Mode of computation of capital gains :
(i) The income chargeable under the head ‘capital gains’ shall be computed by deducting the following items from the full value of the consideration received or accruing as a result of the transfer of the capital asset:
(1) Expenditure incurred wholly and exclusively in connection with such transfer.
(2) The indexed cost of acquisition and indexed cost of any improvement thereto.
(ii) However, no deduction shall be allowed in computing the income chargeable under the head “Capital Gains” in respect of any amount paid on account of securities transaction tax under Chapter VII of the Finance (No.2) Act, 2004.
Under section 48, the cost of acquisition will be increased by applying the cost inflation index (CII). Once the cost inflation index is applied to the cost of acquisition, it becomes indexed cost of acquisition. This means an amount which bears to the cost of acquisition, the same proportion as CII for the year in which the asset is transferred bears to the CII for the first year in which the asset was held by the assessee or for the year beginning on 1st April, 1981, whichever is later. Similarly, indexed cost of any improvement means an amount which bears to the cost of improvement, the same proportion as CII for the year in which the asset is transferred bears to the CII for the year in which the improvement to the asset took place.
| “Cost Inflation Index” in relation to a previous year means such index as may be notified by the Central Government having regard to 75% of average rise in the Consumer Price Index (Urban) for the immediately preceding previous year to such previous year. |
Note – The benefit of indexation will not apply to the long-term capital gains arising from the transfer of bonds or debentures other than capital indexed bonds issued by the Government.
In case of depreciable assets (discussed later), there will be no indexation or the capital gains will always be short-term capital gains.
(iii) Cost Inflation Index: The cost inflation indices for the financial years so far have been notified as under:
| Financial Year | Cost Inflation Index | Financial Year | Cost Inflation Index |
| 1981-82 | 100 | 1998-99 | 351 |
| 1982-83 | 109 | 1999-00 | 389 |
| 1983-84 | 116 | 2000-01 | 406 |
| 1984-85 | 125 | 2001-02 | 426 |
| 1985-86 | 133 | 2002-03 | 447 |
| 1986-87 | 140 | 2003-04 | 463 |
| 1987-88 | 150 | 2004-05 | 480 |
| 1988-89 | 161 | 2005-06 | 497 |
| 1989-90 | 172 | 2006-07 | 519 |
| 1990-91 | 182 | 2007-08 | 551 |
| 1991-92 | 199 | 2008-09 | 582 |
| 1992-93 | 223 | 2009-10 | 632 |
| 1993-94 | 244 | 2010-11 | 711 |
| 1994-95 | 259 | 2011-12 | 785 |
| 1995-96 | 281 | 2012-13 | 852 |
| 1996-97 | 305 | 2013-14 | 939 |
| 1997-98 | 331 | 2014-15 | 1024 |
| 2015-16 | 1081 |
(iv) Special provision for non-residents – In order to give protection to non-residents who invest foreign exchange to acquire capital assets, section 48 contains a proviso. Accordingly, in the case of non-residents, capital gains arising from the transfer of shares or debentures of an Indian company is to be computed as follows:
The cost of acquisition, the expenditure incurred wholly and exclusively in connection with the transfer and the full value of the consideration are to be converted into the same foreign currency with which such shares were acquired. The resulting capital gains shall be reconverted into Indian currency. The aforesaid manner of computation of capital gains shall be applied for every purchase and sale of shares or debentures in an Indian company. Rule 115A is relevant for this purpose.
Non-residents and foreign companies to be subject to tax at a concessional rate of 10% (without indexation benefit or currency fluctuation) on long-term capital gains arising from transfer of unlisted securities [Section 112]
Under section 115AD, where the total income of a Foreign Institutional Investor includes longterm capital gains on sale of unlisted securities, the same would be taxable@10%, without the benefit of indexation or currency fluctuation. In order to bring parity in tax rate on long-term capital gains (arising on sale of unlisted securities) applicable to non-residents and FIIs, section 112 provides that in the case of non-corporate non-residents and foreign companies, long-term capital gains arising from transfer of unlisted securities would be subject to tax@10% without giving effect to indexation provision under second proviso to section 48 and currency fluctuation under first proviso to section 48.