# What is the cost of acquisition for property purchased before 2001?

Let's understand the calculation of cost of acquisition for computation of capital gains

Computation of capital gains is pretty straightforward. You simply deduct the cost of the asset and any expenses in connection with the sale from the asset's sale value. The sale value and expenses are easily available.

But, the same can not be said for the cost of the asset. It may have been acquired decades ago.

So how do you ascertain the cost of acquisition?

In the case of any property, the calculation of cost of acquisition is dependent on when it was acquired.

If the property was acquired on or after April 1, 2001
In this case, the cost of acquisition shall be your actual cost of acquisition, i.e., whatever you paid to acquire the asset. The amount you claim as cost should be supported by relevant documents such as the sale deed which contains the entire history of ownership of the property. In case it is a long-term capital asset, i.e., if you have held it for more than two years, then you are eligible for the benefit of indexation.

If the property was acquired before April 1, 2001
In such a case, the cost of acquisition shall be higher of the fair market value as on April 1, 2001 and your actual cost of acquisition.

Let's understand with an example
Suppose you purchase a property in 1990 for Rs 5 lakh and wish to sell it today. The fair market value of the property as on April 1, 2001 is Rs 8 lakh. Now, your cost of acquisition will be Rs 8 lakh since it's the higher of the two values that are to be compared. If the fair market value as on April 1, 2001 was only Rs 4 lakh, then your cost of acquisition would have been Rs 5 lakh.

Once the cost of acquisition has been determined, the indexation benefit will be applied from the year of acquisition or FY 01-02 (if acquisition is prior to April 1, 2001) till the year of sale using the cost inflation index (CII) chart.

In the above example, where the cost of acquisition was ascertained as Rs 8 lakh, the calculation for indexed cost of acquisition would be as follows:

Indexed cost of acquisition = Cost of acquisition x (CII of year of sale (FY 22-23) / CII of year of acquisition (FY 01-02))
= Rs 8 lakh x (331/100) = Rs 26,48,000

You may read this story to know how we arrived at the CII numbers.

Cost of acquisition in case of ancestral or inherited property
The case of ancestral/inherited property is of much interest to most people because they may not know when exactly it was acquired and for how much. How do you ascertain the cost of acquisition in such cases? A provision has been made for such a scenario.

Now if you have inherited the property, the cost of acquisition for you is zero. Hence for the purpose of computation of capital gains, the cost of acquisition would be the cost at which the previous owner acquired the property. If the previous owner also inherited the property, then you can go as far back until someone has acquired the property by actually paying for it. The adjoining provision makes this task easier.

Also, remember that in case of any property acquired prior to April 1, 2001, the actual cost is compared with fair market value as on April 1, 2001 and you can choose the higher of the two values. If you are unable to ascertain the actual cost then you can opt for the fair market value as on April 1, 2001 as your cost of acquisition.

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