I paid tax on my ESOP perquisite when I exercised. Now I have sold the shares. What is my cost of acquisition, and from what date does my holding period run?
This is stage two. When you sell, the capital gain is the sale consideration MINUS the fair market value that was already taxed as your perquisite at stage one: s.49(2AA) fixes the cost of acquisition of a specified security or sweat equity share as "the fair market value which has been taken into account" for the purposes of s.17(2)(vi). The amount you actually paid for the shares is NOT your cost — the statute deliberately links the cost to the value already charged to salary, so that the same appreciation is not taxed twice. For the holding period, s.2(42A) Explanation 1(i)(hb) says it is reckoned from the DATE OF ALLOTMENT OR TRANSFER of the specified security or sweat equity shares, not from the date of grant and not from the date of vesting.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text), reported as Section 49(2AA) and section 2(42A) Explanation 1(i)(hb) of the Income-tax Act, 1961, as amended up to 2025; s.49(2AA) reproduced in ITA proceedings before the ITAT Mumbai in Rajesh R. Hemrajani v. ITO, 31 July 2026. It bears on section 49(2AA), section 49(2AB), section 2(42A), section 17(2)(vi), section 48, section 45, section 115WC(1)(ba) of the Income Tax Act 1961, in Capital Gains, Salary & Perquisites and How Tax Law Is Read matters.
This is the provision that stops the same rise in value being taxed once as salary and again as capital gain, and it is the provision an Assessing Officer overlooks when he treats the exercise price as the cost. The arithmetic matters at both ends: if the perquisite was computed on a fair market value of Rs 194.15 a share, that same Rs 194.15 is the cost at stage two, whatever the employee actually paid. Two further points repay attention. First, s.49(2AA) is keyed to the value "taken into account" for s.17(2)(vi), so if the perquisite was mis-valued at stage one the cost at stage two moves with it — which is one reason to fight the valuation at stage one rather than at stage two. Second, s.49(2AB) is a different provision for a different era: it fixes the cost by reference to the fringe benefit valuation under s.115WC(1)(ba), which is the machinery that applied while employee share benefits were charged to fringe benefit tax on the employer rather than as a perquisite on the employee. Do not read the two sub-sections as alternatives available at choice. On the holding period, Explanation 1(i)(hb) is an express rule and it displaces the intuition that the clock starts when the option was granted: a long gap between grant and exercise buys the employee nothing.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Section 49(2AA) reads: "Where the capital gain arises from the transfer of specified security or sweat equity shares referred to in sub-clause (vi) of clause (2) of section 17, the cost of acquisition of such security or shares shall be the fair market value which has been taken into account for the purposes of the said sub-clause." The immediately following sub-section, s.49(2AB), reads: "Where the capital gain arises from the transfer of specified security or sweat equity shares, the cost of acquisition of such security or shares shall be the fair market value which has been taken into account while computing the value of fringe benefits under clause (ba) of sub-section (1) of section 115WC." Sub-clause (hb) of Explanation 1(i) to s.2(42A) reads: "in the case of a capital asset, being any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees), the period shall be reckoned from the date of allotment or transfer of such specified security or sweat equity shares;" It sits between sub-clause (ha), which deals with equity shares allotted on the demutualisation or corporatisation of a recognised stock exchange, and sub-clause (hc), which deals with units of a business trust allotted on a transfer referred to in s.47(xvii).
Not a judgment. The statutory position is that on the sale of a specified security or sweat equity share the cost of acquisition is the fair market value already taken into account in charging the perquisite under s.17(2)(vi), and that the period of holding of such a security or share is reckoned from the date of its allotment or transfer to the employee.
Not a judgment; no judicial reasoning is stated for these provisions.
in the case of a capital asset, being any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees), the period shall be reckoned from the date of allotment or transfer of such specified security or sweat equity shares;
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Handle my notice → Ask a CA on WhatsAppThis is stage two. When you sell, the capital gain is the sale consideration MINUS the fair market value that was already taxed as your perquisite at stage one: s.49(2AA) fixes the cost of acquisition of a specified security or sweat equity share as "the fair market value which has been taken into account" for the purposes of s.17(2)(vi). The amount you actually paid for the shares is NOT your cost — the statute deliberately links the cost to the value already charged to salary, so that the same appreciation is not taxed twice. For the holding period, s.2(42A) Explanation 1(i)(hb) says it is reckoned from the DATE OF ALLOTMENT OR TRANSFER of the specified security or sweat equity shares, not from the date of grant and not from the date of vesting. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 49(2AA), section 49(2AB), section 2(42A), section 17(2)(vi), section 48, section 45, section 115WC(1)(ba) of the Income Tax Act 1961. It is reported as Section 49(2AA) and section 2(42A) Explanation 1(i)(hb) of the Income-tax Act, 1961, as amended up to 2025; s.49(2AA) reproduced in ITA proceedings before the ITAT Mumbai in Rajesh R. Hemrajani v. ITO, 31 July 2026. This is the provision that stops the same rise in value being taxed once as salary and again as capital gain, and it is the provision an Assessing Officer overlooks when he treats the exercise price as the cost. The arithmetic matters at both ends: if the perquisite was computed on a fair market value of Rs 194.15 a share, that same Rs 194.15 is the cost at stage two, whatever the employee actually paid. Two further points repay attention. First, s.49(2AA) is keyed to the value "taken into account" for s.17(2)(vi), so if the perquisite was mis-valued at stage one the cost at stage two moves with it — which is one reason to fight the valuation at stage one rather than at stage two. Second, s.49(2AB) is a different provision for a different era: it fixes the cost by reference to the fringe benefit valuation under s.115WC(1)(ba), which is the machinery that applied while employee share benefits were charged to fringe benefit tax on the employer rather than as a perquisite on the employee. Do not read the two sub-sections as alternatives available at choice. On the holding period, Explanation 1(i)(hb) is an express rule and it displaces the intuition that the clock starts when the option was granted: a long gap between grant and exercise buys the employee nothing. If it applies to you, the first step is this: Take your cost of acquisition from Form 12BA or the employer's perquisite working, not from your bank statement. The number you want is the fair market value used for the perquisite, per share.
Section 49(2AA) reads: "Where the capital gain arises from the transfer of specified security or sweat equity shares referred to in sub-clause (vi) of clause (2) of section 17, the cost of acquisition of such security or shares shall be the fair market value which has been taken into account for the purposes of the said sub-clause." The immediately following sub-section, s.49(2AB), reads: "Where the capital gain arises from the transfer of specified security or sweat equity shares, the cost of acquisition of such security or shares shall be the fair market value which has been taken into account while computing the value of fringe benefits under clause (ba) of sub-section (1) of section 115WC." Sub-clause (hb) of Explanation 1(i) to s.2(42A) reads: "in the case of a capital asset, being any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees), the period shall be reckoned from the date of allotment or transfer of such specified security or sweat equity shares;" It sits between sub-clause (ha), which deals with equity shares allotted on the demutualisation or corporatisation of a recognised stock exchange, and sub-clause (hc), which deals with units of a business trust allotted on a transfer referred to in s.47(xvii). It was decided by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Not a judgment. The statutory position is that on the sale of a specified security or sweat equity share the cost of acquisition is the fair market value already taken into account in charging the perquisite under s.17(2)(vi), and that the period of holding of such a security or share is reckoned from the date of its allotment or transfer to the employee.
Not a judgment; no judicial reasoning is stated for these provisions. In the words reproduced by the source cited on this page: "in the case of a capital asset, being any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees), the period shall be reckoned from the date of allotment or transfer of such specified security or sweat equity shares;"
It was decided by the CBDT Circulars & Instructions and is reported as Section 49(2AA) and section 2(42A) Explanation 1(i)(hb) of the Income-tax Act, 1961, as amended up to 2025; s.49(2AA) reproduced in ITA proceedings before the ITAT Mumbai in Rajesh R. Hemrajani v. ITO, 31 July 2026. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 49(2AA), section 49(2AB), section 2(42A), section 17(2)(vi), section 48, section 45, section 115WC(1)(ba), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Not a judgment. The statutory position is that on the sale of a specified security or sweat equity share the cost of acquisition is the fair market value already taken into account in charging the perquisite under s.17(2)(vi), and that the period of holding of such a security or share is reckoned from the date of its allotment or transfer to the employee. It arises in Capital Gains, Salary & Perquisites and How Tax Law Is Read matters, on section 49(2AA), section 49(2AB), section 2(42A), section 17(2)(vi), section 48, section 45, section 115WC(1)(ba) of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Reconcile the two stages before you file: perquisite at stage one equals fair market value less amount paid; capital gain at stage two equals sale price less that same fair market value. If the two numbers do not use the identical fair market value, one of them is wrong. Compute the holding period from the date the shares were ALLOTTED or transferred to you, which is generally the date on the share certificate or the demat credit, not the grant date and not the vesting date. Where the perquisite was taxed in an earlier year and the Assessing Officer at stage two proposes the exercise price as the cost, plead s.49(2AA) in terms and produce the earlier year's Form 16 and Form 12BA as proof of what was "taken into account". Check the character of the gain separately — s.2(42A) fixes only the running of the period, not the rate, and the rate provisions for listed and unlisted shares differ. If your shares were allotted during the fringe benefit tax period, check whether s.49(2AB) rather than s.49(2AA) governs your cost before you compute anything.
Still good law. Both provisions were read in published texts that named the Income-tax Act, 1961 and printed the correct section headings, and s.49(2AA) was reproduced and applied by the ITAT Mumbai in an order of 31 July 2026. No amending instrument or commencement date could be sourced for either provision, so none is stated. No check of later judicial treatment was carried out beyond the corroborating order named. Three qualifications follow. Because no commencement could be established, this entry says nothing about the position for a year before the provisions took their present form, and an allotment made long ago may have to be worked under a different rule; the year of allotment, not the year of sale, is what settles that. Because the only judicial material used is a single Tribunal order, nothing here shows how the provisions have been applied elsewhere — in particular where the security was allotted by a foreign parent, where the perquisite was charged in another country, or where the employee moved between employers between allotment and sale. Each of those raises a question the words do not answer. And the corroborating order carries a visible scanning error in the text it reproduces, which is a reminder that a reproduction inside a judgment is not a substitute for the statute. Anyone quoting s.49(2AA) or Explanation 1(i)(hb) in a proceeding should take the words from the Act as it stands for the year in hand. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Section 49(2AA) was transcribed as a continuous run with its neighbours (2AB) and (2AC) from the current published text, so that no words could be printed under the wrong label, and it was read again in the reproduction inside the ITAT Mumbai order in Rajesh R. Hemrajani v. ITO of 31 July 2026, which prints an obvious scanning error, "seat equity shares" for "sweat equity shares". That order is already in this library and is used here only as a corroborating text, not as a new entry. The holding-period rule is not in sub-clause (d) of Explanation 1(i) to s.2(42A), which deals with a financial asset subscribed on the basis of a right to subscribe. It is in sub-clause (hb), and it was transcribed as a continuous run of sub-clauses (h), (ha), (hb), (hc) and (hd) from a published text of section 2 and read again in a second reproduction of that section. The most recent published text of section 2 could not be used for this, because it was not available as far as clause (42A). No amendment footnote for s.49(2AA) or for Explanation 1(i)(hb) was found, so no commencement date and no amending Act is stated for either. Three things a reader should carry. The two provisions work as a pair and the pairing is the point: s.49(2AA) makes the cost of acquisition the value on which the perquisite was charged under s.17(2)(vi), and Explanation 1(i)(hb) makes the holding period run from the date of allotment or transfer of the security. Take one without the other and the computation under s.48 comes out wrong in one of two directions. The cost rule depends on the perquisite having been charged. Where it was not — because the employer did not treat it as a perquisite, or because the charge was made on a different figure — the sub-section gives no cost, and the assessee has to establish what was actually brought to tax. The employer's records, not the employee's belief, decide it. And the charge on the gain is the ordinary charge under s.45 on the transfer of the security; there is no special rate and no special exemption. Anything said about fringe benefit tax, including the old s.115WC(1)(ba) valuation, belongs to a period that has closed and does not bear on a current computation except through s.49(2AB) where that sub-section applies on its own terms. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Not a judgment. The statutory position is that on the sale of a specified security or sweat equity share the cost of acquisition is the fair market value already taken into account in charging the perquisite under s.17(2)(vi), and that the period of holding of such a security or share is reckoned from the date of its allotment or transfer to the employee.
TaxSphere, “Statutory position — s.49(2AA) and s.2(42A) Explanation 1(i)(hb): stage two of the employee share charge, the cost of acquisition on sale and the holding period that runs from allotment”, https://taxnotice.vittsphere.com/caselaw/case/statutory-position-49-2aa-and-2-42a-hb-esop-cost-of-acquisition-and-holding-period/ (validity last checked 2026-09-09)
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