The Taxmann who keeps a vigil on your transactions requires you to pay taxes on such accrued or realized short or long term capital gains. Short term capital gains tax is computed depending on your tax slab. While the rate for long term capital gains on property sale at present is 20%.
For the calculation of accruing long-term capital gains, property seller is allowed to adjust the cost of acquisition of the property with the inflation based index that the tax department notifies every year. Read more on cost inflation index here /classroom/2013/02/what-is-indexation-159713.html
Also, capital gains also factors-in the cost of improvement incurred in order to revamp the structure of the property. So, the cost of improvement is also required to be indexed depending on the year in which the renovation took place.
So, LTCG is computed by indexing both the cost of acquisition and cost of improvement on the basis of Cost of Inflation Index (CII)
LTCG= Sale Price - (Indexed Cost of Acquisition + Indexed Cost of Improvement+ Transfer cost)
In case, the property is acquired as a result of succession, asset distribution, by will or as a gift, cost of acquisition would be the same at which previous property owner acquired the property. In case, if the property cost is left undetermined, fair market worth of the property on the date previous owner acquired the property is taken to be its cost of acquisition.
As per the recent judgment by the Income Tax Tribunal of Chennai, interest on housing loan i.e. claimed u/s 24(b) as the deduction can also be added to the cost of acquisition, for computing accruing long term capital gain from a transaction. Know about How to calculate long term capital gains tax on property sale?