Income Tax 2025

Appearance

Mode of computation of capital gains. ​

72(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.

72(2) ​

In cases, as prescribed, 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.

72(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.

72(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.

72(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 is entitled to a deduction calculated in such manner, as 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.

72(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.

72(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 the purpose of computing the full value of consideration.

72(8) ​

In this section, the expressions––

  • (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; and
  • (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.
Explanation

Section Summary: ​

This section outlines the method for calculating capital gains, which is the profit earned from the sale of a capital asset. It specifies how to determine the taxable amount by deducting certain expenses and costs from the total consideration received. The section also introduces special rules for indexed costs, non-residents, and specific transactions like those involving business trusts or rupee-denominated bonds.

Key Changes: ​

  1. Indexed Cost of Acquisition and Improvement: The concept of "indexed cost" is introduced, allowing taxpayers to adjust the acquisition and improvement costs for inflation using the Cost Inflation Index (CII). This reduces the taxable capital gains by accounting for inflation over the holding period.
  2. Non-Resident Taxpayers: Specific rules are introduced for non-residents, including currency conversion requirements for calculating capital gains on shares or debentures of Indian companies. Additionally, gains due to rupee appreciation on rupee-denominated bonds are excluded from taxable consideration.
  3. Business Trusts: Amounts received from business trusts that are not taxable under specific provisions must be deducted from the cost of acquisition of the units.
  4. Deduction Restrictions: Certain expenses, such as interest claimed under specific sections and securities transaction tax, are explicitly disallowed as deductions when computing capital gains.

Practical Implications: ​

  1. For Individuals and Businesses:
    • Taxpayers must calculate capital gains by deducting the cost of acquisition, improvement, and transfer-related expenses from the sale consideration.
    • Indexation benefits are available for long-term capital assets, reducing the tax burden by accounting for inflation.
  2. For Non-Residents:
    • Non-residents must convert all amounts (cost of acquisition, transfer expenses, and sale consideration) into the foreign currency used for the initial purchase. The final capital gains must then be reconverted into Indian rupees.
    • Gains from rupee appreciation on rupee-denominated bonds are exempt from tax.
  3. For Unit Holders in Business Trusts:
    • Any non-taxable amounts received from business trusts must be deducted from the cost of acquisition of the units, impacting the capital gains calculation.

Critical Concepts: ​

  1. Cost Inflation Index (CII): A measure used to adjust the cost of acquisition and improvement for inflation. It is calculated based on the Consumer Price Index (CPI) and notified by the government annually.
    • Formula for Indexed Cost of Acquisition: [ \text{Indexed Cost of Acquisition} = \text{Cost of Acquisition} \times \frac{\text{CII for the Year of Transfer}}{\text{CII for the Year of Acquisition or 2001, whichever is later}} ]
    • Formula for Indexed Cost of Improvement: [ \text{Indexed Cost of Improvement} = \text{Cost of Improvement} \times \frac{\text{CII for the Year of Transfer}}{\text{CII for the Year of Improvement}} ]
  2. Indexation: A method to adjust the purchase price of an asset for inflation, reducing the taxable capital gains.
  3. Rupee-Denominated Bonds: Bonds issued by Indian companies in Indian rupees but held by non-residents. Gains due to rupee appreciation on redemption are not taxable.

Compliance Steps: ​

  1. Documentation:
    • Maintain records of the purchase price, improvement costs, and transfer-related expenses.
    • Keep track of the Cost Inflation Index for relevant years.
  2. Calculation:
    • Compute capital gains by deducting allowable expenses (cost of acquisition, improvement, and transfer costs) from the sale consideration.
    • Apply indexation for long-term capital assets if applicable.
  3. Reporting:
    • Report capital gains in the income tax return under the appropriate head.
    • For non-residents, ensure proper currency conversion and reporting of gains.

Examples: ​

  1. Indexed Cost Calculation:

    • Mr. A purchased a property in 2010-11 for ₹50 lakh and sold it in 2023-24 for ₹1.5 crore. The CII for 2010-11 is 167, and for 2023-24, it is 348. [ \text{Indexed Cost of Acquisition} = 50,00,000 \times \frac{348}{167} = ₹1,04,19,161 ] [ \text{Taxable Capital Gains} = 1,50,00,000 - 1,04,19,161 = ₹45,80,839 ]

  2. Non-Resident Currency Conversion:

    • A non-resident purchased shares in 2018 for $10,000 (₹7 lakh at the time) and sold them in 2023 for $15,000 (₹12 lakh at the time). The capital gains are calculated in USD: [ \text{Capital Gains in USD} = 15,000 - 10,000 = $5,000 ] The $5,000 is then converted to Indian rupees at the exchange rate on the date of sale.

  3. Business Trust Units:

    • Ms. B received ₹2 lakh from a business trust, which is not taxable. She purchased the units for ₹10 lakh. The cost of acquisition is reduced to ₹8 lakh (₹10 lakh - ₹2 lakh) for capital gains calculation.

This section simplifies the computation of capital gains while introducing specific rules for indexed costs, non-residents, and business trusts, ensuring clarity and fairness in taxation.