Allocate existing investor cost before computing a sale
For a corporate investor holding capital investments, section 73(1), Table items 14–15 of the Income-tax Act, 2025 governs the stated demerger share-cost allocation. Resulting-company share cost is the original investment cost multiplied by transferred net book value divided by the demerged company’s immediately preceding net worth. The original investment cost is reduced by the allocated amount. This guide concerns tax year 2026–27 and a separately established qualifying demerger; it does not establish scheme eligibility merely from an allotment letter. Checked on 29 October 2026. Income Tax Department: Income-tax Act, 2025, section 73 Table items 14–15 and subsection (2)(c).
Identify each statutory input precisely
Table item 14 defines A as acquisition cost of shares in the demerged company, B as net book value of assets transferred and C as net worth immediately before demerger. Section 73(2)(c) defines that net worth as paid-up share capital plus general reserves appearing in the books. Do not substitute total assets, stock-market capitalisation, a broad accounting equity number or the resulting company’s net worth. Obtain the scheme and the issuer’s supported input reconciliation, retaining the underlying book figures. Income Tax Department: Income-tax Act, 2025, section 73 Table items 14–15 and subsection (2)(c).
The share allotment ratio answers a different question
The number of resulting shares allotted determines how the aggregate allocated cost is distributed over that resulting holding. It does not itself determine the fraction of original cost transferred. A one-for-two allotment need not mean that half the original investment cost moves. Keep entitlement quantities, aggregate statutory allocation and per-share costs in separate columns. A later trading-price ratio is not the formula prescribed by Table item 14. Income Tax Department: Income-tax Act, 2025, section 73 Table items 14–15 and subsection (2)(c).
Preserve original acquisition cohorts
Where supported original holdings have different acquisition costs, apply the established allocation ratio to each cohort and reconcile their sum. Do not lose original lot evidence by recording the new shares at a convenient market quote. Table item 15 reduces original cost by the corresponding allocation; retaining the old full cost and simultaneously assigning resulting-share cost would duplicate basis. The examples assume a positive denominator, straightforward supported inputs and no unusual negative or out-of-range ratio; such exceptional facts need specific analysis rather than a spreadsheet clamp. Income Tax Department: Income-tax Act, 2025, section 73 Table items 14–15 and subsection (2)(c).
Separate cost allocation from tax neutrality and holding period
A scheme described commercially as a demerger still needs the applicable definition and conditions, including section 2(35), and the relevant section 70 transfer treatment. Cost allocation does not by itself prove those conditions. Nor does it decide the holding-period category, tax rate, deemed proceeds or exemption for a later sale. Section 72 supplies the separate capital-gain computation. All example sales stipulate accepted proceeds, identified lots and no transfer expenses or other adjustments, before tax, surcharge and cess. Income Tax Department: Income-tax Act, 2025, section 73 Table items 14–15 and subsection (2)(c).
Close with a conserved-cost reconciliation
For the simple model, resulting cost plus remaining original cost must equal the supported pre-demerger investor cost. Check that equality at cohort and total levels, then reconcile disposals and closing balances separately for the two investee companies. Retain full precision until the appropriate final reporting rounding. This current tax-year guide must not be mechanically applied using 2025 Act section numbers to an AY 2026–27 return for FY 2025–26. Income Tax Department: Income-tax Act, 2025, section 73 Table items 14–15 and subsection (2)(c).
Applicable primary references
Income Tax Department: Income-tax Act, 2025, section 73 Table items 14–15 and subsection (2)(c)
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Basic allocation
Original investor cost A is ₹10 lakh; transferred net book value B ₹30 crore and defined net worth C ₹100 crore. Ratio is 30%. Resulting shares receive ₹3 lakh cost and original shares retain ₹7 lakh. Total basis remains ₹10 lakh.
Illustrative example 2: Build the correct denominator
Paid-up capital is ₹40 crore and general reserves ₹60 crore, giving defined C ₹100 crore. Assume a separate ₹20 crore securities-premium balance is not general reserves. With B ₹25 crore and investor cost ₹8 lakh, resulting cost is ₹2 lakh and original cost ₹6 lakh. Substituting ₹120 crore would wrongly allocate only ₹1,66,666.67 to the resulting holding.
Illustrative example 3: Allotment ratio does not set the cost ratio
An investor owns 1,000 original shares costing ₹10 lakh and receives 500 resulting shares. Stipulated B/C is 20%. Resulting aggregate cost ₹2 lakh gives ₹400 per new share; original aggregate ₹8 lakh gives ₹800 per original share. The 1:2 allotment does not create a 50% tax-cost split.
Illustrative example 4: Different original cohorts
Cohort A costs ₹6 lakh and Cohort B ₹4 lakh. A supported ratio of 25% allocates ₹1.50 lakh and ₹1 lakh respectively to resulting shares. Remaining original costs are ₹4.50 lakh and ₹3 lakh. Aggregate resulting cost ₹2.50 lakh plus original ₹7.50 lakh reconciles to ₹10 lakh.
Illustrative example 5: Partial resulting-share disposal
Assume 500 resulting shares have allocated cost ₹2 lakh, or ₹400 each. Selling 200 identified shares at accepted ₹600 each gives proceeds ₹1.20 lakh, cost ₹80,000 and gain ₹40,000. Remaining 300 resulting shares retain cost ₹1.20 lakh.
Illustrative example 6: Partial original-share disposal
Assume 1,000 original shares retain aggregate cost ₹8 lakh after allocation. Selling 250 identified shares at accepted ₹1,000 each gives proceeds ₹2.50 lakh, cost ₹2 lakh and gain ₹50,000. The remaining 750 shares retain ₹6 lakh cost; use reduced original basis rather than the pre-demerger ₹10 lakh.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Confirm the applicable period | Record the enactment governing the actual transaction. |
| 2 | Establish scheme eligibility | Retain the qualifying demerger and transfer-treatment analysis. |
| 3 | Reconcile investor original cost | Support each acquisition cohort and prior adjustments. |
| 4 | Obtain transferred net book value | Trace B to supported scheme and book records. |
| 5 | Build defined net worth | Reconcile paid-up capital and general reserves immediately before demerger. |
| 6 | Compute the statutory fraction | Use compatible units and retain full precision. |
| 7 | Allocate resulting cost | Apply the ratio to each supported original cost cohort. |
| 8 | Reduce original basis | Apply the matching Table item 15 reduction once. |
| 9 | Reconcile allotments and disposals | Keep quantities and cost distinct for both companies. |
| 10 | Approve the closing register | Prove conserved total basis and review later gain/rate questions separately. |
Sixteen practitioner FAQs
1. Is this the investee company’s expense deduction?
No. It is the shareholder’s investment-cost allocation.
2. Which table entries govern the simple split?
Section 73(1), Table items 14 and 15.
3. What is A?
Acquisition cost of the shares in the demerged company.
4. What is B?
Net book value of assets transferred in demerger.
5. What is C?
The demerged company’s defined net worth immediately before demerger.
6. How is net worth defined here?
Paid-up share capital plus general reserves under section 73(2)(c).
7. Can market capitalisation replace C?
No. It is not the prescribed denominator.
8. Does the allotment ratio itself set B/C?
No. It determines quantities, not that statutory fraction.
9. Can resulting shares simply be entered at their first traded price?
That does not implement the stated cost formula.
10. Must original cost be reduced?
Yes. Table item 15 makes the corresponding reduction.
11. Can both holdings retain the full old basis?
That would duplicate cost.
12. Should differently priced cohorts remain traceable?
Yes. Preserve the evidence and their allocated costs.
13. Does allocation establish demerger eligibility?
No. That requires its separate legal analysis.
14. Does it establish the later sale’s tax rate?
No. Review rate and holding period separately.
15. What if the denominator or ratio is unusual?
Escalate the actual facts; do not impose an invented spreadsheet cap.
16. What is the final control?
Resulting and remaining original costs reconcile to supported original basis in the simple model.
Conclusion
A qualifying demerger allocates the shareholder’s existing cost between resulting-company shares and the original investment. Section 73 uses a defined book-value/net-worth ratio, not the market-price split or allotment ratio alone.