Section 55 of ITA, 1961 : Section 55: Meaning Of Adjusted, Cost Of Improvement And Cost Of Acquisition

Explanation using Example

Imagine Mr. Sharma sold a residential property on June 15, 2023, which he inherited from his father. The property was originally purchased by his father on March 20, 1980. For calculating the capital gains tax on the sale, Mr. Sharma needs to determine the 'cost of acquisition' and the 'cost of improvement' according to the Income-tax Act, 1961.

Since the property was acquired before April 1, 2001, Mr. Sharma has the option to consider the higher of the actual cost to his father or the fair market value of the property as of April 1, 2001, as the cost of acquisition for tax purposes.

Additionally, any capital expenditure incurred by Mr. Sharma or his father for improving the property after April 1, 2001, can be added to the cost of acquisition to arrive at the 'cost of improvement'. However, any expenditure that is deductible in computing income from other heads cannot be included.

Based on these calculations, Mr. Sharma can then proceed to compute the capital gains and the corresponding tax liability from the sale of the inherited property.