000.
| Fact | Position under section 73 |
|---|---|
| Father bought the flat in 1996 for ₹6,00,000 | Previous owner's cost — serial 1(b), succession |
| Father spent ₹4,00,000 on improvements in 2010 | Added — improvement borne by the previous owner |
| The assessee spent ₹3,00,000 on improvements in 2019 | Added — improvement borne by the assessee |
| Acquisition predates 1 April 2001 | Section 90(9)(b) option available — fair market value on 1 April 2001 |
| Fair market value on 1 April 2001 certified at ₹28,00,000; stamp duty value that date ₹21,00,000 | Capped at ₹21,00,000 by section 90(10) |
| Cost adopted | ₹21,00,000, plus post-2001 improvements of ₹7,00,000 |
Two things follow that taxpayers frequently get wrong. Improvements borne by either the previous owner or the assessee are added. But improvement expenditure incurred before 1 April 2001 is excluded by section 90(1)(b)(i) where the 2001 base is used, so the father's 2010 spend counts and a 1998 spend would not.
The holding period also runs from the previous owner's acquisition, which is what makes this a long-term gain taxed under section 197 rather than a short-term one.
Compliance checklist and due dates
- Trace the previous owner's acquisition date and cost — both are needed, for cost and for the holding period.
- Add improvements borne by either the previous owner or the assessee.
- Where the previous owner acquired before 1 April 2001, evaluate the section 90(9)(b) option and the section 90(10) stamp duty cap for land and building.
- Exclude pre-2001 improvement expenditure where the 2001 base is adopted — section 90(1)(b)(i).
- For shares received on amalgamation, carry the cost of the amalgamating company's shares — serial 2.
- For ESOPs, take the cost as the fair market value already taxed under section 17, to avoid double taxation.
- Where the previous owner's cost is unascertainable, use section 90(11).
Common mistakes
- Treating a gifted or inherited asset as having nil cost, or as acquired on the date of inheritance.
- Using the assessee's own acquisition date to decide long-term or short-term.
- Claiming pre-2001 improvement costs alongside the 2001 fair market value base.
- Overlooking the section 90(10) stamp duty cap on the 2001 value for land and building.
- Taxing the ESOP perquisite value again as capital gain instead of taking it as cost under serial 4.
This is an explanatory guide, not tax advice, and it does not reproduce the section in full. Read the bare text of the section before you rely on it, and check for later amendments, the Income-tax Rules made under the new Act, and CBDT circulars and notifications.