The depreciation basis is not simply the gift's market value
For FY 2025–26 and AY 2026–27, Explanation 2 to section 43(1) of the Income-tax Act, 1961 sets a previous-owner-based actual-cost rule for an asset acquired by gift or inheritance. It reduces the previous owner's actual cost by the specified depreciation history. A recipient's valuation report or book entry does not, by itself, replace that statutory computation. Screen any more-specific cost provision and assess taxation of the receipt separately before using the general working.
Read the applicable text: Income-tax Department: section 43(1), Explanation 2 and surrounding actual-cost provisions.
Establish the acquisition route and asset identity
Preserve the gift instrument or succession evidence, previous owner's identity, transfer date and the asset's specifications. This guide concerns a depreciation-cost input for a business or professional asset; it does not establish that every transfer described as a gift is legally effective or exempt from income tax. An inventory disposal, sale for consideration or restructuring needs its own applicable rule. Do not treat all noncash transfers as interchangeable.
Obtain the predecessor's tax evidence
Start with supported actual cost, including relevant tax-cost adjustments. Obtain acquisition invoices and prior tax registers or other reliable records. Accounting carrying value and tax actual cost may differ. A predecessor's pooled block balance is also not necessarily the asset-specific answer required by the provision. Identify gaps explicitly rather than replacing unavailable tax history with a convenient current valuation.
Separate the two historical depreciation limbs
For previous years relevant to assessment years commencing before 1 April 1988, the provision refers to depreciation actually allowed under the stated enactments. For assessment years commencing on or after that date, it uses depreciation that would have been allowable as if the asset were the only asset in the relevant block. Reconstruct the applicable history, classifications and rates. An entry showing no current book depreciation does not automatically establish no statutory reduction.
Keep receipt taxation and subsequent depreciation distinct
A gift's possible tax consequences on receipt are a separate legal question from its depreciation-cost computation. Likewise, once supported actual cost is established, the recipient's eligibility, ownership/use conditions, block classification and applicable depreciation rate require their own review. The illustrations below assume the stated rule applies after screening other provisions; aggregate statutory depreciation is an assumed input in these fictional illustrations, not an independently evidenced asset history or a universal rate. A real computation must reconstruct each applicable period and rate before treating that input as verified.
Maintain a nonduplicated ledger bridge
Show previous-owner cost, required historical reductions, reconstructed recipient tax cost and any different accounting value. Do not claim the historical reduction again as a current expense. Nor should a book impairment be silently substituted for statutory depreciation. Record the final cost once in the recipient's tax register and link it to the acquisition evidence and return computation.
Preserve scope qualifications
This article uses the Income-tax Act, 1961 for FY 2025–26 and AY 2026–27. The Income-tax Act, 2025 applies from 1 April 2026, while the transition preserves the old Act for periods beginning before that date; AY 2026–27 returns for FY 2025–26 therefore remain under the old Act. It does not mechanically apply later tax-year numbering. Where an asset attracts a specific overriding cost treatment or an acquisition route differs from gift or inheritance, resolve that before finalisation. A zero purchase payment alone does not prove either zero tax cost or a market-value step-up under Explanation 2.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Previous-owner cost and the statutory reduction
Supported predecessor actual cost is ₹1,000,000 and the applicable statutory depreciation reconstruction is ₹400,000. The resulting tax cost is ₹600,000. A ₹750,000 gift-date appraisal exceeds that result by ₹150,000 but does not itself replace it.
Illustrative example 2: Book carrying value differs
Predecessor actual cost is ₹800,000, book depreciation ₹250,000 and the required statutory reduction ₹320,000. Book carrying value is ₹550,000; reconstructed tax cost is ₹480,000, a ₹70,000 difference. Do not subtract both depreciation figures.
Illustrative example 3: Both historical limbs are relevant
Assume supported previous-owner cost ₹500,000, pre-1-April-1988-AY depreciation actually allowed ₹100,000 and the applicable later sole-asset hypothetical depreciation ₹240,000. Total statutory reduction is ₹340,000 and recipient tax cost ₹160,000. Each historical input requires its own evidence.
Illustrative example 4: Two assets need separate histories
Assets have predecessor costs ₹600,000 and ₹300,000, with supported statutory reductions ₹180,000 and ₹120,000. Their reconstructed costs are ₹420,000 and ₹180,000, totalling ₹600,000. Keep both workings rather than assuming one average reduction.
Illustrative example 5: Reconcile a recipient's valuation entry
The recipient records a qualifying asset at ₹900,000 in the books. Supported predecessor cost ₹1,200,000 less statutory depreciation ₹500,000 gives tax cost ₹700,000. The ₹200,000 basis difference needs explanation; it is not automatically an additional current deduction.
Illustrative example 6: A missing period is not a zero allowance
Cost is ₹700,000 and documented statutory reductions total ₹210,000, but another required period remains unsupported. ₹490,000 is only the provisional difference before resolving that missing period. If the supported additional reduction is ultimately ₹40,000, final cost becomes ₹450,000. Do not present the provisional figure as verified.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Fix the period | FY 2025–26 and AY 2026–27. |
| 2 | Establish acquisition route | Gift or inheritance documents and legal identity. |
| 3 | Identify the asset | Specifications and predecessor-to-recipient continuity. |
| 4 | Screen specific cost rules | Separate receipt taxation and any overriding provision. |
| 5 | Establish predecessor actual cost | Invoices and supported tax-cost adjustments. |
| 6 | Reconstruct historical depreciation | Actual-allowance and sole-asset hypothetical limbs. |
| 7 | Resolve missing periods | Rates, classification, records and explicit exceptions. |
| 8 | Compute recipient actual cost | Nonduplicated reduction from supported predecessor cost. |
| 9 | Link the recipient's depreciation register | Block and current-use eligibility assessed separately. |
| 10 | Preserve the ledger bridge | Book value, tax cost and return evidence. |
Sixteen practitioner FAQs
1. Is the gift-date appraisal automatically actual cost?
No. Explanation 2 uses the specified previous-owner-based calculation.
2. Does paying nothing automatically mean zero depreciation basis?
Not under this rule solely because no price was paid.
3. Does the guide establish that the receipt is tax-exempt?
No. Receipt taxation requires separate analysis.
4. Can every noncash transfer be treated as a gift?
No. Establish the actual legal acquisition route.
5. Is stock-in-trade disposal the same working?
No. This guide concerns a business-asset depreciation-cost input.
6. Which predecessor amount starts the computation?
Supported actual cost under the applicable provisions.
7. Can book carrying value replace the tax history?
Not automatically.
8. Is pooled block WDV always the asset-specific answer?
Do not assume it reproduces the statutory sole-asset reconstruction.
9. What is the earlier historical limb?
The stated depreciation actually allowed for relevant assessment years before 1 April 1988.
10. What is the later limb?
Depreciation that would have been allowable under the provision's sole-asset assumption for the stated later years.
11. Can an undocumented period be assumed to have no reduction?
No. Identify and resolve the evidence gap.
12. Does current book impairment set tax depreciation history?
No. Keep the measures separate.
13. Is historical depreciation a second current deduction?
No. It reduces the actual-cost input here.
14. Does reconstructed cost decide the current depreciation rate?
No. Verify classification and eligibility separately.
15. Can a more-specific cost provision affect the result?
Yes. Screen applicable specific provisions before finalising.
16. What should the final file show?
Acquisition route, predecessor cost, historical reductions, recipient basis and current-register handoff.
Official sources
Income-tax Department: section 43(1), Explanation 2 and surrounding actual-cost provisions
Income-tax Department: actual section 43 text, including Explanation 2
Income-tax Department: old/new Act transition and AY 2026–27