Taxation · Capital Gains

Computation of Capital Gains and Cost of Acquisition

Updated 4 October 2026 · Fact-checked

Capital gain is full value of consideration minus expenses on transfer minus cost of acquisition and cost of improvement. Decide short-term or long-term first. For gifted or inherited assets, use the previous owner's cost and holding period. Bonus shares allotted after 1 April 2001 cost nil. Apply indexation only where the law still allows it.

Understand Computation of Capital Gains and Cost of Acquisition

A capital gain arises when you transfer a capital asset for more than it cost you. The gain is taxed in the tax year in which the transfer takes place. The computation has a fixed shape: start with what you got, subtract the cost of transferring, then subtract what the asset cost you.

Full value of consideration is the amount received or receivable for the transfer. Where the consideration for land or building is less than the stamp duty value, the stamp duty value is taken as the full value of consideration, subject to the 10% tolerance limit. That is, if the stamp duty value is not more than 110% of the consideration, the actual consideration is used. Check the question for this.

Cost of acquisition is what you paid. Cost of improvement is capital expenditure that adds to the asset, such as adding a floor. Repairs are not improvements. Expenses wholly and exclusively for the transfer, such as brokerage and legal fees, are deducted from the consideration. Securities transaction tax is not deductible.

Some assets have special costs. If you got the asset by gift, will or inheritance, the cost is the previous owner's cost, and the previous owner's holding period is added to yours. For an asset acquired before 1 April 2001, you may take its fair market value on that date as cost. Bonus shares allotted after 1 April 2001 have nil cost. Rights shares cost what you paid for them.

Indexation raises cost using the Cost Inflation Index (CII) to remove the effect of inflation. For transfers on or after 23 July 2024, indexation is generally gone. A resident individual or HUF who transferred land or building acquired before 23 July 2024 may choose between 12.5% without indexation and 20% with indexation. Read the question to see which regime it expects. The CII figures are always given in the paper.

Depreciable assets are different. They sit in a block of assets, and a gain arises only when the block is wiped out or sale proceeds exceed the block value. That gain is always short-term. If the block ceases to exist and its WDV exceeds the proceeds, the difference is a short-term capital loss.

Key rules to remember

Basic capital gain: Capital gain = Full value of consideration − Expenses on transfer − Cost of acquisition − Cost of improvement; For long-term assets where indexation is allowed, use indexed cost and indexed improvement cost instead.
Indexed cost of acquisition: Indexed cost = Cost of acquisition × CII of year of transfer ÷ CII of year of acquisition (or of 2001-02 if acquired earlier and the 1 April 2001 option applies); Use only where indexation is permitted, for example land or building acquired before 23 July 2024 by a resident individual or HUF who opts for 20% with indexation.
Indexed cost of improvement: Indexed improvement = Cost of improvement × CII of year of transfer ÷ CII of year in which the improvement was made; Use the improvement year's CII, not the acquisition year's. Improvements made before 1 April 2001 are ignored.
Gifted, inherited or will asset: Cost = Cost to previous owner (plus previous owner's improvement cost); Holding period = previous owner's period + your period; Applies to gift, will, succession, inheritance and certain transfers not treated as a transfer. The cost is the previous owner's cost however he acquired the asset, worked out under the normal rules, including the 1 April 2001 FMV option. The cost of acquiring the asset by gift itself is not counted.
Asset acquired before 1 April 2001: Cost = Actual cost or FMV on 1 April 2001, at your option; For land or building the FMV chosen cannot exceed the stamp duty value on that date, if one exists.
Bonus shares: Allotted after 1 April 2001: cost = nil, holding period from date of allotment; If allotted before 1 April 2001, cost is the FMV on 1 April 2001.
Rights shares and renunciation: Rights shares: cost = price paid; holding from date of allotment. Renounced rights entitlement: cost = nil; The amount received for renouncing is a short-term capital gain.
Block of depreciable assets: Short-term gain = Sale proceeds − Expenses on transfer − (Opening WDV of block + additions in the year), when this is positive. If the block ceases to exist and (Opening WDV + additions) exceeds net proceeds, the difference is a short-term capital loss.; If the block continues and proceeds are lower than the block value, there is no capital gain or loss. The block is simply reduced for depreciation.

How to solve Computation of Capital Gains and Cost of Acquisition questions

Use the same sequence for any capital gains question. It protects step marks even if you slip on a figure.

1Identify the asset, the date of acquisition and the date of transfer. Check whether it is a capital asset and whether a transfer has actually happened.
2Fix the holding period, adding the previous owner's period for gift, will or inheritance, and from allotment for bonus and rights shares. Classify the gain as short-term or long-term.
3Find the full value of consideration. Check for stamp duty value in land or building, and for non-cash consideration.
4Deduct expenses wholly and exclusively for the transfer, such as brokerage and legal fees. Do not deduct STT, repairs or general costs.
5Determine the cost of acquisition using the special rules if the asset was gifted, inherited, acquired before 1 April 2001, or is bonus or rights shares. Add the cost of improvement.
6For a long-term gain where indexation is allowed, compute the indexed cost and indexed improvement using the CII given. Otherwise use the plain cost.
7Compute the gain, apply any exemption or the rate (for example the ₹1,25,000 limit on listed equity gains), and state the final taxable amount. Write each line as a labelled step.

Quickest way: Exam-time capital gains drill

When to use it: Use this for both MCQs and the 70-mark written paper. Most marks are lost in the classification and cost, not in arithmetic.

For MCQs, first ask: is it gifted, inherited, bonus or pre-2001? These have fixed cost rules, and often the answer is a simple nil or previous owner's cost.
Eliminate options that deduct STT, repairs or interest on a loan from the gain. They are traps.
In a depreciable asset question, check whether the block still exists. If it does and proceeds are less than block value, the answer is nil gain. If the block has ceased to exist and WDV exceeds proceeds, it is a short-term capital loss.
For indexation, write the ratio first (transfer CII ÷ acquisition CII) and simplify before multiplying. Use round CII numbers to check your answer.
In the written answer, use a three-column format: particulars, workings, amount. Show full value, expenses, net consideration, cost, improvement and gain on separate lines.
Give a one-line reason for the holding period and the cost rule you used, such as 'cost of previous owner applies as the asset was acquired by gift'. This earns the marks for the provision.

Common mistakes in Computation of Capital Gains and Cost of Acquisition

Taking the market value on the gift date as the cost of a gifted asset.
Students mix up the gift being taxed as income with the later capital gain.
Fix: For capital gains on sale, the cost is the previous owner's cost. The holding period also includes the previous owner's. Keep the two ideas separate.
Indexing the improvement cost with the acquisition year's CII.
Students treat the asset as one block of cost.
Fix: Index each improvement using the CII of the year in which that improvement was made.
Deducting securities transaction tax or repair costs from the sale price.
Both sound like expenses of the sale.
Fix: Only expenses wholly and exclusively for the transfer are deductible. STT and repairs are not.
Giving bonus shares a cost equal to their market value.
Students assume every share must have some cost.
Fix: Bonus shares allotted after 1 April 2001 have nil cost. Their holding period starts on the date of allotment.
Showing a gain when only some assets of a block are sold.
Students compute the gain asset by asset, as for other capital assets.
Fix: Depreciable assets are pooled in a block. No gain arises unless the block ceases to exist or proceeds exceed the block value. Any gain is short-term. If the block ceases to exist and WDV exceeds proceeds, the difference is a short-term capital loss.
Applying indexation to every long-term gain.
Older study material taught indexation for all long-term assets.
Fix: For transfers on or after 23 July 2024, apply indexation only where the law and the question allow it, such as the option for land or building acquired earlier by a resident individual or HUF.

Worked examples

Example 1

Anil, a resident individual, bought a plot of land in April 2015 for ₹12,00,000 and built a boundary and drainage works in a later year for ₹2,80,000. He sold it in tax year 2026-27 for ₹60,00,000 and paid brokerage of ₹1,00,000. Assume the CII is 240 for the year of purchase, 280 for the year of improvement and 380 for the year of transfer (assumed figures). Compute the long-term capital gain and the tax saved by choosing the better option, ignoring surcharge and cess.

Show the solution

Holding period is more than 24 months, so the gain is long-term. The land was acquired before 23 July 2024, so Anil may choose between 12.5% without indexation and 20% with indexation.
Net consideration = ₹60,00,000 − ₹1,00,000 = ₹59,00,000.
Option A (20% with indexation): Indexed cost = ₹12,00,000 × 380 ÷ 240 = ₹19,00,000.
Indexed improvement = ₹2,80,000 × 380 ÷ 280 = ₹3,80,000.
LTCG = ₹59,00,000 − ₹19,00,000 − ₹3,80,000 = ₹36,20,000. Tax at 20% = ₹7,24,000.
Option B (12.5% without indexation): Cost plus improvement = ₹12,00,000 + ₹2,80,000 = ₹14,80,000.
LTCG = ₹59,00,000 − ₹14,80,000 = ₹44,20,000. Tax at 12.5% = ₹5,52,500.
Option B gives lower tax by ₹7,24,000 − ₹5,52,500 = ₹1,71,500.

Answer: Option A gives LTCG of ₹36,20,000 and tax of ₹7,24,000. Option B gives LTCG of ₹44,20,000 and tax of ₹5,52,500. Anil should choose Option B, saving ₹1,71,500 (before surcharge and cess).

Example 2

Meera received 1,000 listed equity shares as a gift from her father in October 2022. Her father had bought them in 2019 at ₹300 per share. Meera sold all the shares in December 2026 at ₹900 per share and paid brokerage of ₹5,000. Securities transaction tax was paid on the sale. Compute her capital gain and the tax on it at the special rate, ignoring surcharge and cess. Assume she has no other long-term gains in the year.

Show the solution

Holding period includes the father's period. Father bought in 2019, so total holding is more than 12 months. The gain is long-term.
Full value of consideration = 1,000 × ₹900 = ₹9,00,000.
Less brokerage ₹5,000. Net consideration = ₹8,95,000.
Cost of acquisition is the previous owner's cost = 1,000 × ₹300 = ₹3,00,000.
Long-term capital gain = ₹8,95,000 − ₹3,00,000 = ₹5,95,000.
Listed equity LTCG with STT paid is taxed at 12.5% on the gain above ₹1,25,000.
Taxable amount = ₹5,95,000 − ₹1,25,000 = ₹4,70,000.
Tax = 12.5% × ₹4,70,000 = ₹58,750.

Answer: Long-term capital gain is ₹5,95,000. Tax at 12.5% on ₹4,70,000 is ₹58,750 (before surcharge and cess).

Exam tips

Always state the holding period and the classification (short-term or long-term) as your first line. Examiners give a mark for it.
Copy the CII values from the question into a small table before starting. It prevents using the wrong year's index.
For gifted, inherited and bonus share questions, name the rule in words, such as 'cost of previous owner'. This earns the provision mark even if the arithmetic goes wrong.
In MCQs, watch for pre-2001 acquisition and block of assets. These are favourite traps with a single clean answer.
When both the 12.5% and 20% options are available, compute both and compare if time allows. A one-line comparison shows full understanding.

Practice questions from Capital Gains

Computation of Capital Gains and Cost of Acquisition in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Computation of Capital Gains and Cost of Acquisition: frequently asked questions

What is the cost of acquisition of an inherited or gifted asset?

It is the cost to the previous owner, however he acquired the asset, worked out under the normal rules. This includes the 1 April 2001 FMV option if the previous owner acquired it earlier. Add any improvement cost the previous owner incurred. The previous owner's holding period is added to yours to decide whether the gain is short-term or long-term.

What is the cost of acquisition of bonus shares and rights shares?

Bonus shares allotted after 1 April 2001 have nil cost, and their holding period starts on the date of allotment. Rights shares cost the price you paid for them, with holding from the allotment date. The right to subscribe, if sold, has nil cost.

Is indexation still available for CA Intermediate problems?

For transfers on or after 23 July 2024, indexation is generally not available. A resident individual or HUF who transfers land or building acquired before 23 July 2024 can choose 20% with indexation or 12.5% without it. Follow the wording of the question.

How is capital gain computed on transfer of a depreciable asset?

Depreciable assets of the same class form a block. If sale proceeds exceed the opening WDV plus additions, the excess is a short-term capital gain. If the block ceases to exist and the WDV exceeds the proceeds, the difference is a short-term capital loss. If the block continues and proceeds are lower, there is no capital gain or loss, and depreciation is computed on the reduced block.