Section 90 Income Tax Act 2025: How Is Cost of Acquisition Calculated?
Section 90 sets out statutory rules for determining the cost of acquisition and cost of improvement of capital assets, including inherited property, goodwill, rights and bonus securities. These amounts are important when calculating taxable capital gains.
What does Section 90 of the Income-tax Act, 2025 provide?
Section 90 supplies special meanings and valuation rules for cost of acquisition, cost of improvement and related adjustments in computing capital gains. Under section 72, the general starting point is the full value of consideration less qualifying transfer expenses, cost of acquisition and cost of improvement, subject to applicable special rules.
Section 90 does not itself grant a general exemption from capital gains tax. It determines cost amounts used in the computation.
What is the cost of improvement under Section 90?
Under section 90(1), the cost of improvement of goodwill, specified intangible assets and business or professional rights is treated as nil.
For other capital assets, the cost of improvement generally comprises capital expenditure on additions or alterations. Where the assessee or previous owner held the asset before 1 April 2001, only qualifying capital improvements incurred on or after that date are counted. For assets acquired later, the relevant expenditure is generally that incurred after acquisition, including qualifying improvements by a previous owner in specified succession cases.
Section 90(2) excludes expenditure already deductible under the heads income from house property, profits and gains of business or profession, or income from other sources. Ordinary repairs are not automatically capital improvements.
How is the cost of goodwill and intangible assets determined?
Section 90(3) provides special acquisition-cost rules for goodwill of a business or profession, trade marks, brand names, tenancy rights, stage carriage permits, loom hours and other specified intangible or business rights. Broadly, an actual purchase price is recognised where the assessee purchased the right; in specified succession cases the previous owner's purchase price is relevant; and in other cases the statutory cost may be nil.
Self-generated goodwill or a self-created qualifying right should therefore not be assigned an arbitrary acquisition cost. Apply the precise statutory category and the facts of acquisition.
Can fair market value as on 1 April 2001 be used?
Under section 90(9), for certain assets acquired before 1 April 2001, the taxpayer may generally choose between actual acquisition cost and fair market value on 1 April 2001. A similar choice may be available where the asset came through specified modes of succession and the previous owner acquired it before that date.
Important: The option is subject to the restrictions in section 90(10) and other applicable statutory conditions. In particular, do not assume that the 2001 fair market value of land or buildings may exceed the value permitted under the relevant stamp-duty valuation rule.
How are bonus shares and rights entitlements valued?
Section 90 contains special acquisition-cost provisions for securities obtained through rights entitlements and bonus allotments. In general:
- Where an eligible rights entitlement is renounced, its cost in the hands of the person renouncing it is treated as nil.
- Where a shareholder subscribes to securities under a rights offer, the amount actually paid for those securities is the relevant acquisition cost.
- Where securities are allotted free of payment by reason of holding other securities, the statutory acquisition cost is generally nil.
- For the purchaser of a renounced entitlement, the cost of the resulting security includes qualifying amounts paid to the renouncing holder and to the issuing company or institution.
The exact treatment depends on the relevant sub-section, the instrument and the transaction.
How does the 31 January 2018 grandfathering rule work?
Section 90(7) prescribes a special cost rule for qualifying long-term equity shares, units of equity-oriented funds and units of business trusts referred to in section 198 that were acquired before 1 February 2018.
Section 90(8) defines fair market value for this purpose, including exchange-quoted prices on 31 January 2018, the nearest preceding trading day where applicable, net asset value for certain unlisted units and special rules for certain subsequently listed shares. This rule must be read with the other conditions and exclusions in section 90.
Practical examples of Section 90
Example 1: Capital improvement to a house
A property is purchased for Rs. 30 lakh and a qualifying structural extension costs Rs. 8 lakh. Subject to proof, other statutory adjustments and applicable provisions, the capital expenditure of Rs. 8 lakh may be included in cost of improvement. Routine maintenance already claimed as a deduction cannot be counted again.
Example 2: Equity shares acquired before February 2018
Assume qualifying shares were purchased for Rs. 100 per share, their prescribed fair market value was Rs. 180 and they are later sold for Rs. 160. The deemed acquisition cost under the grandfathering formula is the higher of Rs. 100 and the lower of Rs. 180 and Rs. 160, namely Rs. 160 per share. This example addresses acquisition cost only; other tax provisions still apply.
Example 3: Inherited property
If an inherited property was originally purchased by the previous owner before 1 April 2001, section 90(9), read with section 73 and the relevant limitations, may permit the 1 April 2001 fair market value option. Documentary evidence and valuation are important.
Relevant statutory terms
Frequently asked questions
Does Section 90 exempt capital gains from tax?
No. It primarily defines acquisition and improvement costs for calculating gains. Exemptions, if available, arise under other provisions.
Is the cost of improvement of self-generated goodwill deductible?
No. Section 90(1)(a) treats the cost of improvement of goodwill and specified intangible rights as nil.
Can the cost of property acquired before 2001 be replaced with its 2001 market value?
For qualifying assets, the Act generally permits an option to use fair market value as on 1 April 2001, subject to statutory restrictions including section 90(10).
Does the 2018 grandfathering rule apply to all shares?
No. It applies only to the categories and conditions specified in section 90(7) and (8), read with section 198 and other relevant provisions.
Official statutory references
Last reviewed: 10 November 2026. Check subsequent amendments, rules and notifications before relying on a calculation.