Capital Gain and exemptions under head capital gain have been dealt, now some other provisions regarding Capital gain needs to be discussed in detail. Various provisions related to indexation, computation of Capital gain, set off and carry forward of capital loss, etc have been dealt with in this article.

Indexation

In case of long term capital asset, indexation is allowed for the cost of asset for computing the long term capital gain. Indexation means computing the current cost of asset as if, the asset is purchased on the date of transfer or sale. Usually long term assets are held for long periods and their value appreciates over time with increase in cost of living, hence indexation becomes necessary to arrive at the correct value as on the date of sale of such asset. For example in case of a residential house which was purchased in 1985 for Rs. 50,000 is sold in 2010 for Rs. 10,00,000 it will give a huge capital gain of Rs. 9,50,000 if, only Rs.50,000 is reduced from Rs. 10,00,000. Hence indexation becomes necessary to arrive at reasonable value of asset. Moreover during the period in which the residential house is occupied it undergoes various changes in form of new constructions or addition of new floor to the house which also contributes to addition of value to house. They are also called capital appreciation. These expenses of construction is also indexed to give the present value as on date of sale.
For purpose of indexation cost of inflation index (CII) is used. CII is notified by Central Government every year in official gazette.

Formula

For computation of long term capital gain following method is used.
Sales Consideration xxx
Less: Indexed cost of acquisition* xxx
Long Term capital gain/loss xxx

*Indexed cost of acquisition:
Cost of purchase X CII for the year of transfer or Sale / CII for the year of purchase.

Set Off and Carry Forward

Short term and long term capital gain/loss can be set off and carried forward to future years as given below.

Short Term Capital Gain/Loss

Set Off: Short term capital loss can be set off against short term capital gain as well as long term capital gain in the year in which it occurs. It cannot be set off against any other head of income.
Carry Forward: In case a short term capital loss is not fully set off in the year in which it occurred, then it can be carried forward in future years to be set off against short term capital gain or long term capital gain for 8 years.

Long Term Capital Gain/loss

Set Off: Long term capital loss can be set off against long term capital gain only in the year in which it occurs. It cannot be set off against any other head of income.
Carry Forward: In case a long term capital loss is not fully set off in the year in which it occurred, then it can be carried forward in future years to be set off against long term capital gain for 8 years.