Section 48 tells you exactly how to calculate capital gains — it's the formula section. Every capital gains question in your exam starts here, so get this right and the rest becomes mechanical.
The basic formula is simple: Capital Gains = Full Value of Consideration − Transfer Expenses − Cost of Acquisition − Cost of Improvement. "Full value of consideration" is what you receive (or what accrues to you) on selling the asset. "Transfer expenses" are costs like brokerage, stamp duty on sale, and legal fees paid for the transfer — not general maintenance costs. Cost of acquisition is what you originally paid, and cost of improvement is what you spent to upgrade the asset after buying it.
Now the big twist for Long-Term Capital Assets (LTCA): you don't use the plain cost of acquisition — you use the Indexed Cost of Acquisition (ICA). Indexation adjusts your purchase price for inflation using the Cost Inflation Index (CII), notified by the government each year. The formula is: ICA = Cost of Acquisition × (CII of year of transfer ÷ CII of year of acquisition OR FY 2001-02, whichever is later). This is a massive benefit — it reduces your taxable gain significantly.
But here's where students lose marks: indexation does NOT apply everywhere. Three important carve-outs — (1) Equity shares, equity-oriented MF units, and business trust units covered under Section 112A — no indexation at all; (2) Bonds and debentures (other than Capital Indexed Bonds issued by Government and Sovereign Gold Bonds) — no indexation; (3) Non-residents selling shares/debentures of an Indian company — they use a special forex conversion method instead of indexation. Also, Securities Transaction Tax (STT) paid is NOT deductible as a transfer expense — a very common exam trap. This is asked frequently as a 4-mark or 8-mark numerical question in CA Inter.
Example 1 — LTCG on House Property with Indexation
Mr. Sharma bought a house in FY 2014-15 for ₹40,00,000. He spent ₹5,00,000 on renovation in FY 2017-18. He sold it in FY 2024-25 for ₹95,00,000, paying brokerage of ₹1,50,000.
CII values (assumed): FY 2014-15 = 240, FY 2017-18 = 272, FY 2024-25 = 363.
| Item | Calculation | Amount |
|---|---|---|
| Full Value of Consideration | — | ₹95,00,000 |
| Less: Transfer expenses (brokerage) | — | ₹1,50,000 |
| Less: Indexed Cost of Acquisition | ₹40,00,000 × (363 ÷ 240) | ₹60,50,000 |
| Less: Indexed Cost of Improvement | ₹5,00,000 × (363 ÷ 272) | ₹6,67,279 |
| Long-Term Capital Gain | | ₹26,32,721 |
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Example 2 — LTCG on Listed Equity Shares (Section 112A — No Indexation)
Ms. Iyer bought 1,000 shares of ABC Ltd. in FY 2019-20 at ₹200 per share (total cost: ₹2,00,000). She sold them in FY 2024-25 at ₹450 per share (total: ₹4,50,000). STT was paid on both buy and sell. Brokerage on sale: ₹2,000.
| Item | Amount |
|---|---|
| Full Value of Consideration | ₹4,50,000 |
| Less: Transfer expenses (brokerage) | ₹2,000 |
| Less: Cost of Acquisition (NO indexation — Sec. 112A) | ₹2,00,000 |
| Less: STT paid | NIL (not deductible) |
| Long-Term Capital Gain u/s 112A | ₹2,48,000 |
Note: First ₹1,25,000 of LTCG u/s 112A is exempt (from FY 2024-25 onwards). Taxable LTCG = ₹1,23,000 @ 12.5%.
📖 Bare Act text — Section 48, Income Tax Act 1961
(click to expand)
The 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, namely:—
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the asset and the cost of any improvement thereto: Provided that 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 shall be computed 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 the capital gains so computed in such foreign currency shall be reconverted into Indian currency, so, however, that the aforesaid 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: Provided further that where long-term capital gain arises from the transfer of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of clause (ii) 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: Provided also that nothing contained in the first and second provisos shall apply to the capital gains arising from the transfer of a long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust referred to in section 112A: Provided also that nothing contained in the second proviso shall apply to the long-term capital gain arising from the transfer of a long-term capital asset, being a bond or debenture other than—
(a) capital indexed bonds issued by the Government; or
(b) Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, 2015: Provided also that in case of an assessee being 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 him, shall be ignored for the purposes of computation of full value of consideration under this section: Provided also that where shares, debentures or warrants referred to in the proviso to clause (iii) of section 47 are transferred under a gift or an irrevocable trust, the market value on the date of such transfer shall be deemed to be the full value of consideration received or accruing as a result of transfer for the purposes of this section: Provided also that no deduction shall be allowed in computing the income chargeable under the head "Capital gains" in respect of any sum paid on account of securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004 (23 of 2004).
Explanation.—For the purposes of this section,—
(i) "foreign currency" and "Indian currency" shall have the meanings respectively assigned to them in section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999);
(ii) the conversion of Indian currency into foreign currency and the reconversion of foreign currency into Indian currency shall be at the rate of exchange prescribed in this behalf;
(iii) "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 the 1st day of April, 2001, whichever is later;
(iv) "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;
(v) "Cost Inflation Index", in relation to a previous year, means such Index as the Central Government may, having regard to seventy-five per cent of average rise in the Consumer Price Index (urban) for the immediately preceding previous year to such previous year, by notification in the Official Gazette, specify, in this behalf.