Section 48: Method Of Computing Capital Gain

Ritik Chopra | Last updated: 13 September 2021

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Section 48 outlines the method for computing capital gains tax for most assets, excluding shares and debentures held by non-residents. Short-term gains are calculated by deducting the cost of acquisition and improvement from the sale value. Long-term gains use indexed costs for acquisition and improvement, adjusted by the Cost Inflation Index. Certain transfers, like gifts or specific bond sales, have unique valuation rules, and Security Transaction Tax is not deductible.

1. For all assessees and all assets except shares and debentures owned by a non-resident

(a) Short-term capital gain shall be computed by deducting out of full value of consideration the following amounts:

(i) expenditure incurred wholly and exclusively in connection with such transfer,
(ii) the cost of acquisition of the asset; and
(iii) the cost of any improvement thereto.

(b) Long-term capital gain shall be computed by deducting out of full value of consideration the following amounts:

Section 48: How to Calculate Capital Gains Tax

(i) expenditure incurred wholly and exclusively in connection with such transfer,
(ii) the indexed cost of acquisition; and
(iii) the indexed cost of any improvement thereto. (c) Where capital asset being shares, debentures or warrants as referred in Section 47(iii) are transferred under a gift or irrevocable trust the market value on the date of transfer shall be deemed to be the full value of consideration received or accruing as a result of transfer. Expenses disallowed u/s Section 48

Any amount paid on account of Security Transaction Tax shall not be allowed to be deducted u/s 48.

For the above purposes:

A. 'Indexed cost of acquisition' means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the first year in which asset was held by the assessee or for the year beginning on the 1st day of April 2001, whichever is later.

B. "Indexed cost of any improvement" means the amount which bears the cost of improvement the same proportion as cost Inflation Index for the year in which the asset is sold bears tothe cost Inflation Index for the year in which improvement to the asset took place.

C. "Cost Inflation Index", in relation to a previous year, means such Index as the Central government may, having regard to seventy five per cent of average rise in the Consumer

Price Index (urban) for the immediately preceding previous year to such previous year, by notification in the Official Gazette, specify, in this behalf.

Cases in which the Indexation of Cost is not to be done while Calculating Long Term Capital Gain

(i) Transfer of long term debentures or bonds other than capital indexed bonds issued by the Government. [Proviso 3 to section 48].

(ii) Transfer of Soverign Gold Bond issued by RBI under the Soverign Gold Bond Scheme,2015.

(iii) Transfer of shares in or debentures of an Indian Company by a non-resident assessee [Proviso 2 to section 48].

(iv) Transfer of an undertaking or division (assets etc.) in slump sale [section 50 B].

(v) Transfer of a long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust referred to in section 112A. [Third Proviso to section 48].

(vi) Transfer of units purchased in foreign currency [section 115 B].

(vii) Global Depository Receipts (GDRs) or bonds purchased in foreign currency by a non resident [section 115AC]

(viii) Global Depository Receipts (GDRs) or bonds purchased in foreign currency by any resident individual [section 115 ACA]

(ix) Securities (other than units referred to in section 115AB) purchased by Foreign Institutional Investors (FIIS) [section 115AD)

(x) Transfer of foreign exchange asset by a non-resident Indian [section 115D]

FAQ :

A short-term capital gain is calculated by deducting the expenditure incurred on transfer, the cost of acquisition, and the cost of any improvement from the full value of the consideration received.

For long-term capital gains, you deduct the expenditure incurred on transfer, the indexed cost of acquisition, and the indexed cost of any improvement from the full value of the consideration.

Indexed cost of acquisition is calculated by taking the cost of acquisition and multiplying it by a proportion based on the Cost Inflation Index for the year the asset was first held or April 1, 2001, whichever is later.

Yes, any amount paid as Security Transaction Tax is not allowed to be deducted under Section 48.

Indexation is not applied in several cases, including the transfer of long-term debentures (except capital indexed bonds), Sovereign Gold Bonds, shares or debentures of an Indian company by a non-resident, slump sales, and the transfer of equity shares or units in certain funds.