Direct Tax Laws & International Taxation · Capital Gains

Special Cases: Cost, Period of Holding and Deemed Transfers in Capital Gains

Updated 5 October 2026

These are the rules for asset acquisitions that have no ordinary purchase price. For gifts, inheritance, amalgamation and demerger, you take the previous owner's cost and holding period. Bonus shares have nil cost and run from allotment. Conversion into stock-in-trade is taxed on sale. Slump sale gain is price minus net worth.

Understand Special Cases: Cost, Period of Holding and Deemed Transfers

Normal capital gain is simple: sale price minus cost, and a holding period counted from purchase. But many assets are not bought. They arrive by gift, will, bonus issue, rights issue, merger or demerger. For these, the law needs a substitute cost and a substitute start date for holding. That is all this topic is.

The main idea is continuity. When an asset passes without a real sale (gift, inheritance, partition of a HUF, certain transfers to a wholly owned Indian subsidiary, amalgamation), the law treats the new owner as stepping into the old owner's shoes. The new owner takes the previous owner's cost (plus improvements) and the previous owner's holding period. The tax is paid only when the new owner finally sells.

Some assets are new in the hands of the holder, so the clock restarts. Bonus shares cost nil and their holding starts on the date of allotment. Rights shares cost what you paid the company and also start on the allotment date. A rights entitlement that the original holder renounces in favour of another person has nil cost, so the whole amount received is a gain, and it is deemed short-term under the rule for renunciation of a right to subscribe.

Three situations are special deemed-transfer or timing rules. In conversion of a capital asset into stock-in-trade, no capital gain arises at conversion; it arises in the tax year the stock is sold, and the fair market value on conversion date is the deemed full value of consideration. The gain is short-term or long-term according to the holding period from acquisition to the date of conversion, and the rate that applies follows that classification. In a slump sale, an undertaking is sold for a lump sum without values for each asset, and the gain is the price minus net worth. In business reorganisations, a qualifying amalgamation or demerger into an Indian company is not a transfer, and shareholders get a carried-over cost and holding period.

In every question, ask two things first: what is the cost, and when does the holding period start? Then check whether a transfer has even happened in this tax year.

Key rules to remember

Gift, inheritance, will, HUF partition, qualifying group transfers: Cost = cost to previous owner + improvement costs (previous owner and you); holding period includes previous owner's period; If the previous owner acquired before 1 April 2001, you may adopt fair market value on that date as the cost. Cost of improvement incurred before that date is ignored.
Bonus shares: Cost = nil; holding period starts on date of allotment; Exception: bonus shares allotted before 1 April 2001 may take fair market value on that date as cost.
Rights shares (original allottee): Cost = amount paid to company; holding period starts on date of allotment; Holding of the original shares does not count.
Rights entitlement renounced in favour of another person: Cost = nil; gain = full amount received from the renouncee, deemed short-term under the rule for renunciation of a right to subscribe; This applies to the original holder when the entitlement is renounced in favour of another person. The renouncee's cost of shares = amount paid to company + amount paid to renouncer; holding from allotment date.
Conversion into stock-in-trade: Capital gain = FMV on conversion date − cost, taxed in the tax year the stock is sold. Business income = sale price − FMV on conversion; Holding period for the capital gain is counted from acquisition up to the date of conversion into stock-in-trade, not up to the date of sale of the stock. That holding period decides whether the capital gain is short-term or long-term, and the applicable rate follows that classification.
Slump sale: Capital gain = lump sum consideration − net worth of the undertaking; Net worth = total assets − liabilities. Depreciable assets are taken at written down value as per tax rules. Other assets are taken at book value, which excludes any revaluation. Revaluation of any asset is ignored. The gain is long-term if the undertaking was held for more than 36 months; otherwise it is short-term. No indexation.
Demerger: shareholder's cost: Cost of resulting company shares = cost of original shares × (net book value of assets transferred ÷ net worth of demerged company immediately before demerger); Cost of original shares is reduced by this amount. Holding period of resulting company shares includes holding of original shares.
Amalgamation: shareholder's cost: Cost of new shares = cost of shares in amalgamating company; holding period includes the old period; Applies when an Indian amalgamated company issues shares to shareholders of the amalgamating company and the conditions for a non-transfer are met.
Holding period thresholds: 12 months (long-term if held for more than 12 months): securities listed on a recognised stock exchange in India, units of equity-oriented funds, units of UTI, units of a business trust, and zero coupon bonds. 24 months: all other assets (unlisted shares, land, building, jewellery and so on). An undertaking in a slump sale needs more than 36 months; The period normally ends on the date of sale. Exception: for conversion into stock-in-trade, it ends on the date of conversion. Shares held in demat form are identified on first-in-first-out basis; others by specific identification.
Grandfathering for long-term listed equity: Cost = higher of (actual cost) and (lower of FMV on 31 January 2018 and sale price); Use only on a sale of a long-term capital asset that is an equity share, a unit of an equity-oriented fund or a unit of a business trust, acquired before 1 February 2018, where the Act's securities transaction tax conditions are met. Use it only when the question gives the 31 January 2018 value. It is not a general rule for every listed share.

How to solve Special Cases: Cost, Period of Holding and Deemed Transfers questions

Use this order for any question on special cost, holding period or deemed transfer. It keeps you from missing the marks given for stating the rule.

1Identify how the asset was acquired: purchase, gift, will, partition, bonus, rights, conversion, amalgamation, demerger or slump sale.
2Decide whether a transfer has happened in this tax year. Gift, inheritance, qualifying amalgamation and demerger do not trigger gain for the transferor or shareholder. Conversion triggers nothing until the stock is sold.
3Fix the cost: previous owner's cost for continuity cases, nil for bonus and for a rights entitlement renounced in favour of another person, price paid for rights shares, apportioned cost for demerger.
4Fix the start date of holding: previous owner's date for continuity cases, allotment date for bonus and rights, original date for amalgamation and demerger.
5Classify the gain as short-term or long-term using the right test: more than 12 months for securities listed on a recognised stock exchange in India, units of equity-oriented funds, units of UTI, units of a business trust and zero coupon bonds; more than 24 months for all other assets such as unlisted shares, land, building and jewellery; more than 36 months for an undertaking in a slump sale. The period ends on the date of sale, except for conversion into stock-in-trade, where it ends on the date of conversion.
6Compute the gain: full value of consideration less cost and transfer expenses. For slump sale use consideration less net worth. For conversion, capital gain = FMV on conversion date − cost (taxable in the tax year the stock is sold), and business income = sale price − FMV on conversion date.
7State the rule in one line before each computation, and show the working for cost and holding period separately.

Quickest way: Two-column check: cost and clock

When to use it: Use when a case scenario or MCQ lists several acquisitions (gift, bonus, rights) and asks for the gain or the nature of the gain.

Draw two columns for each lot of assets: Cost and Start date.
Fill them from the rule: gift and inheritance carry both from the previous owner; bonus is nil from allotment; rights is price paid from allotment.
Count months from start date to sale date and mark LT or ST.
Compute each lot's gain separately, then add. Never pool lots with different holding periods.
For slump sale, write only: consideration, total assets at tax WDV or book value, liabilities, net worth, gain.

Common mistakes in Special Cases: Cost, Period of Holding and Deemed Transfers

Counting the holding period of bonus shares from the date the original shares were bought.
Students treat bonus shares as a continuation of the original holding.
Fix: Bonus shares are new assets. Start the clock on the allotment date and take cost as nil.
Taxing capital gain in the year a capital asset is converted into stock-in-trade.
Conversion looks like a transfer, so students compute gain immediately.
Fix: The gain is taxed in the year the stock is sold. Use FMV on conversion date as the deemed consideration, and treat the excess of sale price over that FMV as business income. Count the holding period only up to the date of conversion.
Using fair market value or revalued figures to compute net worth in a slump sale.
Students value assets at market because the undertaking is sold at market.
Fix: Use written down value for depreciable assets and book value for the rest, with the book value of non-depreciable assets taken without any revaluation. Ignore any revaluation.
Allowing indexation or itemised asset-wise cost in slump sale.
Habit from ordinary capital gain computation.
Fix: Slump sale uses one lump sum price and one net worth figure. No indexation, and no separate allocation of price to assets.
Apportioning the cost of original shares in a demerger using market values.
Students assume market value is the fair basis.
Fix: Use the ratio of net book value of assets transferred to net worth of the demerged company immediately before demerger.
Giving the renounced rights entitlement a cost equal to the rights price.
Confusion between the entitlement and the shares.
Fix: When the original holder renounces the entitlement in favour of another person, the holder has nil cost for it, so the whole amount received is a short-term gain. The renouncee, not the original holder, includes the price paid.

Worked examples

Example 1

On 10 August 2023, Meera received 1,000 unlisted shares of a company as a gift from her father. He had bought them on 1 June 2020 at ₹150 each. On 5 March 2024 the company issued her bonus shares in the ratio 1:2 on those shares. On 20 September 2026, in tax year 2026-27, she sold all her shares at ₹400 each. Compute her capital gain and state its nature. Ignore transfer expenses.

Show the solution

Rule: for the gifted shares, cost and holding period come from the previous owner. Bonus shares have nil cost and holding starts on allotment.
Gifted shares: cost = 1,000 × ₹150 = ₹1,50,000. Holding runs from 1 June 2020 to 20 September 2026, more than 24 months, so long-term.
Gifted shares: consideration = 1,000 × ₹400 = ₹4,00,000. Gain = ₹4,00,000 − ₹1,50,000 = ₹2,50,000.
Bonus shares: 1,000 × 1/2 = 500 shares. Cost = nil. Holding from 5 March 2024 to 20 September 2026 is about 30 months, more than 24 months, so long-term.
Bonus shares: consideration = 500 × ₹400 = ₹2,00,000. Gain = ₹2,00,000 − nil = ₹2,00,000.
Total long-term capital gain = ₹2,50,000 + ₹2,00,000 = ₹4,50,000, chargeable in tax year 2026-27.

Answer: Long-term capital gain of ₹4,50,000 in tax year 2026-27 (₹2,50,000 on gifted shares and ₹2,00,000 on bonus shares).

Example 2

Alpha Ltd sold its textile undertaking, held for 5 years, to Beta Ltd for a lump sum of ₹3,00,00,000 without assigning values to individual assets. Details at the sale date: land (book value) ₹40,00,000; depreciable assets (written down value as per tax rules) ₹60,00,000; stock ₹50,00,000; debtors ₹30,00,000; trade creditors ₹40,00,000; bank loan ₹20,00,000. The books also show a revaluation of plant that raised its book value by ₹25,00,000. Compute the capital gain.

Show the solution

Rule: sale of an undertaking for a lump sum is a slump sale. Gain = consideration − net worth.
Ignore the revaluation of ₹25,00,000. Depreciable assets are taken at tax written down value.
Total assets = ₹40,00,000 + ₹60,00,000 + ₹50,00,000 + ₹30,00,000 = ₹1,80,00,000.
Liabilities = ₹40,00,000 + ₹20,00,000 = ₹60,00,000.
Net worth = ₹1,80,00,000 − ₹60,00,000 = ₹1,20,00,000.
Capital gain = ₹3,00,00,000 − ₹1,20,00,000 = ₹1,80,00,000.
The undertaking was held for 5 years, which is more than 36 months, so the gain is long-term. No indexation applies.

Answer: Long-term capital gain on slump sale = ₹1,80,00,000.

Exam tips

Write the rule in one line first. Examiners give marks for citing the correct treatment of cost and holding period before the arithmetic.
In case-scenario MCQs, check the dates carefully. The trap is usually the holding period start date for bonus, rights or a gift.
For slump sale, show the net worth table line by line. Marks are awarded for each component, and a wrong revaluation treatment loses easy marks.
For conversion questions, show two parts: capital gain in the year of sale of stock, and business income for the excess. Name the tax year of each.
For demerger and amalgamation, state the condition that the transfer is to an Indian company and the shareholder receives shares as consideration. Then give the cost and holding rule.

Practice questions from Capital Gains

Special Cases: Cost, Period of Holding and Deemed Transfers: frequently asked questions

What is the cost of acquisition of bonus shares?

The cost is nil, and the holding period starts on the date of allotment. The only exception is bonus shares allotted before 1 April 2001, where you may take fair market value on that date. So the whole sale price is gain, long-term or short-term depending on months from allotment.

When is capital gain taxed if a capital asset is converted into stock-in-trade?

It is taxed in the tax year in which the stock-in-trade is sold, not on the conversion date. The fair market value on conversion is the deemed full value of consideration for capital gain, so the capital gain is that value less cost. Whether it is short-term or long-term depends on the holding period from acquisition to the date of conversion, and the rate follows that classification. Any excess of the actual sale price over that value is business income.

How is capital gain computed in a slump sale?

Take the lump sum consideration and deduct the net worth of the undertaking. Net worth is total assets less liabilities, with depreciable assets at tax written down value and other assets at book value, ignoring revaluation. The gain is long-term only if the undertaking was held for more than 36 months.

Is a demerger or amalgamation a transfer for the shareholder?

Where the conditions are met and shares of an Indian resulting or amalgamated company are issued, it is not treated as a transfer of the shareholder's shares. The shareholder carries over cost and holding period. In a demerger the original cost is split in the ratio of net book value of assets transferred to net worth of the demerged company.