NISM-Series-X-B: Investment Adviser (Level 2) · Capital Gains

Computation of Capital Gains and Cost of Acquisition

Updated 11 October 2026 · Fact-checked

Capital gain is the full value of consideration received on transfer, minus expenses on transfer, minus cost of acquisition, minus cost of improvement. Then you decide short-term or long-term from the holding period. Gifted or inherited assets use the previous owner's cost and holding period. Bonus shares have nil cost.

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 year of transfer. The computation always follows the same logic: what you got, less what it cost you to get it and to sell it.

Full value of consideration is what the seller receives or is entitled to receive on transfer. For land or buildings, if the stamp duty value is higher than the sale price beyond the permitted tolerance, the stamp duty value is used instead. You cannot reduce this figure by your own cost.

Cost of acquisition is what you paid for the asset. Cost of improvement is capital spending that adds to the asset, such as adding a floor to a house. Routine repairs are not improvements. Expenses on transfer are costs incurred wholly and exclusively for the sale, such as brokerage, legal fees and stamp charges paid by the seller. Securities Transaction Tax (STT) is not deductible.

Special cases change the cost and the holding period. When an asset comes by gift, inheritance or will, there is no capital gain at that point. The cost to you is the cost to the previous owner (plus the previous owner's improvement costs), and the holding period includes the previous owner's period. The adviser must know this because the client's tax on a later sale depends on it.

Bonus shares are allotted free, so their cost is nil, and the holding period runs from the date of allotment. Rights shares cost what you paid the company, and the holding period runs from the date of allotment. If a shareholder sells the right to subscribe (renounces it), the cost of that entitlement is nil and the gain is short-term. The buyer of the entitlement adds the price paid to the renouncer and the price paid to the company.

Key formulas to remember

Capital gain: Capital gain = Full value of consideration − Expenses on transfer − Cost of acquisition − Cost of improvement; The same structure applies to short-term and long-term gains. Only the holding period and tax treatment differ.
Holding period for listed securities: Long-term if held for more than 12 months; otherwise short-term; This 12-month limit covers listed securities, including units of equity-oriented mutual funds. Unlisted shares, land and buildings need more than 24 months to be long-term. Gold and most other assets also follow 24 months. Some specified assets, such as unlisted bonds and debentures and market-linked debentures, are treated as short-term whatever the holding period.
Gifted, inherited or will-based asset: Cost = Cost to previous owner + previous owner's improvement cost; holding period includes previous owner's period; Gift or inheritance is not a transfer for capital gains. The tax arises only when you later sell.
Bonus shares: Cost of acquisition = nil; holding period from date of allotment; This applies to bonus shares allotted on or after 1 April 2001.
Rights shares: Cost = Amount paid to company; holding period from date of allotment; Renouncing the right gives a short-term gain with nil cost. The buyer's cost is the price paid to the renouncer plus the price paid to the company.
Grandfathering for listed equity shares and equity-oriented fund units bought before 1 February 2018: Cost = Higher of (actual cost) and (lower of FMV on 31 January 2018 and sale value); It applies only to long-term capital gains on listed equity shares and equity-oriented fund units acquired before 1 February 2018. It protects gains up to 31 January 2018 but never creates an artificial loss.

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

Use this order for any computation question. It stops you mixing up the pieces.

1Identify the asset and confirm it is a capital asset and that a transfer has taken place. A gift or inheritance is not a transfer for this purpose.
2Fix the holding period. Note the date of acquisition (or the previous owner's date, or the allotment date for bonus and rights shares) and the date of transfer.
3Classify the gain as short-term or long-term using the holding limit for that asset type. Listed securities, including equity-oriented mutual fund units: 12 months. Land, buildings and unlisted shares: 24 months. Gold and most other assets: 24 months. Some specified assets, such as unlisted bonds and debentures and market-linked debentures, are short-term whatever the holding period.
4Write down the full value of consideration. Check whether stamp duty value applies for property.
5Determine the cost of acquisition using the special rule if the asset came by gift, inheritance, bonus or rights. Add cost of improvement if any. Apply grandfathering only to long-term gains on listed equity shares and equity-oriented fund units bought before 1 February 2018.
6Deduct expenses on transfer, such as brokerage. Do not deduct STT.
7Compute the gain, then apply the exemption or rate for that category. Check set-off of losses last.

Quickest way: Three-check shortcut for MCQs

When to use it: Use it when the question gives a short scenario and asks for the cost, the nature of the gain or the gain amount.

Check how the asset was acquired. Gift, inheritance or will means previous owner's cost and period. Bonus means nil cost. Rights means price paid.
Check the clock. Count months from the correct start date and compare it with 12 or 24 months.
Do the arithmetic in one line: sale price − transfer expenses − cost. Ignore STT and any figure meant as a distractor, such as the market value on the date of gift.

Common mistakes in Computation of Capital Gains and Cost of Acquisition

Using the market value on the date of gift or inheritance as the cost of acquisition.
Students link this with the gift taxation rules, where market value matters to the receiver's income.
Fix: For capital gains, the cost is the previous owner's cost. Market value at the gift date matters only for the separate gift tax rule, not for this cost.
Starting the holding period from the date of gift or inheritance.
Students treat the receiver as a fresh buyer.
Fix: Include the period for which the previous owner held the asset.
Taking the cost of bonus shares as the market price on allotment.
Students confuse bonus shares with purchased shares.
Fix: The cost is nil, and the whole sale value less expenses is the gain. The holding period begins at allotment, not at the date of the original shares.
Deducting STT as an expense on transfer.
It looks like a transaction cost.
Fix: STT is not allowed as a deduction. Only brokerage and similar costs of sale are allowed.
Applying the 12-month test to every asset.
Students remember the listed-share rule and extend it.
Fix: Use 12 months for listed securities, including equity-oriented mutual fund units. Use 24 months for land, buildings, unlisted shares and most other assets such as gold. Some assets, such as unlisted bonds and debentures, are short-term whatever the holding period.
Treating sale of rights entitlement as long-term or giving it a cost.
Students link it to the original shares.
Fix: The renounced right has nil cost and the gain is short-term.

Worked examples

Example 1

Anita bought listed equity shares for ₹4,00,000 and sold them 18 months later for ₹6,50,000. She paid brokerage of ₹5,000 on the sale. She has no other long-term gain on listed equity in the year. Compute the long-term capital gain and the taxable amount after the annual ₹1,25,000 exemption, and the tax at 12.5% before cess.

Show the solution

Holding period is 18 months, which is more than 12 months, so the gain is long-term.
Full value of consideration = ₹6,50,000.
Deduct transfer expense: ₹6,50,000 − ₹5,000 = ₹6,45,000.
Deduct cost of acquisition: ₹6,45,000 − ₹4,00,000 = ₹2,45,000. This is the long-term capital gain.
Deduct the exemption limit: ₹2,45,000 − ₹1,25,000 = ₹1,20,000.
Tax at 12.5% = ₹1,20,000 × 12.5% = ₹15,000 before cess.

Answer: LTCG is ₹2,45,000. The taxable amount is ₹1,20,000 and the tax is ₹15,000 before cess.

Example 2

Rahul holds 1,000 listed shares that he bought for ₹200 each. The company issued 1:1 bonus shares, which were allotted on 1 July. He sold 500 of the bonus shares on 1 January of the following year at ₹300 each. Ignore expenses. What is the cost of these 500 shares, the nature of the gain and the gain? Tax is at 20% on short-term gain on listed equity with STT paid.

Show the solution

Bonus shares are allotted free, so their cost of acquisition is nil.
The holding period starts on the allotment date, 1 July. From 1 July to 1 January of the following year is 6 months, which is not more than 12 months, so the gain is short-term.
Full value of consideration = 500 × ₹300 = ₹1,50,000.
Short-term capital gain = ₹1,50,000 − nil = ₹1,50,000.
Tax at 20% = ₹1,50,000 × 20% = ₹30,000 before cess.

Answer: Cost is nil. The gain is short-term capital gain of ₹1,50,000, with tax of ₹30,000 before cess.

Exam tips

Read how the asset was acquired first. Most trap options in this topic come from using the wrong cost or the wrong start date.
Remember the holding limits: 12 months for listed securities, including equity-oriented mutual fund units, and 24 months for land, buildings, unlisted shares and most other assets such as gold. Unlisted bonds and debentures are short-term whatever the period.
For gift or inheritance questions, ignore the market value on the gift date when the question asks about capital gains cost.
Do the arithmetic carefully on 2-mark caselet questions, since a wrong answer costs 25% of the marks assigned to the question.
Watch for distractors such as STT, repairs and the original share cost in bonus questions. They are often included to catch you.

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

How do I compute capital gains step by step?

Find the full value of consideration, then deduct expenses on transfer, cost of acquisition and cost of improvement. Decide short-term or long-term from the holding period. Then apply the tax rate or exemption for that category.

What is the cost of acquisition for a gifted or inherited asset?

It is the cost to the previous owner, plus the previous owner's cost of improvement. The holding period also includes the previous owner's period. No capital gain arises at the time of the gift or inheritance.

What is the cost of bonus shares and rights shares for tax?

Bonus shares have nil cost and their holding period starts from the date of allotment. Rights shares cost the amount you paid the company and their holding period also starts from allotment. A renounced right has nil cost and gives a short-term gain.

Can I deduct brokerage and STT when computing capital gains?

Brokerage and other costs wholly and exclusively for the transfer are deductible. STT is not deductible.