Step 1
First you need to know the acquisition cost. This is the cost that the seller has incurred while buying and holding the property. Apart from the basic cost paid to the previous owner, you can also consider expenses such as stamp duty, registration fee, brokerage and legal fees paid to acquire the property. All these collectively contribute to the cost of acquisition. You can also take into consideration any expenses incurred on major renovation or improvements in the property while it was in the possession, while calculating the total cost of acquisition.

Step 2
Calculate the indexed cost of acquisition. To arrive at this figure, multiply the purchase price and improvement cost by the Cost Inflation Index (CII) number of the current year (the year of sale) and divide the resulting number by the CII for the year of purchase or improvements.

Get CII for the relevant year from the income tax website www.incometaxindia.gov.in. The income tax department has been releasing these every financial year since 1981 (base year). For properties bought before 1981, one needs to ascertain the fair market value in 1981.

Step 3
Once you have calculated the indexed cost of property acquisition and know the selling price, you can calculate LTCG by deducting indexed cost of property acquisition from the selling price. Say, you plan to sell a house that was bought in May 2011 for Rs50 lakh, and which is worth Rs80 lakh now. According to this formula, the inflation adjusted cost of acquisition would be Rs50 lakh * 1125 (CII number for 2016-17)/785 (CII number for 2011-12). This comes to Rs71,65,605. So your LTCG would be Rs80 lakh minus Rs71.66 lakh, or about Rs8.34 lakh.