Tax on goodwill
This query is : Resolved
04 August 2024
Hello, how is goodwill taxed while selling a business and how can I save tax on that
04 August 2024
Treat it as short term capital gains.
04 August 2024
Is there a way to classify it as long term capital gains, and can someone please suggest ways to save tax on goodwill
13 August 2025
Taxation on the sale of goodwill can be tricky, but with the right understanding of capital gains provisions under the Income Tax Act, 1961, you can legally optimize your tax liability. Let’s go step by step:
🧾 What is “Goodwill” in a Sale of Business?
Goodwill is considered a capital asset under Section 2(14) of the Income Tax Act.
When you sell a business, part of the consideration is often allocated to goodwill, especially if it's a going concern (i.e., you're selling an operational business).
🔍 Is Tax on Sale of Goodwill Short-term or Long-term?
This depends on how the goodwill was acquired:
✅ Case 1: Purchased Goodwill
If you bought the goodwill (e.g., when you acquired another business earlier), and you now sell it:
Holding period > 24 months → Long-Term Capital Gains (LTCG)
Holding period ≤ 24 months → Short-Term Capital Gains (STCG)
❌ Case 2: Self-generated Goodwill
If you developed the goodwill yourself (e.g., in your own business), then:
No cost of acquisition as per Supreme Court ruling (before 2021)
But post-FY 2020-21, goodwill of a business or profession is no longer eligible for depreciation
You can still treat it as a capital asset, and compute capital gains, but only if there’s a determined cost of acquisition (like valuation or purchase)
Important: If cost cannot be determined, then capital gains may not be computable, and could lead to disputes.
🧾 Tax Rate Applicable
Type Taxable as Rate
Purchased goodwill held > 24 months LTCG 20% with indexation
Purchased goodwill ≤ 24 months STCG Slab rate
Self-generated goodwill (if cost determinable) Usually STCG Slab rate
Slump sale (entire business as going concern) Capital gain under Section 50B Special treatment
💡 Tax Saving Options on Sale of Goodwill
Here are legitimate ways to save tax on goodwill sale:
1. Opt for Slump Sale (Section 50B)
If you're selling the entire business as a going concern:
Consider treating it as a slump sale
The entire business (including goodwill) is sold for a lump sum
Gains are long-term if business held >3 years
You compute capital gains using net worth (not FMV of goodwill separately)
Better control over tax, avoids haggling on goodwill valuation
2. Claim Exemption under Sections 54EC, 54F, 54GB
Section 54EC: Invest capital gains in NHAI/REC bonds within 6 months (up to ₹50 lakh)
Section 54F: If you’re an individual/HUF and invest net sale consideration in a residential house
Section 54GB: Invest in startup equity shares and satisfy conditions
3. Use Indexation Benefit (for LTCG)
If you can show it’s a purchased goodwill and you’ve held it >24 months → claim indexed cost of acquisition to reduce taxable capital gains
4. Split Consideration Carefully
During sale negotiation, allocate sale consideration between goodwill, tangible assets, and non-compete fees smartly
Overvaluing goodwill may increase capital gain unnecessarily
Non-compete fees, for example, are taxed as business income, not capital gains — may or may not help based on your slab
✅ Action Plan
Establish nature of goodwill – self-generated or purchased
Check holding period
Explore slump sale route if selling entire business
Claim indexation if possible
Use exemptions (54EC, 54F, 54GB) wisely
Keep all valuation and legal documents — scrutiny on goodwill transactions is common
⚠️ Caution
Goodwill-related tax positions are often scrutinized by tax officers due to:
Valuation disputes
Ambiguity in cost of acquisition
Recent changes in depreciation rules (post-Finance Act 2021)
🧾 What is “Goodwill” in a Sale of Business?
Goodwill is considered a capital asset under Section 2(14) of the Income Tax Act.
When you sell a business, part of the consideration is often allocated to goodwill, especially if it's a going concern (i.e., you're selling an operational business).
🔍 Is Tax on Sale of Goodwill Short-term or Long-term?
This depends on how the goodwill was acquired:
✅ Case 1: Purchased Goodwill
If you bought the goodwill (e.g., when you acquired another business earlier), and you now sell it:
Holding period > 24 months → Long-Term Capital Gains (LTCG)
Holding period ≤ 24 months → Short-Term Capital Gains (STCG)
❌ Case 2: Self-generated Goodwill
If you developed the goodwill yourself (e.g., in your own business), then:
No cost of acquisition as per Supreme Court ruling (before 2021)
But post-FY 2020-21, goodwill of a business or profession is no longer eligible for depreciation
You can still treat it as a capital asset, and compute capital gains, but only if there’s a determined cost of acquisition (like valuation or purchase)
Important: If cost cannot be determined, then capital gains may not be computable, and could lead to disputes.
🧾 Tax Rate Applicable
Type Taxable as Rate
Purchased goodwill held > 24 months LTCG 20% with indexation
Purchased goodwill ≤ 24 months STCG Slab rate
Self-generated goodwill (if cost determinable) Usually STCG Slab rate
Slump sale (entire business as going concern) Capital gain under Section 50B Special treatment
💡 Tax Saving Options on Sale of Goodwill
Here are legitimate ways to save tax on goodwill sale:
1. Opt for Slump Sale (Section 50B)
If you're selling the entire business as a going concern:
Consider treating it as a slump sale
The entire business (including goodwill) is sold for a lump sum
Gains are long-term if business held >3 years
You compute capital gains using net worth (not FMV of goodwill separately)
Better control over tax, avoids haggling on goodwill valuation
2. Claim Exemption under Sections 54EC, 54F, 54GB
Section 54EC: Invest capital gains in NHAI/REC bonds within 6 months (up to ₹50 lakh)
Section 54F: If you’re an individual/HUF and invest net sale consideration in a residential house
Section 54GB: Invest in startup equity shares and satisfy conditions
3. Use Indexation Benefit (for LTCG)
If you can show it’s a purchased goodwill and you’ve held it >24 months → claim indexed cost of acquisition to reduce taxable capital gains
4. Split Consideration Carefully
During sale negotiation, allocate sale consideration between goodwill, tangible assets, and non-compete fees smartly
Overvaluing goodwill may increase capital gain unnecessarily
Non-compete fees, for example, are taxed as business income, not capital gains — may or may not help based on your slab
✅ Action Plan
Establish nature of goodwill – self-generated or purchased
Check holding period
Explore slump sale route if selling entire business
Claim indexation if possible
Use exemptions (54EC, 54F, 54GB) wisely
Keep all valuation and legal documents — scrutiny on goodwill transactions is common
⚠️ Caution
Goodwill-related tax positions are often scrutinized by tax officers due to:
Valuation disputes
Ambiguity in cost of acquisition
Recent changes in depreciation rules (post-Finance Act 2021)
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