Scope and date. Written for FY 2025-26 (AY 2026-27) and FY 2026-27, current as at July 2026. Capital gains is one of the most fact-sensitive areas of Indian tax law — the same sale can be taxed very differently depending on dates, residential status and documentation. Treat this as a thorough map, not as advice on your transaction. For anything material, confirm the position with your CA and against the bare Act.
- 1. Capital Gains Basics
- 2. Calculating the Gain — you are here
- 3. Rates & Special Regimes
- 4. Exemptions 54 to 54GB
- 5. Property Sales
- 6. Losses, Advance Tax & ITR
The Formula
Section 48 (Section 72) gives one formula, applied slightly differently for short and long term.
| Short-term | Long-term | |
|---|---|---|
| Start with | Full value of consideration received or accruing | |
| Less | Expenditure wholly and exclusively in connection with the transfer | |
| Less | Cost of acquisition | Cost of acquisition (indexed only in the surviving property case) |
| Less | Cost of improvement | Cost of improvement (same treatment) |
| = | Short-term capital gain | Long-term capital gain |
Everything difficult about capital gains lives in the definitions of those four lines.
Allowable Transfer Expenses
- Brokerage and commission paid to the agent
- Stamp duty and registration charges borne by the seller
- Legal and conveyancing fees for the sale
- Cost of advertising the property for sale
- Travel expenditure directly incurred to complete the transfer
The test is that the expenditure must be wholly and exclusively in connection with the transfer — not merely connected with owning the asset.
What You May Not Deduct
- Securities Transaction Tax. Expressly not deductible.
- Home loan interest already claimed as a deduction under Section 24(b). You cannot claim the same rupee twice. Interest never claimed elsewhere has, in several rulings, been added to cost — but this is litigated, and you should not assume it.
- Routine repairs, painting and maintenance. These are not cost of improvement.
- Property tax, society maintenance, insurance and other running costs of ownership.
Cost of Improvement
Improvement means a capital addition — a new floor, an extra room, a boundary wall, a borewell, a permanent structure. It does not mean keeping the asset in the condition it was already in.
Cost of improvement is the deduction people lose most often, simply because the bills are gone. Every time you spend capital money on a property you may sell one day — the extra room, the compound wall, the borewell — file the invoice and the bank payment proof in one folder. Fifteen years later that folder is worth real money, and an undocumented claim is one an assessing officer can simply disallow.
Note that any improvement incurred before 1 April 2001 is ignored entirely if you opt for the 1 April 2001 fair market value as your cost — the FMV is taken to subsume it.
Indexation — What Survives
Indexation used to let you inflate your cost by the Cost Inflation Index, so only the real gain was taxed. For transfers on or after 23 July 2024 it is gone, traded away for the lower flat rate of 12.5%.
One exception survives, and it is narrow:
The property grandfathering option. A resident individual or HUF transferring land or a building that was acquired on or before 22 July 2024 pays the lower of: 12.5% without indexation, or 20% with indexation. Compute both and pay the smaller.
Read the conditions strictly, because each excludes a large group:
- Resident — non-residents do not get the choice.
- Individual or HUF — companies, LLPs and firms do not get it.
- Land or building only — not gold, not unlisted shares, not any other asset.
- Acquired on or before 22 July 2024 — a property bought on 1 August 2024 has no choice, ever.
The choice is made property by property, and there is no single answer. As a rough guide: the longer the hold and the more modest the appreciation, the more likely 20% with indexation wins; a property that multiplied several times over usually does better at a flat 12.5%. Compute both — see Example 1.
Where indexation does still apply, the Cost Inflation Index has base year 2001-02 = 100, and you use the CBDT-notified index for the year of acquisition and the year of transfer. Always take the notified figure for your year rather than a number remembered from a previous filing.
Cost of Acquisition — the Special Rules
"What did it cost" is rarely a simple question. Section 49 (Section 73) and Section 55 (Section 90) supply the answers.
| Situation | Cost you take |
|---|---|
| Inherited, gifted, received on HUF partition or under a will | The previous owner's cost — and their holding period counts as yours. |
| Asset acquired before 1 April 2001 | At your option, the actual cost or the fair market value as on 1 April 2001. For land and buildings the FMV taken cannot exceed the stamp duty value as on that date. |
| Listed equity / equity MF bought before 1 February 2018 | The grandfathered cost — see below. |
| Bonus shares | Nil cost (if allotted on or after 1 April 2001). The whole sale value is gain. |
| Rights shares | The amount actually paid to subscribe. |
| Rights entitlement sold without subscribing | Nil cost; the entire receipt is a short-term gain. |
| Self-generated goodwill, tenancy right, route permit, loom hours | Nil cost. Purchased goodwill takes its purchase price. |
| Advance money forfeited on an earlier failed sale | Section 51 (Section 81). Since AY 2015-16 forfeited advances are taxed as income from other sources when forfeited, and no longer reduce your cost. |
The 31 January 2018 Rule, Precisely
For listed equity shares and equity-oriented mutual funds acquired before 1 February 2018, the cost of acquisition is:
Higher of (a) actual cost, and (b) lower of — the fair market value as on 31 January 2018 (the highest quoted price on that date), and the actual sale consideration.
The effect is that everything gained up to 31 January 2018 is protected, and only appreciation after that date is taxed. The nested "lower of" inside the "higher of" is what stops the rule from manufacturing an artificial loss — without it, a share that had risen sharply by January 2018 and then fallen could produce a deductible loss that never economically happened. Worked through in Example 2.
When the Law Overrides Your Sale Price
Three provisions replace your actual consideration with a deemed one. They exist to stop under-declaration, and they catch honest sellers too.
| Section | Applies to | Rule |
|---|---|---|
| 50C (78) | Land or building | If the sale price is below the stamp duty value, the stamp duty value is treated as your sale consideration. A tolerance band applies where the difference is small; beyond it the full stamp duty value is substituted. You may ask the Assessing Officer to refer the matter to a Valuation Officer if the stamp value genuinely exceeds market value. |
| 50CA (79) | Unquoted shares | If sold below fair market value computed under the prescribed rules, the FMV is treated as the consideration. |
| 50D (80) | Any asset | Where consideration is not ascertainable or cannot be determined, the fair market value on the date of transfer is deemed to be the consideration. |
And the mirror rule on the buyer's side: where a property is bought for less than stamp duty value, the shortfall can be taxed in the buyer's hands as income from other sources under Section 56(2)(x). The same transaction can therefore be taxed twice, on both sides. This is the most common nasty surprise in property deals done below circle rate.
Three Worked Examples
Example 1 — Flat sold, with the grandfathering choice
Mrs Sharma, resident individual. Flat bought March 2010 for ₹20,00,000. Sold June 2026 for ₹85,00,000. Brokerage ₹85,000. Acquired before 22 July 2024, so she has the choice.
| Option A — 12.5%, no indexation | Option B — 20%, with indexation | |
|---|---|---|
| Sale consideration | 85,00,000 | 85,00,000 |
| Less brokerage | (85,000) | (85,000) |
| Less cost | (20,00,000) | Indexed cost, assumed (56,00,000) |
| Long-term gain | 64,15,000 | 28,15,000 |
| Tax before cess | 12.5% = 8,01,875 | 20% = 5,63,000 |
Option B wins by ₹2,38,875, so she pays under the indexation method. The indexed cost here is illustrative — use the CBDT-notified Cost Inflation Index for your actual years. The general pattern holds: a long hold with moderate appreciation favours indexation.
Example 2 — Listed shares bought before 2018
1,000 shares bought June 2015 at ₹100 = ₹1,00,000. Highest quoted price on 31 January 2018: ₹250. Sold May 2026 at ₹600 = ₹6,00,000.
- FMV on 31-01-2018 = ₹2,50,000. Sale consideration = ₹6,00,000. Lower of the two = ₹2,50,000.
- Actual cost = ₹1,00,000. Higher of ₹1,00,000 and ₹2,50,000 = ₹2,50,000.
- Long-term gain = ₹6,00,000 − ₹2,50,000 = ₹3,50,000.
- Less the annual exemption of ₹1,25,000 → taxable ₹2,25,000 at 12.5% = ₹28,125 plus cess.
Without grandfathering the gain would have been ₹5,00,000. The pre-2018 appreciation of ₹1,50,000 is protected.
Example 3 — Inherited house
Father bought a house in 2005 for ₹8,00,000. He died in 2024; the son inherited it and sold it in June 2026 for ₹95,00,000.
- The inheritance itself is not a transfer — no tax in 2024.
- The son's cost is the father's ₹8,00,000, not the 2024 market value.
- The father's holding period counts, so it is comfortably long-term.
- Acquired (by the father) before 22 July 2024, so the son — a resident individual — gets the 12.5% vs 20%-with-indexation choice.
The point people miss: inheriting does not reset the cost. The gain that built up over the father's twenty years is taxed in the son's hands.
What's Next?
- Part 3 — Rates & Special Regimes: what rate applies to the gain you just computed
- Part 4 — Exemptions: how to reduce or eliminate the gain by reinvesting
- Part 5 — Property Sales: the full property workflow end to end
- Part 1 — Capital Gains Basics