Section 72: mode of computation of capital gains

The basic computation

Section 72(1) computes income chargeable under "Capital gains" by deducting from the full value of consideration received or accruing on transfer of the capital asset:

• Expenditure incurred wholly and exclusively in connection with the transfer, and
• The cost of acquisition of the asset and the cost of any improvement to it.

Indexation for long-term gains

Section 72(2) provides that, for the purposes of the long-term capital gains formula in Section 197(3), the words "cost of acquisition" and "cost of any improvement" are read as "indexed cost of acquisition" and "indexed cost of any improvement" instead.

Section 72(8) defines the Cost Inflation Index as the index the Central Government notifies, having regard to 75% of the average rise in the Consumer Price Index (urban) for the immediately preceding tax year. The "indexed cost of acquisition" is the cost of acquisition multiplied by the ratio of the Cost Inflation Index for the year of transfer to the Cost Inflation Index for the year the asset was first held by the assessee (or the year beginning 1 April 2001, whichever is later); "indexed cost of any improvement" works the same way, using the year the improvement was made.

What cannot be deducted

Section 72(3) disallows two items from reducing capital gains: interest already claimed as a deduction under Section 22(1)(b) or under Chapter VIII, and securities transaction tax paid under Chapter VII of the Finance (No. 2) Act, 2004.

Special computation rules

• Business trust unit distributions that are not "income" under Schedule V (Table Sl. No. 3 or 4) and not chargeable under Section 92(2)(k) or 223(2) reduce the cost of acquisition of the unit instead of being taxed separately (Section 72(4)).
• Where a specified entity gives a deduction (per Section 67(10)) for money/asset received by a specified person on reconstitution, the entity is entitled to an additional prescribed deduction attributable to the transfer of the capital asset (Section 72(5)).
• For a non-resident, capital gains from transfer of shares/debentures of an Indian company (other than the equity shares in Section 198) are computed by converting cost, transfer expenses and consideration into the original foreign currency of purchase, computing the gain in that currency, then reconverting to Indian currency - and this method applies to every subsequent re-investment and sale as well (Section 72(6)).
• For a non-resident redeeming a rupee-denominated bond of an Indian company, any gain from rupee appreciation against a foreign currency is ignored in computing the full value of consideration (Section 72(7)).

Frequently asked questions