Sub-section (1) is the computation itself: income under "Capital gains" is computed by deducting from the full value of the consideration received or accruing as a result of the transfer, first the expenditure incurred wholly and exclusively in connection with the transfer, and second the cost of acquisition of the asset and the cost of any improvement to it.
Sub-section (2) is the indexation switch. For the purposes of item B of the formula in section 197(3), sub-section (1) is read as if "indexed cost of acquisition" and "indexed cost of any improvement" had been substituted for "cost of acquisition" and "cost of any improvement".
Sub-section (3) bars two deductions outright: interest claimed as a deduction under section 22(1)(b) or under Chapter VIII, and any sum paid as securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004.
Sub-section (4) deals with business trust units. Where a unit holder receives an amount from a business trust in respect of a unit that is not income of the nature in Schedule V (Table: Sl. No. 3 or 4) and is not chargeable under section 92(2)(k) or 223(2), that amount is reduced from the cost of acquisition of the unit; and where the transfer of the unit is not regarded as a transfer under section 70 and its cost is determined under section 73, amounts received in respect of the unit both before and after that transaction are reduced from the cost of acquisition. Sub-section (5) gives a specified entity, on a receipt of money or a capital asset by a specified person as referred to in section 67(10), a further deduction beyond sub-section (1), computed in the prescribed manner, for the amount chargeable in the entity's hands attributable to the transfer of that capital asset.
Sub-sections (6) and (7) are the non-resident rules. For a non-resident, capital gains on transfer of shares in, or debentures of, an Indian company — other than equity shares referred to in section 198 — are computed by converting the cost of acquisition, the transfer expenditure and the full value of the consideration into the same foreign currency as was initially used to purchase the shares or debentures, and reconverting the gain so computed into Indian currency; the method then applies to every re-investment and sale thereafter. Sub-section (7) requires gains arising to a non-resident on account of appreciation of the rupee against a foreign currency at the redemption of a rupee denominated bond of an Indian company to be ignored in computing the full value of consideration.
Sub-section (8) defines the terms. "Cost Inflation Index" for a tax year is the Index the Central Government may specify by notification, having regard to 75% of the average rise in the Consumer Price Index (urban) for the immediately preceding tax year. "Indexed cost of acquisition" bears to the cost of acquisition the same proportion as the Index for the year of transfer bears to the Index for the first year in which the assessee held the asset or for the year beginning 1st April, 2001, whichever is later; "indexed cost of any improvement" applies the same proportion using the Index for the year in which the improvement took place. The rate of exchange for conversion and reconversion is prescribed.
Why it is there
The charge on capital gains is elsewhere; the measurement is here. The section fixes what may be taken off the consideration, what may not, and how the two special measurements — indexation, and computation in the currency a non-resident originally invested — are made. Sub-sections (3) and (4) close specific double-counting routes: interest already deducted under another head or chapter, securities transaction tax, and distributions from a business trust that have not borne tax and would otherwise sit in the cost base.
Who it applies to
Any assessee computing income under the head "Capital gains"
A non-resident transferring shares in, or debentures of, an Indian company other than equity shares referred to in section 198
A non-resident holding a rupee denominated bond of an Indian company at redemption
A unit holder receiving an amount from a business trust in respect of a unit
A specified entity from which a specified person receives money or a capital asset as referred to in section 67(10)
The figures, and what each one turns on
Read the condition in the same row. A figure quoted without it is a wrong answer with a citation attached.
What
Figure
The condition on it
Where
Basis on which the Cost Inflation Index is notified
75% of average rise in the Consumer Price Index (urban)
A matter to which the Central Government must have regard when specifying the Index by notification for a tax year, measured for the immediately preceding tax year; the section does not itself fix the Index
Sub-section (8)(a)
Floor year for the base Cost Inflation Index
The year beginning on 1st April, 2001
Used instead of the first year in which the asset was held, where that year is earlier — whichever is later governs
Sub-section (8)(b)
What this means in practice
Indexation is not a general entitlement. Sub-section (2) substitutes the indexed cost only for the purposes of item B of the formula in section 197(3); outside that computation, sub-section (1) is read with plain cost of acquisition and cost of improvement. Nor is the Cost Inflation Index something the assessee derives — sub-section (8)(a) makes it what the Central Government notifies, and the 75% of the average rise in the Consumer Price Index (urban) is what the Government has regard to, not a formula to be applied to a case. Sub-section (3) removes two items practitioners routinely try to deduct: interest already claimed under section 22(1)(b) or Chapter VIII, and securities transaction tax. For a non-resident, sub-section (6) is a direction, not an option: the entire computation is done in the currency originally used to buy the shares or debentures and only the resulting gain is brought back into rupees, so the gain is measured in the currency invested.
An example
Illustrative only, and invented for this page. The figures are chosen to show the rule biting, not taken from any real matter.
An individual sells a capital asset for 60 lakh rupees. He had paid 20 lakh to acquire it, 5 lakh on improvement, and 1 lakh in brokerage on the sale. Under sub-section (1) the gain is 60 lakh less 1 lakh, 20 lakh and 5 lakh — 34 lakh. Securities transaction tax paid on the sale cannot be added to the 1 lakh of transfer expenditure, because sub-section (3)(b) disallows it. The 20 lakh and 5 lakh are replaced by their indexed equivalents only if the computation being made is the one at item B of the formula in section 197(3).
Where you meet this section
In the capital gains computation in a return, and in any assessment, rectification or appellate order that recomputes a gain — this is the section quoted when the Assessing Officer strikes out an item of claimed cost, refuses indexation, or recasts a non-resident's gain into the original foreign currency.
The words themselves
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
Section 72(1), Income-tax Act, 2025.
any sum paid as securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004
Section 72(3)(b), Income-tax Act, 2025.
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
Section 72(8)(a), Income-tax Act, 2025.
What people get wrong
Indexing as a matter of course. Sub-section (2) substitutes indexed cost only for the purposes of item B of the formula in section 197(3).
Deducting securities transaction tax as an expense of transfer. Sub-section (3)(b) expressly disallows it.
Deducting interest that has already been claimed. Sub-section (3)(a) bars interest claimed as a deduction under section 22(1)(b) or under Chapter VIII.
Deriving the Cost Inflation Index from 75% of the rise in the Consumer Price Index (urban). Sub-section (8)(a) makes the Index what the Central Government notifies; the 75% is only what the Government must have regard to.
Taking 1 April 2001 as the base year in every case. Sub-section (8)(b) uses the Index for the first year in which the asset was held or for the year beginning 1 April 2001, whichever is later.
Treating the foreign currency computation as elective. Sub-section (6) directs how a non-resident's gain on shares or debentures of an Indian company, other than equity shares referred to in section 198, shall be computed.
Bringing rupee appreciation into a rupee denominated bond redemption. Sub-section (7) requires such gains of a non-resident to be ignored in computing the full value of consideration.
Leaving business trust distributions in the cost base. Sub-section (4) reduces the cost of acquisition of the unit by amounts received that are outside Schedule V (Table: Sl. No. 3 or 4) and outside section 92(2)(k) and 223(2).
What this replaced
The correspondence is the Income Tax Department’s own, from its comparison utility for the 1961 and 2025 Acts. A renumbering is the easy half; whether the words changed is the half that decides cases.
Rules of the Income-tax Rules, 2026 that work section 72. Where the rule’s own heading names the section we say so; the rest are marked on reading the rule, which is our derivation and not the department’s. A rule that serves the section silently and that we have missed will not appear here.
Rule 50 — Attribution of income taxable under section 67(10) to capital assets remaining with the specified entity, under section 72
Rule 52 — Rate of exchange for conversion of rupees into foreign currency and reconversion of foreign currency into rupees for purpose of computation of capital gains under section 72
Rule 57 — Determination of fair market value — on reading the rule
A notification is made under a power the Act gives and, within that power, is law. These too were made under the 1961 Act and are placed here by the department’s concordance.
Notification No. 510E- — Cost Inflation Index for the financial year commencing on the 1st day of April specified under section 48 2001-06-11
Notification No. 586(E) — Cost Inflation Index for the financial year commencing on 1st day of April specified under section 48 2000-06-21
Notification No. 11085 — Cost Inflation Index for the financial year commencing on the 1st day of April specified under section 48 1999-09-20
S.O. 709(E) — Cost Inflation Index as mentioned in column (3) of the Table below for the Financial Year (including the financial year 1998-99) m 1998-08-20
Notification No. 770E — Cost Inflation Index as mentioned in column (3) of the Table below for the financial year (including the financial year 1997-98) m 1997-11-07
Notification No. 653E — Cost Inflation Index as mentioned in column (3) of the Table below for the financial year mentioned in the corresponding entry in 1995-07-20
Notification No. 600E — Cost Inflation Index as mentioned in column (3) of the Table below for the financial year mentioned in the corresponding entry in 1994-08-19
Notification No. 489E — Cost Inflation Index as mentioned in column (3) of the Table below for the financial year mentioned in the corresponding entry in 1993-07-05
Notification No. 595E — Cost Inflation Index as mentioned in column (3) of the Table below for the financial year mentioned in the corresponding entry in 1992-08-05
Read this before you rely on it. Every decision below was decided under the Income-tax Act, 1961. It appears here because it is tagged to a 1961 provision that the department’s own mapping carries to section 72. That is an inference we have drawn, not a holding on the new section: where the words changed in the move, the reasoning may not survive. Treat this as the place to start looking, not as authority on the 2025 Act.
CIT v Balbir Singh MainiSupreme CourtHelps taxpayertagged s.48 Our jda was never registered and the project collapsed. Am I still taxed on capital gains?
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K.P. Varghese v ITOSupreme CourtHelps taxpayertagged s.48 The AO says I sold below market value and wants to tax the difference. Can he do that?
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CIT v Manjula J. ShahHigh CourtHelps taxpayertagged s.48 I sold a flat that was gifted to me. Do I index from the gift date or the original purchase?
Gouli Mahadevappa v ITOHigh CourtCuts both waystagged s.48 If the gain is computed on the stamp duty value, can I at least claim s.54F on everything I actually put into the new house?
T R Balasubramanium v ACITHigh CourtHelps taxpayertagged s.48 I received a flat when my company was wound up, paid capital gains tax then, and sold it in the same year. What is my cost?
ACIT v C RamabrahmamITATHelps taxpayertagged s.48 I claimed housing loan interest under s.24(b) every year. When I sell, can the same interest also go into the cost of acquisition?
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Dharamshibhai Sonani v DCITITATHelps taxpayertagged s.48 I fixed the price in 2005 but registered the sale in 2007. Which date's stamp duty value applies?
ITO v Raj Kumar ParasharITATHelps taxpayertagged s.48 The AO substituted the circle rate under s.50C. Does that higher figure also become the net consideration I have to reinvest for s.54F?
Nand Lal Popli v DCITITATCuts both waystagged s.48 I return income under 44AD. Can the AO treat the balance of my receipts as expenditure actually incurred?
CBDT Circular 14/2021CBDTCuts both waystagged s.48 A partner retired and took assets out of the firm. How do s.9B and s.45(4) work together?
CBDT SOP on s.45(5A) joint developmentCBDTHelps departmenttagged s.48 I gave my land to a builder under a jda. When do I have to pay tax on the capital gain?
What this page does not tell you. It does not reproduce the section. Everything above was written from the section’s own text as the Income Tax Department publishes it — the text is here, and nothing here is advice on your facts. Where a figure matters, read the sub-section it comes from.
