The cost adjustment needs a history, not just a ledger balance
For a capital asset transferred in tax year 2026–27, section 81 of the Income-tax Act, 2025 addresses money received and retained in earlier transfer negotiations. It reduces the relevant acquisition cost, written down value or fair market value, subject to the already-taxed exception. This is a basis-reconciliation guide, not a final capital-gains computation. Do not apply its section numbering to FY 2025–26 returns under the earlier Act. Income Tax Department: 2025 Act as amended by Finance Act, 2026, sections 81 and 92(2)(h).
Prove that the money belongs to the earlier negotiations
Identify the same asset, proposed buyer, negotiation documents and receipt. Record whether the amount was retained, refunded or applied to a completed transaction. A customer deposit account may contain unrelated advances and refundable balances. Prepare a receipt-by-receipt schedule rather than reducing the cost of every asset by the total deposits ledger. Income Tax Department: 2025 Act as amended by Finance Act, 2026, sections 81 and 92(2)(h).
Apply the express exception
Section 81(b) prevents deduction from cost where the advance or other money has been included in total income for a tax year under section 92(2)(h), or under section 56(2)(ix) of the 1961 Act. Obtain the prior return computation and relevant assessment evidence. An entry in book income alone does not establish the specified tax inclusion. Conversely, do not reduce basis again merely because a taxable forfeiture occurred under the earlier enactment. Income Tax Department: 2025 Act as amended by Finance Act, 2026, sections 81 and 92(2)(h).
Keep the forfeiture test separate
Section 92(2)(h) concerns money received during capital-asset transfer negotiations where the money is forfeited and the negotiations do not result in transfer. It is not a rule that every deposit becomes taxable on receipt. A receipt, a legally supported forfeiture and the failure of negotiations are distinct facts. Where prior treatment appears wrong, resolve the appropriate tax position and any supported correction route; do not manufacture a basis reduction as a substitute for that analysis. Income Tax Department: 2025 Act as amended by Finance Act, 2026, sections 81 and 92(2)(h).
Construct an asset-level basis bridge
Our recommended working starts with the otherwise applicable basis, lists qualifying retained amounts, excludes amounts protected by the specified prior inclusion, and shows the net section 81 reduction. Keep returned money and unrelated receipts in separate columns. The illustrations assume the stated basis and tax history are legally established. They exclude indexation, rate selection, exemptions and other capital-gains adjustments. Income Tax Department: 2025 Act as amended by Finance Act, 2026, sections 81 and 92(2)(h).
Review across the legislative transition
A historical receipt can remain relevant even though the eventual transfer falls under the 2025 Act. The explicit reference to the 1961 Act is therefore operationally important. Retain the old computation with the new-year asset working. Where the history cannot be established, flag the missing evidence rather than silently assuming either that all advances were taxed or that none were. Income Tax Department: 2025 Act as amended by Finance Act, 2026, sections 81 and 92(2)(h).
Applicable primary references
Income Tax Department: 2025 Act as amended by Finance Act, 2026, sections 81 and 92(2)(h)
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Retained amount requiring reduction
Assume an otherwise applicable basis of ₹100 lakh and an earlier retained negotiation advance of ₹8 lakh that falls within section 81(a), with no clause (b) protection. Adjusted basis is 100 − 8 = ₹92 lakh.
Illustrative example 2: Specified prior inclusion
Keep the ₹100 lakh basis and ₹8 lakh advance, but assume the full advance was included in total income under section 56(2)(ix) in an earlier year. The section 81 reduction is zero; basis remains ₹100 lakh, avoiding a second ₹8 lakh burden through reduced cost.
Illustrative example 3: Mixed receipt history
Basis is ₹150 lakh. Two qualifying retained advances are ₹12 lakh and ₹5 lakh. The ₹12 lakh amount has the specified prior-tax inclusion; the ₹5 lakh amount does not and is assumed reducible. Total retained money is ₹17 lakh, but the reduction is ₹5 lakh and adjusted basis ₹145 lakh.
Illustrative example 4: Refunded deposit
Basis is ₹80 lakh. A negotiation deposit of ₹10 lakh was received and then fully refunded. With no other retained money assumed, section 81 produces no reduction on those facts: basis remains ₹80 lakh. The receipt ledger must show both the ₹10 lakh inflow and outflow.
Illustrative example 5: Two assets kept separate
Asset A has basis ₹90 lakh and a qualifying unprotected retained advance of ₹6 lakh; its adjusted basis is ₹84 lakh. Asset B has basis ₹60 lakh and no related retained advance; it stays at ₹60 lakh. Combined basis is ₹144 lakh, with no arbitrary allocation of A's receipt to B.
Illustrative example 6: Protected current-law forfeiture
A company forfeits ₹7 lakh in failed capital-asset negotiations, with all section 92(2)(h) conditions assumed satisfied and the amount included in total income. On a later covered sale with otherwise applicable basis ₹120 lakh, section 81(b) prevents a ₹7 lakh basis reduction. The protected basis stays ₹120 lakh; this illustration does not compute tax on the forfeiture.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify asset and year | Record capital-asset classification and the applicable enactment. |
| 2 | Establish the starting basis | Retain the supported cost, WDV or fair-market-value working. |
| 3 | List earlier negotiations | Link the proposed transfers to the same asset. |
| 4 | Trace each receipt | Match agreement, payer, date and bank evidence. |
| 5 | Separate refunds | Retain payment proof and exclude money not retained on the modelled facts. |
| 6 | Review forfeiture facts | Distinguish receipt, retention, forfeiture and failed transfer negotiations. |
| 7 | Check specified tax inclusion | Obtain computations and relevant filed or assessed evidence. |
| 8 | Classify protected amounts | Identify the exact receipt protected by section 81(b). |
| 9 | Calculate the net reduction | Reduce only the supported unprotected amount without counting it twice. |
| 10 | Approve the basis bridge | Tie the asset history to the eventual separate gains computation. |
Sixteen practitioner FAQs
1. Does this guide concern the earlier FY 2025–26 return?
No. It concerns a tax-year 2026–27 basis working under the 2025 Act.
2. Is every deposit a cost reduction?
No. Identify its connection to the asset and the statutory conditions.
3. What is the key exception?
Specified inclusion in total income under section 92(2)(h) or old section 56(2)(ix).
4. Does book income prove that exception?
Not alone; retain the tax computation and supporting return or assessment evidence.
5. Can old-law inclusion still matter?
Yes. Section 81 expressly refers to the specified 1961 Act provision.
6. Should refunded receipts stay in the retained-money total?
No. Show the refund trail separately.
7. Does receipt alone establish taxable forfeiture?
No. Review the forfeiture and failed-negotiation facts.
8. Should different assets share one advance pool?
Keep the receipt tied to the actual asset rather than allocating it arbitrarily.
9. What if part of a receipt has different treatment?
Document the supported split and analyse each component without guessing.
10. Can an unsupported earlier tax treatment simply be ignored?
Resolve it and the appropriate supported correction analysis before signing.
11. Are tax rates calculated here?
No. The illustrations isolate basis adjustments.
12. Do the examples establish an exemption?
No. Any exemption requires its own applicable-law analysis.
13. Is an accounting write-off the same as legal forfeiture?
Do not equate them without supporting facts and terms.
14. What record survives the law transition best?
An asset-specific receipt and tax-history schedule with the old computation attached.
15. Can the same unprotected amount reduce basis twice?
No. Maintain a cumulative adjustment control.
16. What should the final reviewer reproduce?
Starting basis, each retained receipt, specified prior inclusion and the resulting net adjustment.
Conclusion
Before reducing acquisition cost for an earlier retained advance, reconcile the negotiations and prior tax treatment. Section 81 protects specified advances already included in total income.