Section 72 is the COMPUTATIONAL CORE of Part E -- the substantive equivalent of 1961 s. 48 in its entirety with all post-1961 accretions including the FA 1992 indexation regime, the FA 1981 / FA 2007 NR foreign-currency conversion rule,…
72
ITA 2025 · Section 72
Section 72 — - MODE OF COMPUTATION OF CAPITAL GAINS
Section 72 is the COMPUTATIONAL CORE of Part E -- the substantive equivalent of 1961 s. 48 in its entirety with all post-1961 accretions including the FA 1992 indexation regime, the FA 1981 / FA 2007 NR foreign-currency conversion rule, the FA 2004 STT-deduction-bar, the FA 2014 / FA 2023 business-trust-unit cost-reduction architecture, the FA 2017 RDB rupee-appreciation neutralisation, the FA 2021 specified-entity-reconstitution-attributable deduction, and the FA 2024 indexation-restriction. EIGHT sub-sections work in tandem: (1) basic formula FVOC minus transfer-expenses minus cost; (2) indexation substitution for LTCG-with-indexation regime; (3) double-deduction bars (HP / Chapter VIII interest already deducted; STT already paid); (4) business-trust unit distribution as cost-reduction (Schedule V Sl. 3/4 non-income returns); (5) specified-entity-reconstitution attributable deduction tying to s. 67(10) A=B+C-D formula; (6) NR foreign-currency conversion rule (cost / consideration / FX); (7) RDB rupee-appreciation neutralisation; (8) definitions -- CII / indexed-cost / indexed-improvement / forex-rate. Practitioner-grade rule: every CG computation under ss. 67-89 ultimately resolves through the s. 72 machinery.
STATUTORY ARCHITECTURE -- THE BASIC FORMULA AND ITS LAYERS
BASIC FORMULA (sub-s. 1): Capital Gains = FULL VALUE OF CONSIDERATION (FVOC) MINUS [(a) expenditure WHOLLY AND EXCLUSIVELY in connection with transfer + (b) COST OF ACQUISITION + cost of any IMPROVEMENT thereto]. Three deductible components: (i) Transfer expenses: brokerage / commission to broker; stamp-duty paid by transferor; legal fees for sale-deed / sale-agreement; technical-services-fees for valuation / due diligence; advertisement / marketing expenses for sale; commission to RIA / mutual-fund-distributor (where applicable). 'Wholly and exclusively' for transfer test -- general business expenses or holding-period costs do NOT qualify. (ii) Cost of acquisition: per s. 73 (24-row Table for special modes -- gift / will / amalgamation / demerger / firm-conversion / etc.) and s. 90 (FMV-2001 election / pre-1-Feb-2018 grandfathering / demutualisation etc.). (iii) Cost of improvement: per s. 90(1) -- only CAPITAL expenditure on additions / alterations post-1-Apr-2001 (or by previous owner under s. 73 Table Sl. 1 modes). POST-FA 2024 INDEXATION REGIME: For LAND / BUILDING (acquired before 23-Jul-2024 by individuals / HUF), assessee may CHOOSE between [20% with indexation per s. 72(2) on indexed cost] OR [12.5% without indexation per s. 197(3)(a)] -- LOWER applies. For OTHER ASSETS (post 23-Jul-2024), indexation generally WITHDRAWN -- flat 12.5% LTCG via s. 197(3)(a) without recourse to s. 72(2). Strategic modeling required for individual / HUF land-building sellers.
SUB-SECTION (2) -- INDEXATION SUBSTITUTION
Sub-s. (2) substitutes 'indexed cost of acquisition' / 'indexed cost of improvement' for the corresponding terms in sub-s. (1) -- BUT ONLY for the purposes of Item B in s. 197(3) formula (the 20%-with-indexation rate route under FA 2024 architecture for land / building / individual-HUF). INDEXATION FORMULA (sub-s. 8(b)): Indexed Cost of Acquisition = Cost × (CII for year of transfer / CII for first year asset held by assessee OR for year beginning 1-Apr-2001, whichever is later). Indexation start-year (sub-s. 8(b)): (i) If acquired POST-1-Apr-2001 -- year of acquisition by ASSESSEE (Manjula J. Shah Bom HC ratio for inherited / gifted -- year of FIRST holding by previous owner); (ii) If acquired PRE-1-Apr-2001 (with FMV-2001 election under s. 90(9)) -- year beginning 1-Apr-2001 (CII = 100). INDEXED COST OF IMPROVEMENT (sub-s. 8(c)): improvement-cost × (CII for transfer-year / CII for year improvement was made). Each improvement separately indexed from its incurrence year. CII PUBLICATION (sub-s. 8(a)): CG notifies CII having regard to 75% of average rise in Consumer Price Index (urban) for immediately preceding tax year. Base year FY 2001-02 = 100. Recent series: FY 2023-24 = 348; FY 2024-25 = 363; FY 2025-26 = 376; FY 2026-27 awaiting notification. Manjula J. Shah (Bom HC, 2009) clarified: for assets received via s. 73 Table Sl. No. 1 (gift / will / inheritance / HUF-partition / 100%-sub transfer / amalgamation), CII denominator = first year of holding by PREVIOUS owner, NOT year of inheritance. Codified by judicial gloss; FA 2024 indexation-withdrawal does NOT eliminate Manjula reasoning for the still-eligible 20%-indexed land/building route.
SUB-SECTION (3) -- ANTI-DOUBLE-DEDUCTION BARS
Sub-s. (3) prohibits two specific double-deductions: (a) HP / CHAPTER VIII INTEREST: interest claimed as deduction under s. 22(1)(b) [equivalent of 1961 s. 24(b) -- HP interest deduction] OR under Chapter VIII (e.g., s. 130 EV-loan-interest, s. 131 affordable-housing, s. 132 housing loan, s. 133 EV-loan-interest under s. 80EEB) -- CANNOT be re-claimed as cost-of-acquisition / cost-of-improvement. Practitioner trap: Indian residential-property purchaser who claims home-loan interest under s. 22 (HP) up to INR 2L / year for 10+ years totals INR 20L+ deduction; on subsequent sale, this INTEREST cannot be added to acquisition cost. Codifies Sir Kameshwar Singh (Patna HC) and Indian Hotels SC anti-double-tax-shielding principle. (b) STT (Securities Transaction Tax): any sum paid as STT under Chapter VII of Finance (No. 2) Act 2004 is NOT deductible as transfer expense. Rationale: STT is the policy-justification for the concessional LTCG rate (12.5% under s. 198); allowing STT as transfer-expense AND concessional rate would double-benefit. Practitioner: stockbroker contract notes show STT separately; ensure NOT added to transfer-expense ledger; only brokerage / GST-on-brokerage / clearing-charges / etc. qualify.
SUB-SECTION (4) -- BUSINESS TRUST UNIT DISTRIBUTION AS COST-REDUCTION
Inserted FA 2014 with FA 2023 expansion. Addresses InvIT / REIT (business trust under s. 198 / 1961 s. 2(13A)) distribution mechanics. BACKGROUND: business trusts distribute units to unit-holders. Distributions can be: (a) INCOME (interest / rent / dividend) -- chargeable as IFOS under s. 92(2)(k) or as PGBP under s. 223(2); OR (b) NON-INCOME RETURNS (capital return / repayment of capital / amortised principal) -- under Schedule V Table Sl. 3 (interest stream from SPV) or Sl. 4 (rental stream). FA 2014 originally treated all unit distributions as income. FA 2023 introduced the cost-reduction mechanism for non-income returns. MECHANISM: where unit-holder receives amount FROM BUSINESS TRUST that is NOT chargeable as income under Sch. V Sl. 3/4 AND is NOT chargeable under s. 92(2)(k) (IFOS) or s. 223(2) (PGBP): (a) Reduce that amount FROM THE COST OF ACQUISITION of the unit; (b) If subsequent transfer is NOT regarded as transfer under s. 70 AND cost is determined under s. 73 (Table cost-tracing for tax-neutral transfers), the amount received BEFORE AND AFTER such non-transfer transaction shall ALSO be reduced from cost. Effect: prevents tax-deferral and double-dip. Pre-FA 2023, business-trust SPVs were distributing repatriation-of-capital tax-free at unit-holder level; FA 2023 forces this to ultimately be CG-event via cost-reduction -- when unit is finally sold, lower cost = higher CG. Worked example: Unit-holder buys InvIT unit at INR 100. Receives INR 8 distribution -- of which INR 5 is non-income (capital repayment per Sch. V Sl. 3) and INR 3 is interest income (chargeable IFOS). Cost reduces by INR 5 to INR 95. On subsequent sale at INR 110, CG = 110 - 95 = INR 15.
SUB-SECTION (5) -- SPECIFIED-ENTITY RECONSTITUTION ATTRIBUTABLE DEDUCTION
Linked to s. 67(10)-(11) firm/AOP/BOI reconstitution regime (FA 2021). When a SPECIFIED PERSON (retiring partner / changing PSR member) receives MONEY OR CAPITAL ASSET from SPECIFIED ENTITY (firm / AOP / BOI) in connection with reconstitution, the specified entity is taxed under s. 67(10) on A=B+C-D formula (B = money received, C = FMV of asset, D = capital account balance). Section 72(5) provides an ADDITIONAL DEDUCTION to the specified entity (in addition to standard sub-s. 1 deductions) -- amount calculated as PRESCRIBED -- for computing the CG attributable to TRANSFER OF SUCH CAPITAL ASSET. The prescribed-manner-deduction (Rule 8AA / 8AB equivalent under 2026 Rules) attributes the s. 67(10) charge appropriately across asset categories. Architecture purpose: avoid economic double-tax. Where firm distributes capital asset to retiring partner: (a) firm pays CG on the asset's transfer (sub-s. 1); (b) firm ALSO pays s. 67(10) charge on B+C-D; without sub-s. (5) attributable deduction, the same economic gain may be doubly captured. The sub-s. (5) attribution mechanism prevents this. Practitioner: FA 2021 firm-reconstitution rules are technically complex; engage TP / CG specialist for application; coordinate with s. 67(10) computation.
SUB-SECTION (6) -- NR FOREIGN-CURRENCY CONVERSION RULE
For NON-RESIDENT holding shares / debentures of an INDIAN COMPANY (other than equity shares referred to in s. 198 -- i.e., excluding listed equity which has its own concessional regime) acquired in foreign currency, special CG computation in foreign currency: (a) Cost of acquisition CONVERTED to FOREIGN CURRENCY (the same currency as initially used for purchase) at acquisition-date exchange rate; (b) Transfer expenditure CONVERTED to same foreign currency at incurrence-date exchange rate; (c) Full value of consideration CONVERTED to same foreign currency at sale-date exchange rate; (d) CG computed in foreign currency = FVOC-FX MINUS Cost-FX MINUS Expenses-FX; (e) RECONVERTED to INR at SALE-DATE exchange rate (Rule prescribed). EFFECT: neutralises rupee-depreciation impact for foreign investors. If a US-resident bought Indian unlisted share at USD 1,000 (INR 50,000 at acquisition rate) and sold for INR 80,000 (USD 1,000 at depreciated rupee), Indian-currency CG = INR 30,000; but foreign-currency CG = NIL -- proviso shifts liability to NIL. Re-investment continuity: same FX-method applies to every reinvestment in Indian-co shares / debentures by the NR. INDEXATION NOT AVAILABLE under sub-s. (6) -- the FX neutralisation IS the inflation-adjustment substitute. Practitioner: NR investors in Indian unlisted shares / debentures (PE / VC investors / corporate-bond holders) MUST opt for sub-s. (6) computation. Documentation: source of funds in foreign-currency / FX-rate at acquisition / sale / FIRC records. Excludes listed equity which has separate s. 198 regime.
SUB-SECTION (7) -- RUPEE-APPRECIATION NEUTRALISATION FOR RDB (FA 2017)
Inserted FA 2017 to neutralise rupee-appreciation effect at redemption of RUPEE-DENOMINATED BONDS (RDBs) issued by Indian company offshore (Masala Bonds) and held by NR. MECHANISM: where NR holds RDB of Indian company AND redemption gives rise to gain on account of RUPEE APPRECIATION against foreign currency, such gain is IGNORED for computing FVOC under sub-s. (1). Background: RDBs are denominated in INR but held by NR who tracks economic position in foreign currency. If rupee appreciates between issuance and redemption, NR has FX-gain in his foreign-currency P&L. This gain would normally enter Indian CG-computation (FVOC at INR-redemption value) but sub-s. (7) carves it out. Effect: NR-holder is taxed only on INR-denominated coupon-rate gains; FX appreciation tax-free. Symmetry with sub-s. (6): for NR shares-debentures (sub-s. 6), CG computed in FX (rupee-depreciation neutralised); for NR RDBs (sub-s. 7), rupee-appreciation neutralised by exclusion. Both protect NR from artificial FX-driven CG. Practitioner: applies only to MASALA BONDS / RDB structures; routine corporate FCBs / FCCBs not covered (those have FX-fluctuation-built-into-coupon).
SUB-SECTION (8) -- DEFINITIONS
(a) COST INFLATION INDEX (CII): Notified by CG having regard to 75% of average rise in Consumer Price Index (urban) for immediately preceding tax year. Base year FY 2001-02 = 100. Annual CG notification. Series: FY 2001-02 = 100; FY 2010-11 = 167; FY 2015-16 = 254; FY 2020-21 = 301; FY 2023-24 = 348; FY 2024-25 = 363; FY 2025-26 = 376 (notified). (b) INDEXED COST OF ACQUISITION: Cost × (CII for year of transfer / CII for first year asset held by assessee OR year beginning 1-Apr-2001, whichever is later). (c) INDEXED COST OF IMPROVEMENT: Improvement Cost × (CII for transfer-year / CII for year of improvement). (d) FOREX CONVERSION RATE: Indian currency to foreign currency / re-conversion: rate as may be PRESCRIBED. Rule 115 / 115AA-equivalent under 2026 Rules. Typically: SBI TT-buying-rate (sale-date) for re-conversion; reference-rate at acquisition / expense-incurrence date. Maintain documentary evidence of FX-rates.
CASE LAW -- LEADING DECISIONS
(i) CIT v. B.C. Srinivasa Setty (SC, 1981, 128 ITR 294) -- where machinery (cost-of-acquisition) cannot work, charge fails; foundational. (ii) CIT v. Tata Iron and Steel Co Ltd (SC) -- 'cost of acquisition' includes ALL incidental expenses (brokerage / registration / stamp duty borne at acquisition). (iii) CIT v. Manjula J. Shah (Bom HC, 2009, 318 ITR 416) -- indexation start-year = first holding by previous owner for s. 73 Table Sl. 1 transfers; codified by judicial gloss. (iv) CIT v. Sun Engineering Works (SC) -- improvement cost requires enduring benefit / increase in life / capacity; mere repairs not allowed. (v) Mrs Hilla J.B. Wadia v. CIT (Bom HC) -- interest on borrowed funds for acquisition CAN be capitalised in cost where not deducted under HP / PGBP. Now restricted by sub-s. (3)(a) double-deduction bar. (vi) CIT v. Ace Builders Pvt Ltd (Bom HC, 2006, 281 ITR 264) -- depreciable asset sale gives STCG character (s. 50 / s. 67 of 2025 Act). (vii) CIT v. India Cements Ltd (SC, 1966) -- transfer expenses scope. (viii) Esso Standard Inc v. CIT (SC, 1975, 86 ITR 23) -- bonus shares NIL cost; codified in s. 90(6)(d). (ix) Cadell Weaving Mill Co v. CIT (SC, 2001) -- transfer broadly construed; computation under s. 72 follows. (x) Recent FA 2024 transition cases (HC level) -- 20% with indexation vs 12.5% without indexation choice for individual / HUF land-building.
WORKED EXAMPLES (POST-FA 2024 REGIME)
EXAMPLE 1 -- INDIVIDUAL LAND-BUILDING (acquired before 23-Jul-2024; sold post): A purchased land in FY 2010-11 for INR 50L. Sells in FY 2026-27 for INR 2.5 cr. ROUTE 1 (12.5% without indexation): CG = 2.5 cr - 50L = 2 cr; Tax = 12.5% × 2 cr = INR 25L. ROUTE 2 (20% with indexation): Indexed cost = 50L × (CII 376 / CII 167) = INR 1.13 cr; CG = 2.5 cr - 1.13 cr = INR 1.37 cr; Tax = 20% × 1.37 cr = INR 27.4L. ROUTE 1 lower (INR 25L) -- A opts for 12.5% flat. EXAMPLE 2 -- LISTED EQUITY (FY 2026-27): A bought listed equity in FY 2018-19 at INR 50,000 (post-FA 2018 grandfathering not applicable). Sells in FY 2026-27 at INR 1,50,000. STT-paid; falls under s. 198 concessional 12.5% LTCG (above INR 1L exempt). CG = 1,50,000 - 50,000 = INR 1,00,000; Tax = 12.5% × (1L - 1L exemption) = NIL. EXAMPLE 3 -- NR INDIAN-COMPANY DEBENTURE (sub-s. 6): US-resident A bought Indian-co debentures at INR 1,00,000 (USD 2,000 at acq rate INR 50/USD). Sells at INR 1,30,000 (USD 1,500 at sale rate INR 86.67/USD). FX-cost = USD 2,000; FX-FVOC = USD 1,500; FX-CG = (USD 500) -- LOSS. Re-converted at sale-rate: -USD 500 × 86.67 = -INR 43,335. CAPITAL LOSS available for set-off. Indian-rupee-only computation would have shown CG = 1.30L - 1.00L = INR 30,000 GAIN. Sub-s. (6) protects NR from artificial FX-rupee-driven CG.
PLANNING NOTES (TWELVE AREAS)
(i) FVOC DETERMINATION -- ensure sale agreement clearly states consideration; for real-estate, watch s. 56 anti-undervaluation rule (FVOC vs SDV); document all on-money / cash components separately. (ii) TRANSFER EXPENSES -- maintain detailed evidence of brokerage / commission / advocate fees / stamp-duty paid by transferor / advertisements; receipts / contract notes / invoices crucial for AO scrutiny. (iii) COST OF ACQUISITION -- agreement-to-purchase + builder demand letters + EMI tracker + stamp-duty receipts + registry; for old assets (pre-2001), Registered Valuer FMV-2001 report + SDV-2001 certificate (s. 90(10) cap). (iv) IMPROVEMENT COST -- contractor invoices + architect plans + municipal approvals; capital-character vs revenue-character distinction (Sun Engineering ratio); only capital qualifies. (v) HP-INTEREST DOUBLE-CHECK (sub-s. 3(a)) -- audit prior years' Form 16 / ITR for s. 22 deduction; subtract from cost-of-acquisition pool to avoid double-claim. (vi) STT EXCLUSION (sub-s. 3(b)) -- broker contract note shows STT separately; reduce from transfer-expense pool. (vii) BUSINESS-TRUST UNIT (sub-s. 4) -- maintain unit-by-unit distribution ledger; tag each receipt as income-Sch.V vs non-income; reduce non-income from cost. Key for InvIT / REIT investors. (viii) FIRM RECONSTITUTION (sub-s. 5) -- coordinate with s. 67(10) computation; engage CG specialist; FA 2021-mode (B+C-D formula) requires careful attribution. (ix) NR FX COMPUTATION (sub-s. 6) -- maintain FX-rate at acquisition / expense-incurrence / sale dates; FIRC documentation; NR-investor-side compliance with prescribed rate per Rule 115. (x) RDB / MASALA BONDS (sub-s. 7) -- NR holders: rupee-appreciation gain ignored; Indian-currency-denominated coupon yields the only chargeable component. (xi) FA 2024 LAND-BUILDING DUAL MODELING -- individual / HUF on land / building acquired before 23-Jul-2024: ALWAYS model BOTH 20%-indexed AND 12.5%-flat; declare lower; document choice in working papers. (xii) WORKING-PAPER DISCIPLINE -- final CG computation should record: (a) sub-section invoked; (b) FVOC determination; (c) transfer expenses with receipts; (d) cost u/s 73 / 90; (e) improvement cost; (f) indexation working (where applicable); (g) sub-s. (3) double-deduction subtraction; (h) sub-s. (4)/(5)/(6)/(7) special adjustments. AO Form 3CD scrutiny commonly targets these.
CROSS-REFERENCES