Chapter IV - Computation of Total Income
Section 72
Section 72: mode of computation of capital gains
Section 72 is the core computation mechanics section for capital gains under the Income-tax Act, 2025 - the successor to Section 48 of the old Act. It sets out the basic subtraction formula, defines the Cost Inflation Index and indexed cost of acquisition/improvement, lists what cannot be deducted, and adds special rules for business trust units, non-resident share/debenture transactions, and rupee-denominated bonds.
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) Income chargeable under the head “Capital gains” shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset, the following amounts:— (a) expenditure incurred wholly and exclusively in connection with such transfer; and (b) the cost of acquisition of the asset and the cost of any improvement thereto.
(2) For the purposes of item B of the formula in section 197(3), the provisions of sub-section (1) shall have effect as if for the words “cost of acquisition” and “cost of any improvement”, the words “indexed cost of acquisition” and “indexed cost of any improvement” had respectively been substituted.
(3) In computing the income chargeable under the head “Capital gains”, the following amounts shall not be allowed as a deduction:— (a) the interest claimed as deduction under section 22(1)(b) or under Chapter VIII; (b) any sum paid as securities transaction tax under Chapter VII of the Finance (No.2) Act, 2004.
(4) If a unit holder receives any amount from a business trust with respect to a unit that is not in the nature of income under Schedule V (Table: Sl. No. 3 or 4) and is not chargeable to tax under section 92(2)(k) or 223(2), then,–– (a) such amount shall be reduced from the cost of acquisition of such unit; and (b) if the transaction of transfer of a unit is not considered as transfer under section 70 and cost of acquisition of such unit is determined under section 73, the amount received with respect to such unit before as well as after such transaction, shall be reduced from the cost of acquisition.
(5) In case of value of any money or capital asset received by a specified person from a specified entity, as referred to in section 67(10), the specified entity, in addition to deductions under sub-section (1), shall also be entitled to a deduction calculated in such manner, as may be prescribed for computing the amount chargeable to income-tax in its hands under that sub-section which is attributable to the transfer of such capital asset.
(6) In the case of an assessee, who is a non-resident, capital gains arising from the transfer of a capital asset being shares in, or debentures of, an Indian company (other than equity shares referred to in section 198) shall be computed–– (a) by converting the cost of acquisition, expenditure incurred wholly and exclusively in connection with such transfer and the full value of the consideration received or accruing as a result of the transfer of the capital asset into the same foreign currency as was initially utilised in the purchase of the shares or debentures; and (b) the capital gains so computed in such foreign currency shall be reconverted into Indian currency, so, however, that the said manner of computation of capital gains shall be applicable in respect of capital gains accruing or arising from every reinvestment thereafter in, and sale of, shares in, or debentures of, an Indian company.
(7) In the case of an assessee who is a non-resident, any gains arising on account of appreciation of rupee against a foreign currency at the time of redemption of rupee denominated bond of an Indian company held by the assessee, shall be ignored for computing the full value of consideration under this section.
(8) For the purposes of this section,–– (a) “Cost Inflation Index”, in relation to a tax year, means such Index as the Central Government may, having regard to 75% of average rise in the Consumer Price Index (urban) for the immediately preceding tax year to such tax year, by notification, specify, in this behalf; (b) “indexed cost of acquisition” means an amount which bears to the cost of acquisition, the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on 1st April, 2001, whichever is later; (c) “indexed cost of any improvement” means an amount which bears to the cost of improvement, the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the year in which the improvement to the asset took place; and (d) the conversion of Indian currency into foreign currency and the reconversion of foreign currency into Indian currency shall be at such rate of exchange as may be prescribed in this behalf.
Introduction
Capital gain starts with the full value of transfer consideration and subtracts allowable transfer expenditure and asset cost. Section 72 also controls indexation in specified cases and bars named duplicate deductions.
Key takeaways
Basic computation
Capital gains generally start with the full value of consideration and subtract transfer expenditure incurred wholly and exclusively, cost of acquisition and cost of improvement.
Indexation is limited
The indexed-cost substitution in this section applies for the stated calculation under Section 197(3); it is not a blanket rule for every capital gain.
Specific exclusions and variations
The section excludes specified deductions and includes special computation rules for particular assets and non-resident transactions.
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)).
Step-by-step flow for applying Section 72
- 1
Determine the full value of consideration
Use the actual consideration, unless a special rule substitutes another figure, for example Section 78 (stamp duty value for land or building) or Section 80 (fair market value where consideration is not ascertainable).
- 2
Deduct transfer expenses
Only expenditure incurred wholly and exclusively in connection with the transfer (Section 72(1)(a)).
- 3
Deduct cost of acquisition and cost of improvement
Where item B of the Section 197(3) formula applies, use the indexed costs (Section 72(2)).
- 4
Exclude non-deductible items
Interest already claimed under Section 22(1)(b) or Chapter VIII, and securities transaction tax, are not deductible (Section 72(3)).
- 5
Apply any special rule for the asset
For example, the business-trust unit cost reduction in Section 72(4) or the non-resident rules in Section 72(6).
Practical checklist
Do
- Prepare a gain worksheet showing consideration, wholly transfer-connected expenditure, acquisition cost and improvement cost separately.
- Check the particular long-term rate provision before using indexed cost.
- Remove interest already deducted under house-property or Chapter VIII provisions and securities transaction tax.
Avoid
- Do not treat gross sale proceeds as taxable gain.
- Do not index every long-term asset without the provision that permits it.
Illustrative example
Worked example: sale of a commercial office
Hypothetical facts (illustration only, not a real taxpayer): An individual sells an office for ₹1.2 crore. She bought it for ₹70 lakh, spent ₹10 lakh on a structural extension, and paid ₹1.5 lakh brokerage on the sale. The stamp duty value equals the sale price. Earlier she had claimed interest on the purchase loan under Section 22(1)(b).
Consideration
₹1.2 crore; Section 78 does not change it because the stamp duty value is not higher.
Deductions
Brokerage ₹1.5 lakh + cost ₹70 lakh + improvement ₹10 lakh = ₹81.5 lakh.
Excluded
The loan interest already claimed under Section 22(1)(b) cannot be added to cost.
Outcome
- Capital gain = ₹1.2 crore - ₹81.5 lakh = ₹38.5 lakh (before any applicable exemption).
- Whether indexed costs apply depends on whether item B of Section 197(3) is used for her case.
Glossary
- Full value of consideration
- The transfer value used in the gain formula, which can be substituted by a deeming provision.
- Indexed cost
- Cost adjusted by the statutory indexation method where the relevant rate/computation provision allows it.
Frequently asked questions
What is deducted from sale consideration to compute capital gains?
Expenditure incurred wholly and exclusively for the transfer, plus the cost of acquisition and cost of improvement of the asset, per Section 72(1).
How is the Cost Inflation Index defined under the new Act?
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, per Section 72(8)(a).
Can I deduct home loan interest or STT while computing capital gains?
No - Section 72(3) disallows deducting interest already claimed under Section 22(1)(b) or Chapter VIII, and securities transaction tax paid under the Finance (No. 2) Act, 2004, from capital gains.
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