Recover the earlier valuation before computing the gain
For shares held as a capital asset and sold by a company in FY 2025–26, apply the Income-tax Act, 1961 for AY 2026–27. The transition to the Income-tax Act, 2025 for tax years beginning on or after 1 April 2026 does not move this sale into the new Act. Section 49(4) applies where the transferred property’s value was subject to income tax under the specified clauses of section 56(2), including section 56(2)(x). The cost is the value taken into account under that clause. For shares received for inadequate consideration, section 56(2)(x)(c)(B) generally brings the aggregate shortfall into income when it exceeds ₹50,000, subject to the provision’s exclusions and the rules applicable at receipt. Use the full fair market value actually taken into account for the relevant shares as the section 49(4) cost; keep it separate from the shortfall included in income.
Read the applicable text: Income-tax Act, 1961: sections 48, 49(4), 50CA and 56(2)(x) CBDT: notified ITR-6 for AY 2026–27 CBDT Notification 61/2017: rules 11UA and 11UAA CBDT Notification 42/2020: rule 11UAD exception Income Tax Department: transition to the 2025 Act.
Build a share-lot link
Match the asset, number and class of shares, acquisition date, price paid and earlier tax valuation to the earlier computation, return and any later relevant order. Trace the disposed shares to that lot and apportion only where the identity and allocation are supported. A valuation report without a matching earlier tax record does not establish that section 49(4) applies.
Check the sale side independently
For a share other than a quoted share, section 50CA generally substitutes prescribed fair market value for consideration under section 48 when actual consideration is lower. Rule 11UAA uses the transfer date for valuation and refers to the applicable method in rule 11UA(1)(c). Check whether a prescribed exception such as rule 11UAD applies. The earlier acquisition value does not fix the later full value of consideration. Apply section 48 and the applicable holding-period and tax rules separately. Deduct qualifying transfer expenditure incurred wholly and exclusively in connection with the transfer; do not deduct securities transaction tax in the section 48 computation. The examples stipulate the sale-side consideration for tax and any stated allowable transfer costs; they do not compute a tax rate, apply an exemption or assume indexation.
Preserve both scenarios where evidence is unresolved
If the earlier acquisition was exempt, outside the charge, or otherwise not subject to the relevant provision, do not use section 49(4) merely because a fair value was recorded. Determine the actual cost rule separately. Reconcile the final consideration, supported cost and applicable expenses to the capital gains computation and to Schedule CG of ITR-6 where that form applies, and explain any lot or valuation mismatch before filing.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Use the full earlier value
A company paid ₹28 lakh for shares. The relevant prior value was ₹40 lakh and ₹12 lakh was taxed under section 56(2)(x). Assuming section 49(4) applies and sale-side consideration is ₹55 lakh, the gain before costs is ₹15 lakh.
Illustrative example 2: Partial lot disposal
A 2,000-share lot had a supported section 49(4) cost of ₹30 lakh. The company disposes of 800 identical shares from that lot for stipulated tax consideration of ₹16 lakh. Allocated cost is ₹12 lakh and gain before expenses is ₹4 lakh.
Illustrative example 3: Two lots with separate evidence
An earlier taxed lot has cost ₹9 lakh under section 49(4). A separate purchased lot has supported ordinary cost of ₹11 lakh. Tax consideration for both lots totals ₹27 lakh. Aggregate gain before expenses is ₹7 lakh, subject to separate classification.
Illustrative example 4: Sale value differs from cash price
Sale cash price is ₹35 lakh but assume a supported section 50CA determination makes tax consideration ₹38 lakh. Section 49(4) cost is ₹29 lakh. The gain before costs is ₹9 lakh, not ₹6 lakh.
Illustrative example 5: Do not substitute the amount taxed for cost
Prior consideration was ₹44 lakh, the value taken into account ₹50 lakh, and the taxable shortfall ₹6 lakh. With tax consideration of ₹57 lakh and allowable transfer expense of ₹1 lakh, gain is ₹6 lakh. Using the shortfall itself as cost would wrongly give ₹50 lakh.
Illustrative example 6: No earlier charge on the stated facts
A share lot has an accounting valuation of ₹18 lakh and an independently supported tax cost of ₹10 lakh under the applicable ordinary rule. There was no earlier section 56 charge. At tax consideration of ₹22 lakh, gain before expenses is ₹12 lakh rather than ₹4 lakh.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Confirm sale year and applicable Act | Return and statutory scope |
| 2 | Identify the sold lot and class | Share register and sale evidence |
| 3 | Recover earlier acquisition consideration | Contract, payment and allotment evidence |
| 4 | Confirm the earlier section 56 treatment | Filed computation and relevant assessment record |
| 5 | Identify the value actually taken into account | Earlier valuation and income bridge |
| 6 | Separate qualifying and other lots | Lot-specific cost working |
| 7 | Verify sale-side deemed consideration independently | Section 50CA and valuation review |
| 8 | Test transfer expenses and other inputs | Section 48 computation and documents |
| 9 | Reconcile the capital-gains output | Return working and source evidence |
| 10 | Escalate missing valuation or conflicting orders | Exception record and supported conclusion |
Sixteen practitioner FAQs
1. Is the earlier section 56 taxable excess itself the cost?
The cost is the value taken into account under the provision, not merely the shortfall charged.
2. Can the purchase price still be used where section 49(4) governs?
Use the statutory deemed cost for the relevant property.
3. Does a book fair value create a section 49(4) cost?
No. Confirm the earlier tax charge and the value used.
4. What if the property was outside section 56(2)(x)?
Determine the applicable cost rule independently.
5. Does a later value replace the earlier cost?
Not merely because market value changed. Establish the supported statutory cost.
6. Can several acquisition lots use the same cost automatically?
Reconcile each lot separately.
7. How is a partial disposal handled?
Allocate to identified shares using the supported cost of that lot.
8. What if the share class changed?
Reconcile the legal event and applicable tax cost rules rather than assuming identity.
9. Does section 49(4) decide the later consideration?
No. Review the sale-side consideration separately.
10. Can unquoted shares require a section 50CA review?
Yes. Compare actual consideration with the prescribed transfer-date fair market value under rule 11UAA and check whether an exception applies.
11. Does this article set a capital-gains rate?
No. Apply the correct holding-period and rate rules to the actual transaction.
12. Can the same transfer expense be deducted twice?
No. Keep expense and statutory cost in separate reconciliation columns.
13. Does the earlier tax payable have to equal the valuation figure?
No. Tax, taxable income and underlying value are distinct amounts.
14. What if an order changes the acquisition value?
Use the supported legal record and assess any dispute or correction.
15. Should unverified shares be assigned an average value from a different lot?
No. Resolve the identity and applicable allocation first.
16. What evidence should remain with the computation?
Keep acquisition, valuation, prior charge, lot linkage, disposal and sale-side valuation support.
Official sources
Income-tax Act, 1961: sections 48, 49(4), 50CA and 56(2)(x) CBDT: notified ITR-6 for AY 2026–27 CBDT Notification 61/2017: rules 11UA and 11UAA CBDT Notification 42/2020: rule 11UAD exception Income Tax Department: transition to the 2025 Act