Cost of Acquisition, Indexation and Cost of Improvement (Income Tax Act 2025)
Capital gains are the sale price minus three things: the cost of acquisition, the cost of any improvement, and the expense of the transfer itself (section 72(1)). The Income-tax Act, 2025 fixes what "cost" means in sections 73 and 90. Indexation, which raises the cost by a Cost Inflation Index, now has a narrow job: it is used only to test the tax on land and buildings acquired before 23 July 2024 (section 197(3)).
This guide is for taxpayers and practitioners computing gains for tax year 2026-27. Everything is taken from the Act as amended by the Finance Act, 2026, with the section number beside it. It is information, not tax advice.
How are capital gains computed under the Income-tax Act, 2025?
Section 72(1) says capital gains are computed by deducting the following from the full value of the consideration received or accruing on the transfer:
- expenditure incurred wholly and exclusively in connection with the transfer (brokerage, legal fees and similar); and
- the cost of acquisition of the asset and the cost of any improvement to it.
Section 72(3) lists two amounts you cannot deduct: interest that was claimed under section 22(1)(b) or under Chapter VIII, and securities transaction tax (STT).
What is the cost of acquisition of an asset?
For most assets bought outright, it is what you paid. The Act adds special rules for assets that did not come by a plain purchase. The diagram shows the main routes.
Assets that came by gift, will, inheritance or a trust
Under section 73(1), Table Sl. No. 1, the cost is the cost to the previous owner, plus the cost of any improvement made by the previous owner or by you. The table covers a gift, a will, succession, inheritance or devolution, distribution on liquidation of a company, a transfer to a revocable or irrevocable trust, and the transfers listed in section 70(1) that are not treated as a transfer. "Previous owner" means the last owner who got the asset by a mode other than these (section 73(2)(a)). If the previous owner's cost cannot be found, the cost is the fair market value on the date the asset became the previous owner's (section 90(11)).
Assets held before 1 April 2001
You may take either the actual cost or the fair market value on 1 April 2001 (section 90(9)(a)). For land or buildings, that fair market value cannot exceed the stamp duty value on 1 April 2001, where one is available (section 90(10)).
Equity shares and equity fund units bought before 1 February 2018
For a long-term equity share, a unit of an equity oriented fund or a unit of a business trust referred to in section 198 (the STT-paid category) acquired before 1 February 2018, the cost is the higher of actual cost and the lower of fair market value and the sale price (section 90(7)). For a listed asset, fair market value is the highest price quoted on a recognised exchange on 31 January 2018 (section 90(8)(b)(i)). The sale price cap means this rule cannot create a loss that you did not make.
Intangibles, bonus shares and rights entitlements
| Asset | Cost of acquisition | Section |
|---|---|---|
| Goodwill, trade mark, brand name, tenancy rights, stage carriage permits, loom hours, other rights, if bought | Purchase price | 90(3)(a) |
| The same assets, if not bought | Nil | 90(3)(c) |
| Bonus shares allotted without payment | Nil | 90(6)(d) |
| Right to subscribe, if you renounce it | Nil for you; the buyer's cost is the price paid to you plus the amount paid to the company | 90(6)(b), (e) |
| Shares you subscribed to under a rights entitlement | Amount you actually paid | 90(6)(c) |
| Share received on a demerger (resulting company) | Formula using cost of the demerged shares, net book value of assets transferred and net worth | 73(1), Table Sl. No. 14, 15 |
| Share received on amalgamation of an Indian company | Cost of the share in the amalgamating company | 73(1), Table Sl. No. 2 |
| Specified security or sweat equity shares | Fair market value used for the salary perquisite | 73(1), Table Sl. No. 4 |
| Share from consolidation, sub-division, conversion into stock or another kind of share | Worked out from the cost of the shares or stock it came from | 90(9)(d) |
| Asset received on liquidation of a company, where you were taxed on it under section 68 | Fair market value on the date of distribution | 90(9)(c) |
| Shares allotted on demutualisation of a stock exchange | Cost of the original membership; trading or clearing rights are nil | 90(12) |
If goodwill had depreciation claimed on it before the tax year starting 1 April 2020, that depreciation is subtracted from the purchase price (section 90(4)).
What counts as cost of improvement?
It is capital expenditure on additions or alterations to the asset (section 90(1)(b)). If the asset was yours or the previous owner's before 1 April 2001, only spending on or after that date counts. For an asset acquired by gift or inheritance, improvements by the previous owner count too.
Two exclusions apply:
- Expenditure that was deductible in computing house property income, business income or income from other sources is not a cost of improvement (section 90(2)). Rs 20,000 of repairs that you claimed as a deduction cannot be added again.
- For goodwill, intangible assets and rights, the cost of improvement is nil (section 90(1)(a)).
What is indexation under the Income-tax Act, 2025?
Indexation replaces your cost with an inflation-adjusted cost. Section 72(8) defines it:
- Cost Inflation Index (CII): an index the Central Government notifies each tax year, based on 75% of the average rise in the Consumer Price Index (urban) (section 72(8)(a)).
- Indexed cost of acquisition = cost of acquisition x (CII of the year of transfer / CII of the first year the asset was held, or of the year beginning 1 April 2001, whichever is later) (section 72(8)(b)).
- Indexed cost of improvement = cost of improvement x (CII of the year of transfer / CII of the year the improvement was made) (section 72(8)(c)).
Section 72(2) does not give indexation to every seller. It applies it only for item B of the formula in section 197(3). The rest of the time, gains are computed with the plain cost.
Who gets the indexation option?
Under section 197(3), the option is for a resident individual or HUF who transfers a long-term capital asset that is land or a building, or both, acquired before 23 July 2024. Tax A is the 12.5% tax on long-term capital gains under section 197(1)(b). Tax B is the same tax computed at 20% on a gain worked out with indexed cost of acquisition and indexed cost of improvement. The excess of A over B (E = A - B) is ignored.
Section 197(6)(d) points back to section 72 for what "indexed cost" means. The Cost Inflation Index figures themselves come from the Central Government's notification and are not in the Act, so the examples below use assumed index values.
Which year do I index from if I bought before 2001 or inherited the property?
Section 72(8)(b) divides the transfer-year index by the index for the first year the asset was held by you, or the year beginning 1 April 2001, whichever is later. So an asset held since the 1990s is indexed from 2001-02, and the cost you index is the actual cost or the 1 April 2001 fair market value, as you choose (section 90(9)(a)). Improvements are indexed from the year each one was made (section 72(8)(c)), and only spending on or after 1 April 2001 counts as improvement.
The same choice applies to a gifted or inherited asset that was the previous owner's before 1 April 2001: you may use the previous owner's cost or the 1 April 2001 fair market value (section 90(9)(b)). For land or buildings that value is capped at the stamp duty value on that date (section 90(10)). Where the Act does not say, the index values are not part of it: the Central Government notifies a table for each tax year, so take the figures from the current notification.
How do I work this out? Four worked examples
All examples are for tax year 2026-27, ignore surcharge and health and education cess, and assume a resident individual with no other capital gains.
Example 1: land bought in 2024 or earlier, indexation does not help
Ravi sold a plot for Rs 1,00,00,000 in 2026-27. He bought it for Rs 20,00,000 and later spent Rs 5,00,000 on levelling and a boundary wall. Transfer expenses were Rs 1,00,000. Assumed index values: 200 in the purchase year, 300 in the improvement year, 400 in the transfer year.
| Step | Tax A (no indexation) | Tax B (indexed) |
|---|---|---|
| Sale price | 1,00,00,000 | 1,00,00,000 |
| Less transfer expenses | 1,00,000 | 1,00,000 |
| Less cost of acquisition | 20,00,000 | 20,00,000 x 400/200 = 40,00,000 |
| Less cost of improvement | 5,00,000 | 5,00,000 x 400/300 = 6,66,667 |
| Capital gain | 74,00,000 | 52,33,333 |
| Tax | 12.5% = 9,25,000 | 20% = 10,46,667 |
A (9,25,000) is below B (10,46,667), so E is nil and Ravi pays Rs 9,25,000.
Example 2: land held for a long time, indexation lowers the tax
Anita bought a house in 2001-02 for Rs 15,00,000 and sells it in 2026-27 for Rs 1,00,00,000, with transfer expenses of Rs 1,00,000. No improvements. Assumed index values: 100 in the purchase year (also the year beginning 1 April 2001, the earliest base allowed), 400 in the transfer year (a factor of 4).
| Step | Tax A (no indexation) | Tax B (indexed) |
|---|---|---|
| Net sale value (1,00,00,000 - 1,00,000) | 99,00,000 | 99,00,000 |
| Less cost of acquisition | 15,00,000 | 15,00,000 x 400/100 = 60,00,000 |
| Capital gain | 84,00,000 | 39,00,000 |
| Tax | 12.5% = 10,50,000 | 20% = 7,80,000 |
A is more than B, so E = 10,50,000 - 7,80,000 = 2,70,000 is ignored and Anita pays Rs 7,80,000.
Example 3: an inherited flat
Meena inherited a flat from her father. He had bought it for Rs 18,00,000 and spent Rs 2,00,000 on improvements. Meena spent Rs 3,00,000 on capital renovation. She sells it for Rs 90,00,000 with Rs 90,000 of transfer expenses.
| Step | Rs |
|---|---|
| Previous owner's cost (section 73, Sl. No. 1) | 18,00,000 |
| Improvement by previous owner | 2,00,000 |
| Improvement by Meena | 3,00,000 |
| Total cost | 23,00,000 |
| Sale price less transfer expenses (90,00,000 - 90,000) | 89,10,000 |
| Capital gain (89,10,000 - 23,00,000) | 66,10,000 |
The father's cost carries over, so the whole gain since his purchase is taxed when she sells. Which rate and option apply depends on the period of holding and the acquisition date, which is a separate check.
Example 4: listed shares bought before 1 February 2018
Suresh sells 1,000 listed shares in 2026-27 at Rs 600 each, paying Rs 3,000 brokerage. He bought them in 2015 at Rs 200 each. The highest quoted price on 31 January 2018 was Rs 350. Assume STT was paid on purchase and sale, so section 198 applies.
| Step | Rs |
|---|---|
| Actual cost (1,000 x 200) | 2,00,000 |
| Fair market value on 31 January 2018 (1,000 x 350) | 3,50,000 |
| Sale price (1,000 x 600) | 6,00,000 |
| Lower of fair market value and sale price | 3,50,000 |
| Cost of acquisition: higher of 2,00,000 and 3,50,000 | 3,50,000 |
| Gain (6,00,000 - 3,000 - 3,50,000) | 2,47,000 |
| Gain above Rs 1,25,000 (section 198(2)(a)) | 1,22,000 |
| Tax at 12.5% | 15,250 |
If Suresh had sold at Rs 300 per share (Rs 3,00,000), the lower of fair market value and sale price would be 3,00,000. His cost would then be 3,00,000, so the gain would be nil before the Rs 3,000 brokerage. The rule never turns a profit into a loss for the seller. STT paid is not deductible (section 72(3)(b)).
Other cost rules worth knowing
- Business trust units: amounts received on a unit that are not income reduce its cost of acquisition (section 72(4)).
- Non-residents selling Indian company shares or debentures: the gain is computed in the foreign currency first used to buy them, then converted to rupees (section 72(6), which excludes equity shares covered by section 198; rate rules in rule 52). Gains on rupee appreciation at redemption of rupee bonds are ignored (section 72(7)).
- Specified entities: where section 67(10) applies, the entity gets an extra deduction worked out as prescribed (section 72(5); rule 50 and Form 27).
- Holding period for certain transfers: rule 6 sets how the holding period is counted for conversions, Income Declaration Scheme assets and branch-to-subsidiary conversions.
Common mistakes
- Indexing every sale. Indexation applies only inside section 197(3), to a resident individual or HUF selling land or buildings acquired before 23 July 2024. Listed shares and other assets are computed with plain cost.
- Adding back repairs already claimed. Expenditure deducted under house property, business or other sources income is excluded from cost of improvement (section 90(2)).
- Using the date of inheritance as the cost date. For gifted or inherited assets the cost is the previous owner's, not the market value on the day you received it.
- Deducting STT or loan interest. Section 72(3) disallows both.
- Using a pre-2001 market value above the stamp duty value. For land or buildings, the 1 April 2001 value is capped at the stamp duty value where available (section 90(10)).
- Losing the paperwork. The previous owner's purchase deed, improvement bills and the 31 January 2018 price are the proof for these costs. Collect them before the sale, not after.
Quick reference
| Item | Figure or rule | Where |
|---|---|---|
| Long-term capital gains rate | 12.5% | Section 197(1)(b) |
| Rate used for indexed comparison | 20% | Section 197(3), item B |
| Cut-off date for the indexation test | Land or building acquired before 23 July 2024 | Section 197(3) |
| Exempt slice of listed equity gains | Rs 1,25,000 a year | Section 198(2)(a) |
| Equity cost base date | 1 February 2018 (FMV on 31 January 2018) | Section 90(7), (8) |
| Pre-2001 asset base date | 1 April 2001 | Section 90(9)(a) |
Where this is in the Act
- Section 72: mode of computation, disallowed deductions, indexation definitions, non-resident currency rules.
- Section 73: cost of acquisition for gifts, inheritance, mergers, demergers and other modes.
- Section 90: meaning of cost of improvement and cost of acquisition, 2001 and 2018 base dates.
- Sections 197 and 198: tax on long-term capital gains and the indexation comparison.
- Rules 6, 50 and 52 (Income-tax Rules, 2026): holding period, specified entities, foreign exchange rates.
For the year terms used above, see tax year versus previous year and assessment year.
For a CA firm, the effort in a capital gains file is collecting proof of cost: the previous owner's deed, improvement bills and the 2018 price. Finexo's practice management software lets you keep a document checklist per client and track who has sent what. It does not compute capital gains for you.
Frequently Asked Questions
How is capital gain computed under the Income-tax Act, 2025?
Under section 72(1), you deduct the transfer expenses, the cost of acquisition and the cost of any improvement from the full value of consideration. Interest claimed as a deduction and STT are not allowed (section 72(3)).
Is indexation still available under the Income-tax Act, 2025?
Only in a limited way. Section 197(3) lets a resident individual or HUF compare the 12.5% tax with a 20% tax on an indexed gain for land or buildings acquired before 23 July 2024, and the excess of the first over the second is ignored.
What is the cost of acquisition for an inherited property?
It is the cost to the previous owner plus the cost of any improvement by the previous owner or by you (section 73(1), Table Sl. No. 1). If the previous owner's cost cannot be found, the fair market value on the date the previous owner got it is used (section 90(11)).
What counts as cost of improvement?
Capital expenditure on additions or alterations to the asset (section 90(1)(b)). Expenditure already deducted as house property, business or other sources expense is excluded (section 90(2)), and for goodwill and similar intangibles it is nil.
What is the cost of listed shares bought before 1 February 2018?
The higher of the actual cost and the lower of the fair market value (highest quoted price on 31 January 2018) and the sale price, for long-term equity shares, equity oriented fund units and business trust units covered by section 198 (section 90(7), (8)).
How do I index a property bought before 1 April 2001?
Take the actual cost or the fair market value on 1 April 2001, whichever you choose, and multiply by the transfer-year index divided by the index for the year beginning 1 April 2001 (sections 72(8)(b) and 90(9)(a)). For land or buildings that fair market value cannot exceed the stamp duty value on that date (section 90(10)).
Where do I find the Cost Inflation Index?
The index for each tax year is notified by the Central Government; section 72(8)(a) only says how it is to be set, based on 75% of the average rise in the urban Consumer Price Index. Use the figures in the current notification.