Allocate cost before computing gains
For a company holding mutual-fund units as capital assets in tax year 2026–27, section 73(1), Table items 11–12 of the Income-tax Act, 2025 provides the segregated-portfolio cost allocation. Segregated cost equals original total-portfolio acquisition cost multiplied by NAV of the asset transferred to the segregated portfolio, divided by NAV of the total portfolio immediately before segregation. Main-portfolio cost is reduced by that allocation. Checked on 5 November 2026. These 2025 Act numbers must not be applied mechanically to an AY 2026–27 return for FY 2025–26.
Income-tax Act, 2025: section 73 and commencement SEBI Circular 2018/160: definitions and portfolio mechanics
Identify the actual portfolio event
Section 73(2)(b) adopts the main, segregated and total portfolio meanings from SEBI Circular 2018/160 dated 28 December 2018. The segregated portfolio contains the affected instrument separated from the scheme; the main portfolio excludes it and the total includes it. Obtain the actual AMC notice, holding statement and valuation evidence. A general NAV fall or an internal accounting impairment does not establish that statutory segregation occurred. This article addresses investor tax basis after an established event, not the AMC’s current regulatory eligibility to create a new portfolio.
Income-tax Act, 2025: section 73 and commencement SEBI Circular 2018/160: definitions and portfolio mechanics
Use the prescribed numerator and denominator
B is NAV of the asset transferred; C is NAV of the total portfolio immediately before segregation. Obtain the AMC’s supported figures on a compatible basis. Do not divide later quotations of the two holdings or substitute instrument face value for NAV. A later zero market valuation does not prove that the required original numerator was zero. If the correctly evidenced statutory numerator is zero, the formula gives zero; missing evidence is not a zero input.
Income-tax Act, 2025: section 73 and commencement SEBI Circular 2018/160: definitions and portfolio mechanics
Preserve original acquisition cohorts
Apply the supported ratio to each original cost cohort and reconcile the total. Equal numbers of main and segregated units do not imply equal costs. Quantity entitlement and the statutory NAV fraction answer different questions. Keep original cost, segregated allocation, reduced main cost, quantity, disposals and closing basis in separate columns. Retaining the full original cost in the main ledger while assigning another cost to segregated units duplicates tax basis.
Income-tax Act, 2025: section 73 and commencement SEBI Circular 2018/160: definitions and portfolio mechanics
Analyse recovery payments separately
The cited SEBI circular distinguishes transfers of segregated units from distributions following recovery and does not allow ordinary subscription/redemption in the segregated portfolio. Do not label every cash receipt an ordinary redemption. The cost formula alone does not determine the tax character of a payment where rights continue. The examples stipulate completed transfers of identified capital-asset units, accepted proceeds, no transfer expenses and no other adjustments. They compute pre-tax gains only; rates, holding-period classification and any special mutual-fund provisions need separate analysis.
Income-tax Act, 2025: section 73 and commencement SEBI Circular 2018/160: definitions and portfolio mechanics
Reconcile tax cost and accounting carrying value
An accounting write-down or reversal can differ from tax basis. Reconcile the original supported cost to disposed cost and remaining basis across both portfolios, and explain the difference from financial accounts. Keep precision until required reporting rounding. A reviewer should be able to reproduce the calculation from original acquisition evidence and AMC inputs without relying on a broker’s present-day valuation or assuming the new holding was acquired free of cost.
Income-tax Act, 2025: section 73 and commencement SEBI Circular 2018/160: definitions and portfolio mechanics
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Basic allocation
Original cost is ₹12 lakh; transferred-asset NAV ₹8 crore and immediately preceding total NAV ₹80 crore. The 10% ratio allocates ₹1.20 lakh to segregated units and leaves ₹10.80 lakh in main units. Total basis remains ₹12 lakh.
Illustrative example 2: Equal quantities
Assume 1,000 original units costing ₹1 lakh and 1,000 corresponding segregated units, with a supported 4% allocation. Segregated cost is ₹4,000, or ₹4 per unit; main cost ₹96,000, or ₹96 per unit. A 50:50 allocation would misallocate ₹46,000.
Illustrative example 3: Two acquisition cohorts
Costs of ₹6 lakh and ₹9 lakh at a supported 12% fraction allocate ₹72,000 and ₹1.08 lakh to segregated units. Main costs become ₹5.28 lakh and ₹7.92 lakh. Segregated ₹1.80 lakh plus main ₹13.20 lakh equals original ₹15 lakh.
Illustrative example 4: Partial segregated-unit transfer
Assume 1,000 identified segregated units have allocated cost ₹20,000. A completed transfer of 400 for ₹12,000 uses cost ₹8,000 and gives gain ₹4,000. The remaining 600 retain ₹12,000 basis. This assumes a completed transfer, not an ordinary fund-redemption facility.
Illustrative example 5: Main-portfolio disposal
Reduced main cost ₹4.50 lakh covers 5,000 identified units. A disposal of 2,000 units for ₹2.20 lakh uses cost ₹1.80 lakh and gives gain ₹40,000. Remaining main cost is ₹2.70 lakh.
Illustrative example 6: Later quote does not reset basis
Original cost ₹2 lakh and supported original ratio 15% allocate ₹30,000 to segregated units and ₹1.70 lakh to main units. Assume an actual completed transfer of all segregated units for a later quoted ₹5,000. Pre-tax loss is ₹25,000; the later quote does not replace original allocated cost.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Fix the applicable period | Record transaction date, enactment and capital-asset classification. |
| 2 | Identify the segregation | Keep the AMC notice and portfolio identifiers. |
| 3 | Reconcile original cost | Support each acquisition cohort and earlier disposals. |
| 4 | Obtain transferred-asset NAV | Retain numerator evidence and valuation timing. |
| 5 | Obtain total NAV | Use the immediately preceding denominator on a compatible basis. |
| 6 | Calculate segregated basis | Preserve computational precision. |
| 7 | Reduce main basis | Prove combined cost conservation for every cohort. |
| 8 | Reconcile quantities | Tie holdings and transfers to statements. |
| 9 | Classify the actual receipt | Distinguish transfer, recovery and continuing rights. |
| 10 | Close both ledgers | Reconcile disposed cost and remaining basis to original records. |
Sixteen practitioner FAQs
1. Is segregated cost automatically nil?
No. Use the prescribed formula with evidenced inputs.
2. Which enactment does this guide use?
The Income-tax Act, 2025 for tax year 2026–27.
3. Which table items apply?
Section 73(1), items 11–12.
4. What is A?
Supported cost of the units in the total portfolio.
5. What is B?
NAV of the asset transferred to the segregated portfolio.
6. What is C?
NAV of the total portfolio immediately before segregation.
7. Can later market prices establish the ratio?
No. They are not the required original inputs.
8. Does equal unit entitlement mean equal costs?
No. Quantity and the NAV allocation fraction are separate.
9. What happens to main cost?
It is reduced by the allocated segregated cost.
10. How are multiple acquisitions tracked?
Preserve supported cohorts and reconcile each allocation.
11. Does accounting impairment establish tax basis?
No. Maintain a separate tax-cost working.
12. Is an absent NAV input zero?
No. Resolve the evidence gap before finalising.
13. Is every recovery a redemption?
No. Examine the actual event and continuing rights.
14. What disposals do the examples assume?
Completed transfers of identified units with accepted proceeds and no other adjustments.
15. Does this article determine final tax rates?
No. Applicable charging, classification and rate rules need separate checking.
16. What is the key closing control?
Original cost must reconcile to utilised basis plus remaining basis across both holdings.
Official sources
Income-tax Act, 2025: section 73 and commencement SEBI Circular 2018/160: definitions and portfolio mechanics