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Tax Laws and Practice · Capital Gains

Computation of Capital Gains: Step-by-Step Method

Updated 11 October 2026

Capital gains are computed under section 72 of the Income-tax Act, 2025. Take the full value of consideration, deduct transfer expenses, then deduct the cost of acquisition and cost of improvement. The result is short-term or long-term gain depending on the holding period. Indexation now applies only in the special land or building case under section 197(3).

Understand Computation of Capital Gains

A capital gain is the profit you make when you transfer a capital asset. You do not tax the sale price. You tax the gain, which is the sale price less what it cost you to get and sell the asset.

Section 72(1) gives the base rule. From the full value of the consideration received or accruing from the transfer, you deduct two things: (a) expenditure incurred wholly and exclusively in connection with the transfer, such as brokerage; and (b) the cost of acquisition of the asset and the cost of any improvement to it.

Some items are never deductible. Under section 72(3), interest claimed as a deduction under section 22(1)(b) or under Chapter VIII is not allowed. Securities transaction tax paid is also not allowed.

The gain is then classed as short-term or long-term, based on how long you held the asset. This matters because long-term gains are taxed under section 197 at 12.5%, and the rate for short-term gains differs by asset type. Holding periods are covered in the topic on short-term and long-term capital assets.

Indexation raises the cost to adjust for inflation. Under the 2025 Act, the general long-term rate is 12.5% without indexation. Indexation survives only as a comparison: for a resident individual or HUF transferring land or building acquired before 23 July 2024, the excess tax over the 20% indexed computation is ignored (section 197(3)).

Key rules to remember

Basic computation (section 72(1))
Capital gain = Full value of consideration − Transfer expenses − Cost of acquisition − Cost of improvement
Transfer expenses must be incurred wholly and exclusively in connection with the transfer.
Indexed cost of acquisition (section 72(8)(b))
Cost of acquisition × CII of year of transfer ÷ CII of first year of holding (or year beginning 1 April 2001, whichever is later)
Used only for the comparison in section 197(3), for land or building acquired before 23 July 2024.
Indexed cost of improvement (section 72(8)(c))
Cost of improvement × CII of year of transfer ÷ CII of year of improvement
Each improvement is indexed from the year it was made.
Tax on long-term capital gains (section 197(1))
Tax = Tax on (total income − LTCG) + 12.5% × LTCG
Subject to sub-sections (2), (3) and (4) of section 197.
Basic exemption shortfall (section 197(2))
Taxable LTCG = LTCG − (Basic exemption limit − other income), if other income is below the limit
Only for resident individuals and HUFs.
Land or building relief (section 197(3))
E = A − B, where A = 12.5% tax on gain without indexation and B = 20% tax on gain with indexed costs
Resident individual or HUF; land or building acquired before 23 July 2024. E is the excess tax ignored.
Slump sale (section 77(3) and (5))
Net worth = Aggregate value of total assets − Liabilities. Net worth is deemed to be the cost of acquisition and the cost of improvement. Fair market value of the capital assets on the date of transfer is deemed to be the full value of consideration.
In the aggregate value of total assets: depreciable assets are taken at the written down value of the block under section 41(1)(c); goodwill not acquired by purchase from a previous owner is nil; assets whose entire expenditure is allowed or allowable under section 46 are nil; other assets are at book value. Revaluation is ignored. An accountant's report is required under section 77(4).
Depreciable block (section 74(2))
Short-term gain = Sale value − (Transfer expenses + Opening WDV of block + Actual cost of assets acquired in the year), only if the sale value exceeds this total
Applies when the block continues to exist. The excess of the sale value over the total of the three items is deemed short-term capital gain; if there is no excess, there is no gain under this rule.

How to solve Computation of Capital Gains questions

Use this order for any computation question. It keeps your answer in ICSI style: provision, working, conclusion.

  1. 1Identify the asset and check it is a capital asset that has been transferred in the tax year.
  2. 2Check for special cases first: slump sale (section 77), depreciable block (section 74), foreign exchange asset of an NRI (section 215), or non-resident shares (section 72(6)).
  3. 3Fix the holding period and classify the gain as short-term or long-term. For a slump sale, 36 months or less makes it short-term under section 77(2).
  4. 4Write the full value of consideration, and deduct expenses incurred wholly and exclusively on the transfer.
  5. 5Deduct the cost of acquisition and cost of improvement. Never deduct interest barred by section 72(3) or securities transaction tax.
  6. 6For long-term land or building bought before 23 July 2024 by a resident individual or HUF, compute tax both ways and ignore the excess under section 197(3).
  7. 7Apply section 197 (12.5% on LTCG), check the basic exemption shortfall under section 197(2), then state the conclusion clearly.

Quickest way: Three-line capital gain method

When to use it: Use it for straightforward sale of a single asset when time is short.

  1. Line 1: Sale price minus transfer expenses equals net consideration.
  2. Line 2: Total cost equals acquisition cost plus improvements.
  3. Line 3: Net consideration minus total cost equals gain. Label it STCG or LTCG and apply the rate. If it is pre-23 July 2024 land or building, run the 20% indexed comparison.

Common mistakes in Computation of Capital Gains

  • Deducting securities transaction tax or home loan interest while computing the gain.

    Students treat them as expenses of transfer.

    Fix: Remember section 72(3): these amounts are not allowed as a deduction.

  • Applying indexation to every long-term asset.

    Older material taught indexation as the general rule.

    Fix: Under section 197(1) the general LTCG rate is 12.5% without indexation. Indexation appears only in the section 197(3) comparison.

  • Using the wrong base year in the index ratio.

    Students forget the 1 April 2001 rule.

    Fix: Use the first year of holding or the year beginning 1 April 2001, whichever is later, for cost of acquisition.

  • Adding revaluation gains to net worth in a slump sale.

    Students use the revalued book figures.

    Fix: Section 77(5)(a) says revaluation changes are ignored. Use the written down value of the block (section 41(1)(c)) for depreciable assets. Take goodwill not acquired by purchase from a previous owner at nil. Also take at nil any asset whose entire cost is allowed or allowable under section 46.

  • Ignoring the basic exemption shortfall for resident individuals.

    Students apply 12.5% to the whole gain.

    Fix: Under section 197(2), reduce the LTCG by the shortfall of other income below the exemption limit, then tax the balance.

Worked examples

Example 1

Ramesh, a resident individual, sold a plot of land in Pune in the current tax year for ₹90,00,000. He paid brokerage of ₹1,00,000. He bought the plot on 1 April 2020 for ₹40,00,000. The plot is a long-term capital asset (holding periods are covered in the topic on short-term and long-term capital assets). Assume he has other income above the basic exemption limit, ignore cess, and assume for this question a Cost Inflation Index of 300 for the year of acquisition and 375 for the year of transfer. Compute his long-term capital gain and the tax payable, applying section 197(3).

Show the solution
  1. The question states that the plot is a long-term capital asset, so the gain is a long-term capital gain.
  2. Full value of consideration = ₹90,00,000.
  3. Less expenditure on transfer (brokerage) = ₹1,00,000. Net consideration = ₹89,00,000.
  4. Less cost of acquisition = ₹40,00,000.
  5. Long-term capital gain without indexation = ₹89,00,000 − ₹40,00,000 = ₹49,00,000.
  6. A = tax under section 197(1)(b) at 12.5% = ₹49,00,000 × 12.5% = ₹6,12,500.
  7. The plot was acquired on 1 April 2020, before 23 July 2024, and Ramesh is a resident individual, so section 197(3) applies. Compute B.
  8. Indexed cost of acquisition = ₹40,00,000 × 375 ÷ 300 = ₹50,00,000.
  9. Gain with indexation = ₹89,00,000 − ₹50,00,000 = ₹39,00,000.
  10. B = tax at 20% on this gain = ₹39,00,000 × 20% = ₹7,80,000.
  11. E = A − B = ₹6,12,500 − ₹7,80,000, which is negative. There is no excess tax to ignore, so E is nil.
  12. Tax payable = A − E = ₹6,12,500.

Answer: The long-term capital gain without indexation is ₹49,00,000 and the tax at 12.5% is ₹6,12,500. On the assumed CII values, the 20% indexed computation gives ₹7,80,000, which is higher. So no excess is ignored under section 197(3) and the tax payable is ₹6,12,500. If the indexed computation had given a lower tax, the tax payable would have been that lower figure.

Example 2

Meena, a resident individual, has a long-term capital gain of ₹5,00,000 from the sale of unlisted shares of a private limited company. This gain is taxed under section 197. She has no other income. Assume the basic exemption limit is ₹4,00,000 for this question. Compute the taxable long-term capital gain and the tax at 12.5%, ignoring cess and any rebate.

Show the solution
  1. The asset is unlisted shares held long-term, so the gain is taxed under section 197. (Equity shares referred to in section 198 are dealt with separately and are not covered by this working.)
  2. Total income reduced by the LTCG is nil, which is below the basic exemption limit of ₹4,00,000.
  3. Shortfall = ₹4,00,000 − ₹0 = ₹4,00,000.
  4. Under section 197(2)(a), reduce LTCG by the shortfall: ₹5,00,000 − ₹4,00,000 = ₹1,00,000.
  5. Under section 197(2)(b), tax the balance at 12.5%: ₹1,00,000 × 12.5% = ₹12,500.

Answer: The taxable long-term capital gain is ₹1,00,000 and tax is ₹12,500 (before cess and any rebate).

Exam tips

  • Start every answer by quoting section 72(1) and then show the working in a clear list.
  • Always state whether the gain is short-term or long-term and give the reason, since the conclusion depends on it.
  • For land or building bought before 23 July 2024, show the section 197(3) comparison, even if the examiner does not ask for it directly.
  • Check for hints of special cases such as a slump sale, a block of depreciable assets or an NRI before applying the basic formula.
  • Show your working in rupees with Indian grouping and mention that securities transaction tax is not deductible.

Practice questions from Capital Gains

Computation of Capital Gains: frequently asked questions

What is the full value of consideration in capital gains?

It is the amount received or accruing as a result of the transfer of the capital asset. It is the starting point under section 72(1). You deduct transfer expenses and costs from it.

Is indexation still available for long-term capital gains?

Under the Income-tax Act, 2025, the general LTCG rate is 12.5% without indexation (section 197(1)). Indexed costs are used only to test the relief in section 197(3) for land or building acquired before 23 July 2024 by a resident individual or HUF.

Which expenses can I deduct from capital gains?

You can deduct expenditure incurred wholly and exclusively in connection with the transfer, the cost of acquisition and the cost of improvement. You cannot deduct securities transaction tax or interest claimed under section 22(1)(b) or Chapter VIII.

How is capital gain computed on a slump sale?

The fair market value of the capital assets on the date of transfer is treated as the full value of consideration, and net worth is treated as the cost. The gain is long-term unless the undertaking was held for 36 months or less, in which case it is short-term.