Computation of Capital Gains and Full Value of Consideration

Understand Computation of Capital Gains and Full Value of Consideration

Key rules to remember

Capital gain

Capital gain = FVC − transfer expenses − cost of acquisition − cost of improvement

Short-term gain when the asset is held for the short-term period or less; long-term otherwise. Deduct expenses of transfer only if wholly and exclusively connected with the transfer.

Stamp duty value rule (land or building)

If SDV ≤ 110% × actual consideration, FVC = actual consideration; if SDV > 110% × actual consideration, FVC = SDV

Applies when actual consideration is less than SDV. Do not apply the 110% limit to the whole SDV; once it is crossed, the full SDV is used, not just the excess.

Date of agreement rule

SDV is taken on the date of agreement if the date of agreement differs from the date of registration and the whole or part of the consideration was received on or before the agreement date by account payee cheque or draft, ECS through a bank account, or another prescribed electronic mode

Cash received on the agreement date does not qualify, and neither does a cheque or draft that is not account payee. Otherwise SDV on the date of transfer (registration) is used.

Unquoted shares and undeterminable FVC

If FVC of unquoted shares is less than FMV per the Rules, FVC = FMV; if FVC cannot be determined, FVC = FMV on the transfer date

FMV is computed under the prescribed Income-tax Rules. The question usually gives the FMV.

Indexed cost (only where indexation is allowed)

Indexed cost = Cost × CII of year of transfer ÷ CII of year of acquisition

Use for the same treatment of cost of improvement, with the CII of the year of improvement. Indexation is not available for most transfers now. Use it only where the question or law allows.

Pre-1 April 2001 assets

Cost of acquisition = actual cost or FMV on 1 April 2001, at the assessee's choice; improvements before that date are ignored

For land or building, the FMV chosen cannot exceed the SDV on 1 April 2001.

Period of holding for long term

Listed securities: more than 12 months. Other assets (including land, building, unlisted shares): more than 24 months

Unlisted bonds and debentures transferred on or after 23 July 2024, and market-linked debentures, are deemed short-term capital assets irrespective of the holding period. Confirm the period for the specific asset in the related topic on holding period.

How to solve Computation of Capital Gains and Full Value of Consideration questions

1. 1Identify the capital asset, the date of acquisition and the date of transfer. Decide whether the gain is short term or long term using the period of holding for that asset.
2. 2Fix the FVC. If the asset is land or building and the actual price is below SDV, test the 110% tolerance. Check the date of agreement rule if registration happened later. For unquoted shares, compare with FMV.
3. 3List transfer expenses. Include only brokerage, legal and similar costs of the transfer. Leave out STT and any cost not connected with the transfer.
4. 4Determine the cost of acquisition. Use the special-cost rules if the asset came by gift, inheritance or was acquired before the cut-off date (for example, before 1 April 2001 or grandfathering of listed equity).
5. 5Determine the cost of improvement. Take only capital expenditure on improvement after acquisition. Ignore repairs, and improvements made before 1 April 2001.
6. 6Apply indexation only if the question and law allow it. Compute indexed cost of acquisition and indexed cost of improvement separately with the correct CII.
7. 7Subtract: FVC − expenses − cost of acquisition − cost of improvement. Label the result as short-term or long-term capital gain.
8. 8State what comes next: exemptions, set-off and rate of tax, as the question requires, and conclude with the final gain figure.

Quickest way: Four-line capital gains check

Common mistakes in Computation of Capital Gains and Full Value of Consideration

• Taking SDV as FVC whenever it is higher than the actual price.

  Students remember that SDV overrides the price but forget the 10% tolerance.

  Fix: Compute SDV ÷ actual price. If it is 110% or less, use the actual price. If it is more, use the whole SDV.

• Using SDV on the registration date when an advance was paid earlier by cheque.

  Students overlook the date of agreement rule.

  Fix: Check whether the agreement date differs from the registration date and whether any part was received on or before the agreement date by account payee cheque or draft, ECS through a bank account, or another prescribed electronic mode. If yes, use SDV on the agreement date.

• Deducting repairs or routine maintenance as cost of improvement.

  The word improvement is read loosely.

  Fix: Allow only capital expenditure that adds to or enhances the asset. Repairs and maintenance are not part of cost of improvement.

• Applying indexation to every long-term gain.

  Older study notes treat indexation as standard.

  Fix: Index only where the law allows it for the transfer in the question, such as the specific option for resident individuals and HUFs on land or building acquired before 23 July 2024. Otherwise use unindexed cost.

• Deducting STT or the cost of the sale deed stamp duty paid by the buyer as transfer expense.

  Any cost around a sale is assumed to be deductible.

  Fix: Deduct only expenses wholly and exclusively incurred in connection with the transfer by the transferor. STT is not deductible.

• Ignoring improvements made before 1 April 2001 or treating them as deductible.

  Students add all improvement costs without checking dates.

  Fix: When the asset was acquired before 1 April 2001 and the FMV option is used, ignore improvements made before that date.

Worked examples