How income tax law determines your asset's true value

In an era of growing tax transparency, a fundamental issue often remains overlooked: many taxpayers are still uncertain about how to correctly determine the value of the assets they own.

Assets such as land, houses, flats, buildings, and shares are more than figures on a form; they represent significant financial footprints and often lifelong investments. Yet, when it comes to declaring their value for tax purposes, uncertainty is widespread.

For years, the core question for taxpayers has been: "What is my asset truly worth in the eyes of the law, and how much value should be shown in my return?" Relying on assumptions, hearsay, or partial advice often leads to reporting incorrect acquisition values.

These errors, though seemingly minor, can result in serious tax, financial, and legal consequences during audits or investigations, including penalties or additional liabilities.

Filing an income tax return is not just a legal obligation; it is a civic responsibility. However, accurately declaring asset values—whether for immovable property or financial investments—continues to confuse taxpayers.

This confusion was recently highlighted when a colleague sought my advice. He had inherited land and flats from his father and was preparing to file his first tax return.

He was specifically perplexed about which value to use for these inherited assets: the current market value, a zero value, or his father's original purchase price. Since this was his initial declaration of ownership, the process felt complicated.

I assured him that the matter is straightforward, as the income tax law provides clear instructions for valuing inherited property.

The good news is that the solution already exists. Section 58 of the Income Tax Act 2023 provides a clear and practical method for determining both acquisition value and capital income. Understanding it ensures proper compliance and protects taxpayers from avoidable risks.

How to calculate acquisition value of purchased and gifted or inherited assets

The acquisition value of commonly purchased assets, such as land, buildings, or shares, is determined by adding three components: the original purchase price, all transfer-related expenses (including registration fees, stamp duty, deed preparation costs, and legal fees), and any development expenses incurred on the asset, such as land filling, construction, or other improvements.

For instance, if you purchase a house for Tk 50 lakh, spend Tk 3 lakh on registration and related fees, and Tk 2 lakh on development work, your total acquisition value becomes Tk 55 lakh.

However, if a person receives an asset through a gift, will, inheritance, family distribution, or trust, the acquisition value is determined differently. In such cases, the acquisition price is the fair market value or purchase price on the date when the transferor (the person who gave the asset) first became the owner of that asset.

This means that even if you did not buy the asset yourself, its market value on the date the original owner acquired it will be treated as your acquisition price.

For example, if you inherit land from your father, and he purchased the property in 2005 when its market value was Tk 10 lakh, then your acquisition value will be considered Tk 10 lakh.

How is capital income calculated on sale or transfer of an asset?

The capital income on sale or transfer of assets is determined based on the difference between the selling price and the acquisition price.

In this case, the selling price is considered to be the higher of the actual selling price and the fair market value of the asset at the date of transfer. That is, capital income is calculated as: Sales or transfer price minus acquisition price.

However, in the case of property transfer, the amount of tax collected at source under Section 125 shall be treated as the final tax payable under Section 163 (11) (5) for a normal individual taxpayer.

For example, if a piece of land is sold for Tk 40 lakh, but the fair market value of the land on the date of transfer is Tk 50 lakh, then the sale price will be Tk 50 lakh. Again, if a flat is sold for Tk 80 lakh, even though its market price is only Tk 70 lakh, then the actual sale price will be Tk 80 lakh, because in this case also the higher of the two prices will be considered.

Why accurate valuation matters and what taxpayers should do

Transparency in the tax system is important not only for the state, but also for the personal safety of the taxpayer. Incorrect asset valuation can lead to audit questions, penalties, and, in many cases, an unexpectedly large tax burden.

The mistakes that many taxpayers make unknowingly or due to wrong advice can actually be easily avoided with a little awareness before filing the return.

Therefore, it is essential for taxpayers to have a minimum understanding of Section 58 of the Income Tax Act 2023, to properly assess the actual earning value of their assets, and to seek professional tax advice if necessary.

Showing the correct value of assets not only makes the tax system transparent and effective, but also protects taxpayers from unnecessary risks, complications, and financial losses. It is therefore important to know and follow the law.