Full value of consideration
The amount received or receivable for transferring a capital asset — usually the actual sale price, but replaced by fair market value in specific situations the Act names, such as unquoted shares sold below value.
In plain language
Every capital gains computation starts with one figure: what did the transfer actually bring in? The Act calls this the full value of consideration, and, oddly, it never defines the phrase.
The workbook explains it has to be read in its ordinary commercial sense: the consideration received or receivable by the owner in exchange for the asset. It can be paid in cash or in kind — and if it is in kind, the fair market value of what was received stands in for a cash figure.
How it works
That is the general rule. The Act then lists specific situations where full value of consideration is not simply the price actually agreed, and substitutes a different figure instead:
- Converting a capital asset into stock-in-trade — the fair market value on the date of conversion.
- Transferring ESOP securities as a gift, or into an irrevocable trust — the market value of the securities on the date of transfer.
- A non-resident redeeming rupee-denominated bonds — the appreciation of the rupee against the foreign currency between issue and redemption is excluded from the consideration.
- Unquoted shares transferred for less than fair market value — the fair market value on the date of transfer substitutes for the actual price.
- Consideration that cannot be ascertained at all — the fair market value of the asset on the date of transfer.
In every one of these cases, the actual cash that changed hands, if any, is set aside and a valuation figure takes its place instead.
A worked example
Illustrative figures. Mr Iqbal holds unquoted shares of a private company with a fair market value of Rs 8,00,000 and sells them to a friend for just Rs 5,00,000, well below their real worth.
Because unquoted shares transferred for less than fair market value are one of the Act's named special cases, his full value of consideration for computing capital gains is not the Rs 5,00,000 he actually received — it is the Rs 8,00,000 fair market value. His capital gains computation starts from Rs 8,00,000, whatever cost of acquisition applies, even though only Rs 5,00,000 actually reached his bank account.
Compare Ms Thomas, who separately converts a plot of land she held as an investment into stock-in-trade for a real-estate venture she is starting. No sale takes place at all, yet the fair market value of the land on the date of conversion is treated as her full value of consideration for that year's capital gains computation, even though she has not received a single rupee.
Why NISM asks about it
Chapter 8 (Capital Gains), section 8.5, opens the entire computation of capital gains with "full value of consideration" as the first of four components, and Table 8.3 lists the five special-case substitutions. Expect a question that gives a transfer scenario matching one of the five special cases and asks what figure to use as the full value of consideration, rather than the cash price actually mentioned in the facts.
Common exam traps
- The Act does not define "full value of consideration" at all — it is read in its ordinary commercial sense, a fact examiners like to test directly.
- Consideration received in kind is valued at fair market value, not ignored or assumed to be nil.
- The five special-case substitutions override the actual price agreed between the parties — a candidate who uses the contract price for unquoted shares sold below fair market value will understate the gain.
- This is the consideration side of the computation; cost of acquisition is a separate figure with its own, different table of special cases — do not merge the two tables in revision.
Check yourself
1.What is the cost of acquisition when share warrants are converted into shares, and when they are transferred to another person?
- a)The upfront payment in both cases
- b)The strike price on conversion, and the upfront payment on transfer
- c)The upfront payment on conversion, and the strike price on transfer
- d)The fair market value of the shares in both cases
Show the answer
Answer: (b) The strike price on conversion, and the upfront payment on transfer
On conversion, the gain is the excess of the full value of consideration over the STRIKE PRICE of the share warrant, the consideration being the fair market value of the shares on the date of conversion under section 50D. On transfer, the gain is the excess of the full value of consideration over the UPFRONT PAYMENT or price paid, the consideration being the sum received from the buyer. The difference reflects what the holder has actually paid in each case.
Where this is taught
Free preparation for NISM Series X-BRelated terms
- Capital asset (Section 2(14))Section 2(14)'s wide definition of what can generate a capital gain — property of any kind held by an assessee — narrowed by exclusions for stock-in-trade, personal effects and rural agricultural land.
- Cost of acquisitionWhat an assessee is treated as having paid for a capital asset — usually the price actually paid, but overridden by special rules for bonus shares, ESOPs, gifts and inherited assets.
- ExchangeMutually swapping one asset for another, neither side being money — one of the modes of transfer under Section 2(47), and therefore ordinarily a taxable capital-gains event.
- Indexed cost of acquisitionCost of acquisition scaled up by the Cost Inflation Index, so that only the real gain is taxed; withdrawn for transfers on or after 23 July 2024 except for land or building acquired before that date.
- Share warrantAn option issued by a company to subscribe to its equity shares at a pre-determined price — and, in tax terms, a capital asset whose conversion, transfer or forfeiture each has its own treatment.