Section 48 of ITA, 1961 : Section 48: Mode Of Computation

Explanation using Example

Let's consider a hypothetical scenario where Mr. Sharma, a resident of India, sold a piece of land in 2023 that he had purchased in 2000. The full value of the consideration he received from the sale was ₹50 lakhs. The cost of acquisition of the land in 2000 was ₹10 lakhs, and he spent ₹2 lakhs on legal fees and brokerage at the time of sale (expenditure incurred wholly and exclusively in connection with the transfer).

To compute the capital gains, Mr. Sharma would deduct the ₹2 lakhs spent on legal fees and brokerage from the ₹50 lakhs received, leaving ₹48 lakhs. However, because the land is a long-term capital asset, he would also use the "indexed cost of acquisition" rather than the actual cost of acquisition to account for inflation over the years.

Assuming the Cost Inflation Index (CII) for the year 2000 was 100 and the CII for 2023 is 300, the indexed cost of acquisition would be calculated as follows:

Indexed Cost of Acquisition = Cost of Acquisition x (CII for the year of transfer / CII for the year of acquisition)

Indexed Cost of Acquisition = ₹10 lakhs x (300 / 100) = ₹30 lakhs

Now, Mr. Sharma would deduct the indexed cost of acquisition (₹30 lakhs) from the remaining ₹48 lakhs to arrive at the capital gains:

Capital Gains = ₹48 lakhs - ₹30 lakhs = ₹18 lakhs

Therefore, Mr. Sharma's income chargeable under the head "Capital gains" would be ₹18 lakhs, which is the amount subject to capital gains tax as per Section 48 of the Income-tax Act, 1961.