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Direct and Indirect Taxation · Capital Gains

How to Compute Capital Gains for CMA Inter

Updated 10 October 2026 · Fact-checked

Capital gains are computed under section 72 of the Income-tax Act, 2025. Start with the full value of consideration. Deduct expenditure wholly and exclusively on the transfer, then the cost of acquisition and cost of improvement. Indexation applies only where the law specifically provides it. The result is a short-term or long-term gain or loss.

Understand Computation of Capital Gains

Section 72(1) gives the core rule. Income under the head "Capital gains" is the full value of the consideration received or accruing from the transfer of a capital asset, less (a) expenditure incurred wholly and exclusively in connection with the transfer, and (b) the cost of acquisition of the asset and the cost of any improvement to it.

Think of it as a profit calculation on one asset. Sale price is what you got. Transfer expenses (brokerage, legal fees, stamp costs of the seller) reduce it. What you paid for the asset and what you spent to improve it also reduce it. What is left is the gain.

Whether the gain is short-term or long-term depends on how long the asset was held. That decides the rate and the exemptions available. Study that classification under Short-term and Long-term Capital Assets. This page covers the arithmetic.

Indexation adjusts cost for inflation. Under section 72(8), the indexed cost of acquisition is the cost multiplied by the Cost Inflation Index (CII) of the year of transfer, divided by the CII of the first year the asset was held by the assessee or the year beginning 1 April 2001, whichever is later. Indexed cost of improvement uses the CII of the year the improvement took place as the denominator. Section 72(2) applies this indexed version only for the purpose of item B of the formula in section 197(3). So do not index unless the question or the rate provision says so, and use the CII values given in the question.

Some amounts are not deductible. Section 72(3) bars interest claimed as a deduction under section 22(1)(b) or under Chapter VIII, and any securities transaction tax paid.

Key rules to remember

Capital gain (basic rule, section 72(1))
Capital gain = Full value of consideration − Expenditure on transfer − Cost of acquisition − Cost of improvement
Expenditure must be wholly and exclusively in connection with the transfer.
Indexed cost of acquisition (section 72(8)(b))
Indexed cost of acquisition = Cost of acquisition × CII of year of transfer ÷ CII of first year of holding (or 2001-02 if later)
Use the later of the first year of holding and the year beginning 1 April 2001 as the base year. Apply only where indexation is allowed.
Indexed cost of improvement (section 72(8)(c))
Indexed cost of improvement = Cost of improvement × CII of year of transfer ÷ CII of year of improvement
Index each improvement separately using its own year.
Non-deductible items (section 72(3))
Not allowed: interest claimed under section 22(1)(b) or Chapter VIII; securities transaction tax
Do not deduct these even if the question lists them.
Cost Inflation Index (section 72(8)(a))
CII is notified by the Central Government for each tax year
The exam gives the CII figures. Do not use remembered values.

How to solve Computation of Capital Gains questions

Use the same layout for every capital gains problem. It earns step marks and avoids missed deductions.

  1. 1Identify the asset and the date of acquisition and transfer. Decide short-term or long-term from the holding period.
  2. 2Write the full value of consideration. If the question gives a different value for the transfer, use what the question or the relevant provision directs.
  3. 3Deduct expenditure incurred wholly and exclusively in connection with the transfer, such as brokerage and legal charges. Leave out securities transaction tax and the interest items barred by section 72(3).
  4. 4Find the cost of acquisition. Add any cost of improvement. Ignore routine repairs, which are not improvements.
  5. 5Check whether indexation applies. If it does, compute indexed cost of acquisition and indexed cost of each improvement using the CII given.
  6. 6Compute the gain: net consideration less cost (or indexed cost) less improvement.
  7. 7Label the result as short-term or long-term capital gain (or loss) and state the next step, such as exemption or tax rate, if the question asks.
  8. 8 Show every working note separately, with the formula, so the examiner can award method marks.
  9. 9

Quickest way: Four-line capital gains layout

When to use it: Use it for any numerical question with limited time, especially when there are several improvements.

  1. Line 1: Sale consideration less transfer expenses gives net consideration.
  2. Line 2: Cost of acquisition, indexed only if allowed, as a ratio of CII values.
  3. Line 3: Each improvement with its own CII ratio.
  4. Line 4: Net consideration less lines 2 and 3 gives the gain. Write short-term or long-term beside it.

Common mistakes in Computation of Capital Gains

  • Deducting securities transaction tax as a transfer expense

    It looks like a cost connected with the sale.

    Fix: Section 72(3)(b) disallows it. Leave it out.

  • Indexing in every problem

    Students remember indexation as a standard step.

    Fix: Index only where the question or the provision applies it. Section 72(2) limits the indexed version to item B of the formula in section 197(3).

  • Using the wrong base year for CII

    Students always use 2001-02 or the year of purchase without checking.

    Fix: Use the later of the first year of holding and the year beginning 1 April 2001.

  • Treating repairs as cost of improvement

    Both are spending on the asset.

    Fix: Only expenditure that adds to or enhances the asset counts as improvement. Routine repairs do not.

  • Indexing all improvements with the purchase year's CII

    Students apply one ratio to the total cost.

    Fix: Each improvement uses the CII of the year it took place.

  • Deducting interest on a loan taken to buy the asset

    It feels like part of the cost.

    Fix: Interest claimed under section 22(1)(b) or Chapter VIII is not allowed under section 72(3)(a).

Worked examples

Example 1

Mr. Sharma sold a plot for ₹40,00,000. Brokerage on the sale was ₹40,000. He had bought it years ago for ₹10,00,000 and spent ₹2,00,000 on development, which counts as improvement. Assuming indexation applies, the CII figures given are: year of purchase 100, year of improvement 150, year of transfer 300. Compute the capital gain.

Show the solution
  1. Net consideration = ₹40,00,000 − ₹40,000 = ₹39,60,000.
  2. Indexed cost of acquisition = ₹10,00,000 × 300 ÷ 100 = ₹30,00,000.
  3. Indexed cost of improvement = ₹2,00,000 × 300 ÷ 150 = ₹4,00,000.
  4. Capital gain = ₹39,60,000 − ₹30,00,000 − ₹4,00,000 = ₹5,60,000.

Answer: Capital gain = ₹5,60,000 (long-term, given indexation applies as stated).

Example 2

Ms. Iyer sold a house for ₹75,00,000 and paid legal charges of ₹50,000 and securities-style tax-like levy of ₹10,000 that is securities transaction tax. She had bought the house for ₹30,00,000 and made an addition costing ₹5,00,000. No indexation is to be applied. Compute the gain.

Show the solution
  1. Securities transaction tax is not allowed under section 72(3)(b), so ignore ₹10,000.
  2. Net consideration = ₹75,00,000 − ₹50,000 = ₹74,50,000.
  3. Cost of acquisition = ₹30,00,000 and cost of improvement = ₹5,00,000, total ₹35,00,000.
  4. Gain = ₹74,50,000 − ₹35,00,000 = ₹39,50,000.

Answer: Capital gain = ₹39,50,000.

Exam tips

  • Always draw the layout with the heads: full value, expenses, cost, improvement. Marks go to each line.
  • Say which CII you use for each cost and show the ratio, even if the arithmetic slips.
  • Read whether the question allows indexation before you index.
  • For MCQs, check for a disallowed item such as securities transaction tax; options often include it as a trap.
  • State short-term or long-term at the end. It is often a mark.

Practice questions from Capital Gains

Computation of Capital Gains 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: frequently asked questions

What is the basic formula for computing capital gains?

Take the full value of consideration. Deduct expenditure wholly and exclusively on the transfer, the cost of acquisition and the cost of improvement. This is the rule in section 72(1) of the Income-tax Act, 2025.

Which year do I use as the base year for indexation?

Use the Cost Inflation Index of the first year the asset was held by the assessee or the year beginning 1 April 2001, whichever is later. Section 72(8)(b) states this.

Can I deduct securities transaction tax while computing capital gains?

No. Section 72(3)(b) says any sum paid as securities transaction tax is not allowed as a deduction. Interest claimed under section 22(1)(b) or Chapter VIII is also not allowed.

How is indexed cost of improvement worked out?

Multiply the cost of improvement by the CII of the year of transfer and divide by the CII of the year in which the improvement took place. This follows section 72(8)(c).