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Updated: 10 November 2026 | Income-tax Act, 2025, as amended by Finance Act, 2026

Section 40 Income Tax Act 2025: How Is Cost of Acquisition Calculated?

Section 40 provides a special method of calculating the cost of acquisition when certain assets acquired through amalgamation, gift, will, irrevocable trust or partition of a Hindu undivided family are sold as stock-in-trade.

Important distinction: Section 40 of the Income-tax Act, 2025 deals with the cost of acquisition of certain assets. Section 40 of the Income-tax Act, 1961 dealt with amounts not deductible. The broadly corresponding earlier provision is Section 43C of the 1961 Act.

What does Section 40 of the Income-tax Act, 2025 cover?

Section 40(1) applies for computing income chargeable under the head Profits and gains of business or profession where an asset becomes the property of:

  1. An amalgamated company under a scheme of amalgamation; or
  2. An assessee under a gift, will, irrevocable trust or total or partial partition of a Hindu undivided family (HUF).

Where such an asset is sold as stock-in-trade, Section 40 prescribes the cost to be used in calculating business income. It is a special cost-computation rule, not a general exemption from tax.

How is the cost of acquisition calculated under Section 40(1)?

The statutory cost is the aggregate of the following components:

  1. Original acquisition cost: the cost in the hands of the amalgamating company (in an amalgamation) or the transferor or donor (in the other specified cases).
  2. Cost of improvement: any cost of improvement made.
  3. Transfer-related expenditure: any expenditure incurred by the amalgamating company or transferor or donor, as applicable, wholly and exclusively in connection with the transfer.
Formula: Cost under Section 40 = original owner's acquisition cost + cost of improvement + qualifying transfer-related expenditure.

The provision looks to the specified predecessor's cost rather than treating the recipient's acquisition as having a nil cost merely because the recipient did not pay purchase consideration.

Relevant statutory terms and definitions

Cost of acquisition: The cost attributed to an asset for the relevant computation. Under Section 40, the specified predecessor's cost forms the starting point, with the statutory additions.
Stock-in-trade: An asset held as trading inventory rather than as a capital investment; its sale is generally considered in computing business income.
Amalgamation: A merger of companies satisfying the applicable statutory conditions; the meaning and conditions must be read with the definitions in Section 2 of the Act.
Hindu undivided family (HUF): A family unit recognised as a separate taxable person under income-tax law. Section 40 expressly refers to assets acquired on its total or partial partition.
Irrevocable trust: A trust arrangement that cannot be revoked in accordance with its governing terms and applicable law. Section 40 expressly includes acquisition under such a trust.
Profits and gains of business or profession: The income-tax head under which the relevant trading profit is computed; Section 40 supplies a special cost rule for that computation.

Illustrative calculations

Example 1: Property received under a will and later sold as trading stock

Suppose the previous owner acquired an asset for Rs. 12,00,000, qualifying improvements cost Rs. 2,00,000 and qualifying transfer-related expenditure was Rs. 30,000. If the recipient subsequently sells the asset as stock-in-trade, the Section 40 cost would be Rs. 14,30,000. Assuming a sale price of Rs. 20,00,000 and no other relevant adjustments, the illustrative difference is Rs. 5,70,000.

Example 2: Asset acquired through amalgamation

Assume an amalgamating company originally purchased an asset for Rs. 8,00,000, spent Rs. 1,50,000 on improvements and incurred Rs. 50,000 of qualifying transfer expenditure. If the amalgamated company sells the asset as stock-in-trade, its Section 40 cost would be Rs. 10,00,000, subject to the applicable facts and other provisions.

These examples illustrate only the statutory cost formula. They do not resolve questions of stock valuation, conversion from capital asset to stock-in-trade, other deductions or the timing of taxation.

When does Section 40 not apply?

Section 40(2) expressly excludes an asset referred to in Section 67(6). Therefore, before applying the Section 40 formula, determine whether the asset falls within that cross-referenced provision. If it does, the applicable special rule must be considered instead.

Practical compliance points

  • Retain the predecessor's purchase deed, invoices or other evidence of original acquisition cost.
  • Maintain documentary evidence of improvements and their cost.
  • Preserve evidence of the gift, will, trust, HUF partition or scheme of amalgamation.
  • Keep records establishing when and how the asset was treated as stock-in-trade.
  • Check Section 67(6) and other relevant provisions before finalising the tax computation.

Frequently asked questions

Does Section 40 apply to every inherited asset?

No. Section 40 addresses the specified acquisitions when the asset is sold as stock-in-trade for computing business or professional income. Other provisions may govern a capital asset sold as an investment.

Is the acquisition cost zero when an asset is received as a gift?

Not under this special rule. For a qualifying asset sold as stock-in-trade, the statute begins with the transferor's or donor's acquisition cost and adds the prescribed amounts.

Does the provision apply to assets acquired under a revocable trust?

Section 40(1)(b) expressly specifies an irrevocable trust. Other arrangements require separate examination under the applicable provisions.

What is the equivalent provision in the Income-tax Act, 1961?

The broadly corresponding provision is Section 43C of the Income-tax Act, 1961.

Does Section 40 prescribe a tax rate?

No. It determines a cost component used in computing business income; the applicable tax rate is determined under other provisions.

Official statutory sources

Income-tax Act 2025 - Official PDFIncome Tax Department - Act and Rules

This explanatory article is for general information. The statutory text, relevant amendments and facts of the transaction govern any actual tax computation.