Section 72 of the Income-tax Act, 2025 — How Capital Gains Are Computed

In plain language

What Section 72 says in plain English

Section 72 of the Income-tax Act, 2025 lays down the mode of computation of capital gains — that is, the exact arithmetic used to figure out how much profit is taxable when you sell (transfer) a capital asset such as land, a building, shares, mutual funds, gold or jewellery. It is the direct successor of the well-known Section 48 of the Income-tax Act, 1961. The head of income "Capital gains" itself is charged under Section 67; Section 72 only tells you how to measure the gain once a transfer has happened.

The core rule in Section 72(1) is a simple subtraction:

• Capital gain = Full value of consideration − Cost of acquisition − Cost of improvement − Transfer expenses.
• Full value of consideration is the amount you receive (or become entitled to receive) on the sale.
• Cost of acquisition is what you originally paid to acquire the asset (see Section 73 for special cases like gifts and inheritance).
• Cost of improvement is capital spending that added to the asset (e.g. building an extra floor).
• Transfer expenses are amounts spent "wholly and exclusively" in connection with the sale — brokerage, legal fees, stamp charges paid by the seller, advertising.

Who it applies to

Section 72 applies to every taxpayer — individuals, HUFs, firms, LLPs, companies, NRIs and trusts — whenever there is a transfer of a capital asset that is chargeable under the head "Capital gains". It applies to both short-term and long-term capital assets, though some benefits (like indexation) are available only for certain long-term assets.

Key conditions, limits and special rules

• Indexation (Section 72 read with the indexed-cost rule): For eligible long-term assets, "cost of acquisition" and "cost of improvement" are replaced by indexed cost, computed using the government-notified Cost Inflation Index (CII). The base year is 1 April 2001 (or the year of first holding, whichever is later).
• Indexation withdrawn from 23 July 2024: Following the Finance (No. 2) Act, 2024, and carried into the 2025 Act, indexation is no longer available for most long-term assets transferred on or after 23 July 2024. The general LTCG rate is now 12.5% without indexation.
• Land and building grandfathering: A resident individual or HUF who acquired land or a building before 23 July 2024 may choose the lower of (a) 12.5% without indexation or (b) 20% with indexation.
• STT is not deductible: Securities Transaction Tax paid on purchase or sale of listed securities cannot be subtracted while computing capital gains.
• Interest not double-counted: Interest already claimed as a deduction (for example under house-property provisions) cannot be added again to cost.
• Non-resident forex rule: An NRI transferring shares or debentures of an Indian company must compute the gain in the same foreign currency originally used to buy them and reconvert to rupees — this neutralises rupee-depreciation and denies indexation.
• Rupee-denominated bonds: Gains arising only from rupee appreciation on such bonds held by a non-resident are excluded.

How it interacts with related sections

• Section 67 creates the charge; Section 72 measures it.
• Section 73 supplies the cost of acquisition in special modes (gift, inheritance, partition, amalgamation).
• Sections 82 and 85 (successors to 54/54F etc.) allow you to reinvest and claim exemptions after the gain is computed under Section 72.
• The rate sections then apply the correct tax — 12.5% or 20% for LTCG, and the applicable short-term rate.

Practical implications

For most taxpayers selling property or shares after April 2026, the calculation is now cleaner: subtract your genuine costs and transfer expenses, and generally do not apply indexation. Keep every purchase deed, improvement bill and brokerage note — the burden of proving cost is on you. If you own old property (bought before 23 July 2024), always run both methods (12.5% flat vs 20% with indexation) and pick the cheaper one, because for older, low-cost properties indexation can still win.