What is Capital Gain? The Formula, Explained

Capital Gain = Full Value of Consideration − (Cost of Acquisition + Cost of Improvement + Transfer Expenses). For long-term gains where indexation applies, “Cost of Acquisition” and “Cost of Improvement” are each replaced with their indexed values using the Cost Inflation Index (CII), which adjusts historical cost upward for inflation before it’s subtracted from the sale price — reducing the taxable gain.

Capital gains tax exists to tax the real economic profit from an asset sale, distinct from your regular salary or business income, because property gains are typically large, infrequent, and earned over long holding periods — the tax code treats them with separate rates, holding-period rules, and reinvestment exemptions rather than folding them into ordinary income tax slabs (except for short-term gains, which are taxed at slab rate).

LTCG vs STCG — Holding Period Rules

Holding period formula: Count from the date of the original purchase deed (or, for inherited/gifted property, the previous owner’s original purchase date — the holding period “tacks on” from the prior owner) to the date of the sale/transfer deed. This 24-month threshold for immovable property was set by Budget 2024, reduced from the earlier 36-month rule.

Budget 2024/2026 Rule Changes — What Actually Applies Now

This grandfathering was added by amendment shortly after the original Budget 2024 announcement (which had initially proposed 12.5% with no indexation for everyone), specifically to protect long-term property holders from a sudden tax increase caused by losing decades of inflation adjustment. Budget 2026-27 made no further changes to this structure — it continues to apply for FY 2026-27 as described here.

Indexation & The Cost Inflation Index — Full Table

Indexed Cost of Acquisition = Cost of Acquisition × (CII of year of sale ÷ CII of year of purchase, or year 2001-02, whichever is later). The identical formula applies to cost of improvement, using the CII of the year the improvement was made. Indexation is only relevant if you’re using the 20%-with-indexation option for property acquired before 23 July 2024 — it plays no role in the 12.5%-flat calculation.

Source: CBDT notifications under Section 48, Explanation (v) of the Income Tax Act, 1961 (base year revised to 2001-02 by Finance Act, 2017; latest figures per CBDT Notification No. 70/2025 dated 1 July 2025 for FY 2025-26, and subsequent CBDT notification for FY 2026-27).

Capital Gains by Property Scenario

Residential Property, Flats, Builder Floors, Apartments & Villas

Standard LTCG/STCG rules apply directly as described above. A residential property sale is also the only asset type eligible for the simpler Section 54 exemption route (as opposed to Section 54F, used for other asset types).

Commercial Property, Office, Retail Shop

Same LTCG/STCG mechanics, but reinvestment exemption is different: commercial property sale proceeds cannot use Section 54 (residential-only); instead, Section 54F applies if you reinvest into a residential house, and Section 54EC bonds remain available regardless of the asset type sold, up to the ₹50 lakh cap.

Plots & Agricultural Land

Non-agricultural plots follow standard property capital gains rules. Rural agricultural land (as defined under Section 2(14) of the Income Tax Act, based on distance from municipal limits and population) is specifically excluded from the definition of “capital asset” altogether — its sale is not subject to capital gains tax at all. Urban agricultural land, however, IS treated as a capital asset and taxed normally; Section 54B offers a specific exemption when agricultural land is sold and the proceeds are reinvested in other agricultural land.

Inherited Property

Inheritance itself is not a “transfer” for capital gains purposes — no tax arises at the point of inheriting. When the inheritor eventually sells the property, the cost of acquisition is taken as the previous owner’s original cost (or FMV as on 1 April 2001, if the previous owner acquired it earlier), and the holding period is counted from the previous owner’s original acquisition date, not from the date of inheritance — this is why inherited property very often qualifies as long-term immediately upon sale.

Gifted Property

Same mechanics as inherited property: a genuine gift (from a specified relative, or otherwise, subject to the recipient’s own tax treatment under Section 56(2)(x) at the time of receipt) is not itself a capital-gains “transfer” for the donor. On the recipient’s eventual sale, cost and holding period both carry over from the original owner who first acquired the asset.

NRI Property Sale

NRIs follow the identical LTCG/STCG computation as resident sellers, with the key procedural difference being TDS: buyers must deduct TDS under Section 195 based on the NRI seller’s actual computed capital gains rate (not a flat 1% as under Section 194-IA for resident sellers), and NRIs can apply for a Lower/Nil TDS Certificate under Section 197 in advance to avoid excess deduction. Full detail: see our NRI Rental Income Tax & Repatriation Guide.

Joint Ownership

Each co-owner is taxed individually on their proportionate share of the capital gain, based on their ownership percentage in the property (as reflected in the sale deed/title, or the joint-ownership agreement) — not as a single combined gain. Each co-owner separately claims their own Section 54/54EC/54F exemption against their own share.

Under-Construction vs Ready-to-Move Property

For under-construction property purchased directly from a builder, the holding period for capital gains purposes generally begins from the date of the original allotment letter/agreement (not the possession/registration date), per multiple judicial precedents recognizing an allotment as conferring a right in the property — though this is a fact-specific area where professional advice is valuable if your holding period is close to the 24-month line.

Tax-Saving Chapter — Section 54, 54EC, 54F & More

Section 54 — Sold a Residential House, Reinvest in Another House

Section 54F — Sold Any Other Long-Term Asset (Land, Commercial Property, etc.), Reinvest in a House

Section 54EC — Capital Gains Bonds (REC / PFC / IRFC)

Other Reinvestment Sections

Capital Gains Account Scheme (CGAS)

If you can’t complete your reinvestment before your income tax return due date, deposit the unutilised gain into a CGAS account at an authorised bank before that due date — this preserves your exemption eligibility while giving you the full statutory window (1/2/3 years, depending on the section) to actually complete the purchase or construction.

Decision Trees

Comparison Tables

Worked Examples

50 Frequently Asked Questions

Related Tools & Guides

Bibliography & Official Sources

1. Income Tax Law

• Income Tax Act, 1961 — Sections 45, 48, 50C, 54, 54B, 54D, 54EC, 54F, 54G, 54GA, 194-IA, 195
• Finance Act, 2024 (as amended) — reduced holding period for LTCG on immovable property to 24 months; introduced 12.5% LTCG rate; grandfathered 20%-with-indexation option for property acquired before 23 July 2024
• Finance Act, 2023 — introduced ₹10 crore cap on Section 54/54F exemption, effective AY 2024-25

2. CBDT References

• CBDT Notification No. 70/2025 dated 1 July 2025 — CII for FY 2025-26 notified as 376
• CBDT Notification No. 44/2024 dated 24 May 2024 — CII for FY 2024-25 notified as 363
• CBDT Notification No. 44/2017 dated 5 June 2017 — revised CII base year to 2001-02

3. Government Websites

• Income Tax Department — incometaxindia.gov.in
• CBDT — incometax.gov.in

Last verification date: July 25, 2026. This page is for general information and planning purposes and does not constitute legal or tax advice. Figures and thresholds are current as of this date per publicly available CBDT notifications and secondary reporting cross-checked against them; always confirm the latest applicable rate/threshold with a Chartered Accountant before filing.