Actual Cost of an Asset for Depreciation Under Income Tax Act 2025 (Section 39 and 40)
The actual cost of an asset used in business or profession is the figure on which depreciation is worked out. Under section 39 of the Income-tax Act, 2025, you start with what the assessee actually paid and then reduce it for GST credit, subsidies and cost met by others, exclude cash payments above Rs 10,000 a day, and apply special rules for gifts, mergers, demergers and similar cases. Section 40 separately fixes the cost of acquisition of certain assets that are sold as stock-in-trade.
This guide walks through each step with the section number beside it. Every rule below comes from the Act as amended by the Finance Act, 2026, and the examples use tax year 2026-27. Last reviewed against that text on 10 November 2026.
Why does actual cost matter for depreciation?
Section 33 allows depreciation on specified assets used wholly and exclusively for business or profession. For a block of assets it is a prescribed percentage of the written down value (section 33(3)), and for power-generation undertakings a prescribed percentage of the actual cost to the assessee (section 33(2)). Either way, the actual cost computed under section 39 is where the figures start, so an error in it carries into every later year's depreciation. For the rates and the block of assets, see our guide on depreciation rates, block of assets and written down value.
How is actual cost computed under section 39?
What must be deducted from the cost? (section 39(1))
| Reduction | Clause |
|---|---|
| Part of the cost met by any other person or authority, directly or indirectly | 39(1)(a) |
| GST paid, where credit of input tax has been claimed and allowed | 39(1)(b) |
| Excise duty or additional customs duty, where credit has been claimed and allowed under the Central Excise Rules, 1944 | 39(1)(c) |
| Subsidy, grant or reimbursement, by whatever name called, relatable to the acquisition, received from the Central Government, a State Government, any authority established under law, or any other person | 39(1)(d) |
The practical point on GST: if input tax credit is claimed and allowed, the GST does not form part of the cost on which depreciation is claimed. If credit is not claimed or not allowed, section 39(1)(b) does not reduce the cost.
What if the subsidy is not tied to one asset? (section 39(3))
Where a subsidy, grant or reimbursement is not directly relatable to the asset acquired, the reduction is shared across assets. The Act defines A as the total subsidy not directly relatable to the asset, B as the cost of the asset being computed, and C as the cost of all the assets for which the subsidy was received. The reduction for one asset is its share of the subsidy in proportion to cost, that is A x B / C. (The formula itself is not printed in the text of the Act we worked from, so confirm it against the official gazette copy before relying on it.)
What is the Rs 10,000 cash rule? (section 39(2))
A payment, or aggregate of payments, exceeding Rs 10,000 in a day for acquiring an asset or part of it, made to a person otherwise than by a specified banking or online mode, is excluded from actual cost. The test is per day and per payee, and it excludes the whole of that day's payment, not only the amount above Rs 10,000.
Worked example 1: machine with GST credit, subsidy and a cash payment
Assumptions (tax year 2026-27): Ravi's firm buys a machine for production. Price Rs 10,00,000 plus 18% GST. GST credit is claimed and allowed. A State Government subsidy of Rs 1,50,000 is directly relatable to the machine. Rs 40,000 of the price was paid in cash to the supplier on one day.
| Step | Working | Rs |
|---|---|---|
| Price paid including GST | 10,00,000 + 1,80,000 | 11,80,000 |
| Less: GST credit claimed and allowed (39(1)(b)) | 18% of 10,00,000 | (1,80,000) |
| Less: cash payment above Rs 10,000 in a day (39(2)) | Whole day's cash payment | (40,000) |
| Less: subsidy directly relatable (39(1)(d)) | State Government | (1,50,000) |
| Actual cost for depreciation | 11,80,000 - 1,80,000 - 40,000 - 1,50,000 | 8,10,000 |
Worked example 2: one subsidy for two machines
Assumptions (tax year 2026-27): Meena's company receives a Rs 3,00,000 grant for setting up a unit and it is not tied to any single machine. It buys Machine X for Rs 8,00,000 and Machine Y for Rs 4,00,000, both for that unit. No GST credit, no cash payments. Here A = 3,00,000 and C = 12,00,000.
| Machine X | Machine Y | |
|---|---|---|
| Cost (B) | 8,00,000 | 4,00,000 |
| Share of grant: A x B / C | 3,00,000 x 8,00,000 / 12,00,000 = 2,00,000 | 3,00,000 x 4,00,000 / 12,00,000 = 1,00,000 |
| Actual cost | 6,00,000 | 3,00,000 |
The two reductions add up to the full Rs 3,00,000 grant, which is a useful check.
Which special cases change the actual cost? (section 39(4))
| Situation | Actual cost |
|---|---|
| Asset moves from an amalgamating company to an Indian amalgamated company (Sl. No. 1) | Same as if the amalgamating company had continued to hold it |
| Asset moves from a demerged company to an Indian resulting company (Sl. No. 2) | Same as if the demerged company had continued, but not more than the written down value in its hands |
| Inventory converted into a capital asset (Sl. No. 3) | Fair market value on the date of conversion, determined as prescribed |
| Asset received by gift or inheritance (Sl. No. 4) | Previous owner's actual cost, reduced by depreciation actually allowed (tax years up to the one starting 1 April 1986) and depreciation allowable from the tax year starting 1 April 1987 as if it were the only asset in its block |
| Building owned by the assessee is put to business use (Sl. No. 5) | Actual cost reduced by the depreciation that would have been allowable from acquisition, at the rate in force on the date it was put to business use |
| Transfer between holding and subsidiary company where section 70(1)(c) and (d) conditions are met (Sl. No. 6) | Same as if the transferor had continued to hold it |
| Asset used in business earlier, then reacquired (Sl. No. 7) | The lower of (a) the original actual cost reduced by depreciation as in Sl. No. 4, or (b) the price at which it is reacquired |
| Asset bought from the previous owner and leased or hired back to that owner (Sl. No. 8) | Written down value in the previous owner's hands at the time of transfer |
| Asset used in business after scientific research use, with a deduction under section 33(3) (Sl. No. 9) | Actual cost reduced by the deduction allowed under section 45(1)(a)(i) of this Act or section 35(1)(iv) of the 1961 Act |
| Asset bought abroad as a non-resident, then brought to India and used in business (Sl. No. 10) | Actual cost reduced by the depreciation that would have been allowable had it been used in India since acquisition, at the rate in force |
| Asset acquired under a SEBI-approved corporatisation of a recognised stock exchange (Sl. No. 11) | Actual cost as if there was no corporatisation |
| Asset on which a deduction under section 46 was allowed or allowable to the assessee, or to a person from whom the assessee got it by a special mode of acquisition (Sl. No. 12) | (a) Nil; (b) where that deduction becomes deemed income under section 46(9)(b), actual cost reduced by depreciation that would have been allowable since acquisition, at the rate in force |
| Interest paid or payable in connection with acquisition (Sl. No. 13) | Excludes the part relatable to any period after the asset is first put to use |
Worked example 3: interest on a loan taken to buy an asset
Assumptions (tax year 2026-27): Ravi buys a machine for Rs 20,00,000 on a bank loan. Interest on the loan up to the date the machine is first put to use is Rs 60,000. Interest for the period after that is Rs 20,000. Sl. No. 13 excludes only the part relatable to the period after first use, so the Rs 20,000 stays out. Taking the pre-use interest of Rs 60,000 as part of the cost, the actual cost is 20,00,000 + 60,000 = Rs 20,60,000. How the Rs 20,000 is treated otherwise depends on the rest of the Act.
Real-life examples
Gift from a parent. Ravi's father gives him a delivery van he has used in his own business. Ravi starts using it in his business. Under Sl. No. 4, Ravi does not take the market value as his cost. He takes his father's actual cost and reduces it by the depreciation allowed or allowable on it in the earlier years, treated as though it was the only asset in its block. The result is broadly comparable to a written down value, though the Table's own formula governs.
Self-occupied house turned into an office. Meena bought a small building for Rs 40,00,000 and lived in it. In 2026-27 she moves her consultancy there. Under Sl. No. 5, her actual cost is Rs 40,00,000 reduced by depreciation that would have been allowable had the building been used in her profession since the day she bought it, at the rate in force on the date she puts it to use. If that notional depreciation works out to, say, Rs 6,00,000 (an assumed figure), her actual cost for depreciation becomes Rs 34,00,000.
Cash purchase of a laptop. Suresh, a consultant, pays a dealer Rs 55,000 in cash on one day for an office laptop. The payment exceeds Rs 10,000 in a day and is not by a specified banking or online mode, so under section 39(2) the whole Rs 55,000 is excluded from actual cost. He would have no cost to claim depreciation on for that purchase.
Merger. An Indian company takes over another company's plant under a scheme of amalgamation. Under Sl. No. 1 the amalgamated company's actual cost is the same as it would have been had the amalgamating company continued to own the plant. The merger does not reset the cost to the price implied by the deal.
Can the Assessing Officer substitute a different cost? (section 39(5) and (6))
Yes, in one narrow case. If the asset was used by another person for his own business before the acquisition, and the Assessing Officer is satisfied that the main purpose of the transfer was to reduce tax by claiming depreciation on an enhanced actual cost, the Assessing Officer may determine the actual cost having regard to all the circumstances. This does not apply to Sl. No. 8 of the Table, and the determination needs the prior approval of the Joint Commissioner.
What are "special modes of acquisition"? (section 39(7))
The term is used in Sl. No. 12 of the Table. It covers acquisition (a) by gift, will or an irrevocable trust; (b) on distribution on the liquidation of a company; or (c) by transfers referred to in section 70(1)(a), (c), (d), (e), (j), (zd), (ze) and (zf).
What does section 40 say about cost of acquisition of stock-in-trade?
Section 40 applies when you compute income under the head "Profits and gains of business or profession" and an asset is sold as stock-in-trade after it became the property of:
- an amalgamated company under a scheme of amalgamation; or
- an assessee under a gift, will or irrevocable trust, or on total or partial partition of a Hindu undivided family.
The cost of acquisition is the sum of (i) the cost of acquisition in the hands of the amalgamating company, transferor or donor, (ii) any cost of improvement made, and (iii) any expenditure incurred by the amalgamating company, transferor or donor wholly and exclusively in connection with the transfer. The section does not apply to an asset referred to in section 67(6).
Worked example 4: plot received as a gift and sold as stock-in-trade
Assumptions (tax year 2026-27): Anil's father gifts him a plot, and Anil sells it as stock-in-trade of his real-estate business for Rs 60,00,000. His father had bought it for Rs 30,00,000, made improvements of Rs 4,00,000, and spent Rs 50,000 wholly and exclusively on the transfer.
| Item | Rs |
|---|---|
| Cost of acquisition in the donor's hands (40(1)(i)) | 30,00,000 |
| Cost of improvement (40(1)(ii)) | 4,00,000 |
| Expenditure on the transfer by the donor (40(1)(iii)) | 50,000 |
| Cost of acquisition | 34,50,000 |
| Sale price | 60,00,000 |
| Business profit on this item, before other expenses | 25,50,000 |
How does actual cost become written down value? (section 41)
Section 41(1) turns actual cost into the written down value (WDV) that depreciation is charged on. An asset acquired in the tax year has WDV equal to its actual cost. An asset acquired earlier has WDV equal to actual cost less depreciation actually allowed under this Act or the Income-tax Act, 1961. For a block of assets, WDV is [(A - D) + B - C] - E, where A is the block's WDV in the preceding tax year, D the depreciation actually allowed for that year, B the actual cost of assets added in the year, C the sale money plus scrap value of assets sold or discarded (not more than (A - D) + B), and E applies only to a slump sale.
Example (tax year 2026-27): Meena's block has A = 10,00,000 and D = 1,50,000. She adds a machine with actual cost B = 8,10,000 and sells an old one for C = 1,00,000. WDV = (10,00,000 - 1,50,000) + 8,10,000 - 1,00,000 = 15,60,000. Section 41(2) and (4) also let a holding, subsidiary, amalgamated or resulting company start from the transferor's WDV instead of section 39.
Quick reference: section 39 and 40 at a glance
| Point | Provision |
|---|---|
| Starting point: actual cost to the assessee, then reductions | Section 39(1) |
| Cash or non-banking payment limit | Rs 10,000 in a day, section 39(2) |
| Subsidy not tied to one asset | Pro rata by cost, section 39(3) |
| Special circumstances (13 cases) | Section 39(4) Table |
| Tax-avoidance transfer: AO may fix the cost | Section 39(5), with Joint Commissioner approval under 39(6) |
| Cost of stock-in-trade received by merger, gift, will, trust or partition | Section 40(1) |
Common mistakes
- Depreciating on the invoice total. Where GST credit has been claimed and allowed, the GST must come out of the cost.
- Forgetting subsidies and grants. A reimbursement or grant received later, or from a private person, still reduces cost if it relates to the acquisition.
- Ignoring the daily cash limit. Several cash payments to the same supplier on one day are added together. Once the total is above Rs 10,000, the whole amount is out.
- Using market value for gifted or inherited assets. The Table points to the previous owner's cost, reduced for depreciation, not the current value.
- Missing the section 40 route. Stock-in-trade received by gift or merger carries over the earlier owner's cost plus improvements and transfer expenses, not its value on the day it was received.
- Treating the pro-rata subsidy as optional. If a grant covers several assets, each asset must bear its share.
Where this is in the Act
- Section 39(1): reductions from actual cost; 39(2): Rs 10,000 cash rule; 39(3): subsidy not directly relatable; 39(4): Table of special circumstances; 39(5) and (6): Assessing Officer's power and approval; 39(7): special modes of acquisition.
- Section 40: cost of acquisition of certain assets sold as stock-in-trade.
- Section 41(1): written down value; 41(2) and (4): transferee's cost for transfers between group companies, mergers and demergers.
- Related: section 33 (depreciation), section 46, section 70 (transfers not regarded as transfer) and section 67(6).
If you keep fixed-asset records for clients, the hard part is capturing the facts that drive actual cost: whether GST credit was claimed, whether a subsidy came in, how each payment was made, and who owned the asset before. Finexo's practice management software helps a CA firm keep client documents and follow-ups in one place so that these facts are collected before the depreciation schedule is prepared. It does not compute actual cost for you.
This article is general information based on the text of the Act, not tax advice. Check the facts of each asset before applying any rule.
Frequently Asked Questions
What is actual cost under section 39 of the Income-tax Act, 2025?
It is the cost of an asset used for business or profession to the assessee, reduced by cost met by others, GST or excise credit claimed and allowed, and subsidies or grants relatable to the asset. It is the starting figure for depreciation under section 33.
Is cash payment for an asset allowed in actual cost?
Payments exceeding Rs 10,000 in a day to a person, made otherwise than by a specified banking or online mode, are excluded from actual cost under section 39(2). The whole of that day's payment is excluded, not only the excess.
Does GST form part of the actual cost of an asset?
Not where input tax credit has been claimed and allowed. Section 39(1)(b) deducts that GST from the cost. If credit is not claimed or allowed, the clause does not reduce the cost.
What is the actual cost of an asset received as a gift?
Under section 39(4), Sl. No. 4, it is the previous owner's actual cost, reduced by depreciation allowed or allowable on it, treated as if it was the only asset in its block.
How is written down value linked to actual cost?
Under section 41(1), an asset bought in the tax year has WDV equal to its actual cost. An older asset has actual cost less depreciation actually allowed. A block's WDV adds the year's additions and subtracts sale proceeds.
What does section 40 of the Income-tax Act, 2025 cover?
It fixes the cost of acquisition of an asset sold as stock-in-trade after it came to an amalgamated company, or to an assessee by gift, will, irrevocable trust or HUF partition. The cost is the earlier owner's cost, plus improvements, plus expenditure on the transfer.