Cost Inflation Index

The Cost Inflation Index (CII) is an annual index notified by the Central Board of Direct Taxes (CBDT) that adjusts the purchase cost of long‑term assets for inflation. It reflects how prices rise over time to ensure only real gains (income) are taxed when an asset is sold.

By inflating the original purchase cost based on the applicable CII values, taxpayers can reduce their long‑term capital gains. They can avoid paying income tax on the inflation‑driven portion of profits. This inflation adjustment is commonly used for assets such as property, gold, and certain investments to determine a fair taxable gain.

As the CII increases every year, it leads to a higher indexed cost, which ultimately reduces the taxable gain. It ensures that income tax is levied only on the actual capital gain, not on the inflationary rise in value.

The government notifies the CII for each financial year. The index for the base year (currently FY 2001–02) is set at 100, and subsequent years have increasing values based on inflation data.

Also Read: Section 45 of the Income Tax Act

The purpose of the CII of income tax is to adjust the tax amount resulting from the sale of long-term assets. Its primary role is to adjust the purchase price of capital assets to account for inflation over time. By doing so, it ensures that individuals are not taxed on inflationary gains.

Avoids Taxing Inflationary Gains

One of the biggest challenges in capital gains taxation is distinguishing between real and inflation-driven gains. Over time, the value of money decreases due to inflation. CII helps adjust the original cost of an asset's acquisition to reflect its present-day value. It means only the actual gain (after accounting for inflation) is taxed, not the inflated amount.

Reduces Long-Term Capital Gains

The Cost Inflation Index helps lower taxable capital gains from long-term investments. It increases the original purchase cost based on inflation during the holding period. A higher indexed cost means lower profit when the asset is sold. As a result, you pay less tax on long-term gains. This is especially useful for properties, gold, and certain mutual funds.

Ensures Fair Taxation

The CII index method applies to capital gains, allowing taxpayers to adjust the purchase price of their capital assets in accordance with their sale price. Without such an adjustment, taxpayers might end up paying tax on gains they did not truly earn. This would lead to unfair taxation, particularly for long-held assets such as property or gold. By indexing the cost of acquisition, CII enables taxpayers to report lower long-term capital gains, thereby reducing their tax liability.

Protects Taxpayers from Inflation Impact

Inflation raises prices over time, even if the value of the asset remains constant. Without indexation, you may be subject to tax on the inflation-driven portion of the price increase. The Cost Inflation Index India ensures that only the actual growth in asset value is taxed. It avoids taxing gains that are simply due to rising living costs. It ensures that tax calculations remain fair and accurate for long-term asset holders.

Helps in Real Wealth Calculation

CII helps you understand the real return on your investment. It adjusts your purchase cost to reflect today’s value of money. This makes it easier to track how much actual profit you earned. It supports better financial decisions by showing true wealth growth. Whether you are planning to sell or reinvest, this index keeps you better informed.

Helps Maintain Purchasing Power

Using a Cost Inflation Index calculator helps in neutralising inflation in capital gain calculations. The CII indirectly supports taxpayers in maintaining their real wealth. It protects the value of long-term savings and investments by ensuring individuals are not penalised for holding assets over time. This method ensures that the taxation system remains unbiased by applying it to real gains rather than nominal ones.

Overall, CII brings both accuracy and fairness to the capital gains tax system.

Also Read: Section 45 (5A) of the Indian Income Tax Act.

Also Read: Individual Income Tax Slab

The base year in the Cost Inflation Index (CII) serves as the starting point for adjusting the purchase price of assets for inflation, with a value of 100. The index for all upcoming years is compared to this base year to determine the inflation percentage.

If any capital asset is purchased before the base year of the cost index, taxpayers can use either the actual cost or the fair market value (FMV) as of the first day of the base year.

Initially, the base year was 1981–82, but it was changed to 2001–02 in the Union Budget 2017. The purpose is to make asset valuations more relevant and realistic for modern-day taxpayers.

The shift also simplified calculations and reduced disputes related to historical property valuations.

The main reason for this change was the difficulty taxpayers faced in proving asset values from 1981 due to poor
documentation.

For capital assets acquired before April 01, 2001, taxpayers can take the higher actual cost or FMV as of April 01, 2001, as the purchase price and get the benefits of indexation.

By shifting the base year to 2001, the government made it easier to find accurate property valuations. With the new base year, capital gains tax is applied only on real gains, not on the inflation-driven increase in asset value. This leads to fairer taxation and simplifies the process for long-term asset holders.

The Cost Inflation Index (CII) works by adjusting the original cost of a capital asset to account for inflation. This process is called inflation adjustment. Instead of using the actual purchase price, the indexed cost is calculated using the CII value for the year of purchase and the year of sale.

This adjustment plays a key role in computing long-term capital gains (LTCG). When you sell an asset after holding it for more than 24 or 36 months (depending on the asset type), you become liable to pay LTCG tax. However, thanks to CII, you pay tax only on the real gain, not on the inflated difference.

Let us understand the difference:

• Nominal gain is the sale price minus the actual purchase price.
• Real gain is the sale price minus the inflation-adjusted purchase price.

By using this indexed cost, your taxable gain is reduced, resulting in a lower tax liability. In short, CII ensures you are taxed on actual profit, not inflation.

Also Read:

Long Term Capital Gain Tax on Property

Long Term Capital Gain Tax on Shares

Indexation is used to adjust the purchase cost of a long-term capital asset for inflation. This helps calculate the inflation-adjusted cost, which reduces your taxable capital gains. Indexation applies only to long-term assets held for more than 24 months (12, 24, or 36 months, depending on the category of assets).

Before applying indexation, add any related costs, like legal fees or brokerage, to the asset’s purchase price. Then, multiply this total cost by the Cost Inflation Index (CII) for the year of the sale. Divide the result by the CII of the purchase year. This gives you the indexed cost of acquisition, which is used to calculate long-term capital gains tax.

Formula to Calculate Cost Inflation Index

Indexed Cost of Acquisition = (CII of Transfer or Sale Year x Cost of acquisition) ÷ CII of the Year of Asset Purchase or 2001-02, whichever is later.

Indexed Cost of Improvement = (CII of Transfer or Sale Year x Cost of Improvement) ÷ CII of the Year in which the improvement to the asset took place.

Step-by-Step Breakdown to Use the Cost Inflation Index Calculator:

• Step 1: Identify the Actual Cost - Find the original cost of the asset when you bought it.
• Step 2: Find the CII Values - Get the CII for the year of sale and the CII for the year of purchase from the official income tax list released by the CBDT.
• Step 3: Plug the Values into the Formula - Multiply the actual cost by the CII of the sale year, then divide it by the CII of the purchase year.

Example: Calculating Indexed Cost Using CII

Let us say you purchased a plot of land in 2010–11 for ₹6,00,000. You spent ₹50,000 on legal and brokerage charges. You sold it in 2023–24.

From the CBDT table:

• CII for 2010–11 = 167
• CII for 2023–24 = 348

Now, calculate the total cost of acquisition: ₹6,00,000 + ₹50,000 = ₹6,50,000

Next, apply the indexation formula:

Indexed Cost of Acquisition = (₹6,50,000 × 348) ÷ 167 = ₹13,54,491

So, instead of ₹6,50,000, the cost considered for capital gains tax will be ₹13,54,491.

Now, let us say, you sold the land for ₹18,00,000. Your taxable capital gain would be: ₹18,00,000 – ₹13,54,491 = ₹4,45,509

This significantly reduces your taxable income by taking inflation into account.

Also Read: Long-Term Capital Gains (LTCG) Tax Calculation

The indexation benefit is available only on long-term capital assets, which are generally held for more than 24 or 36 months, depending on the type of asset. Eligible assets include:

• Real estate (land and buildings)
• Gold, silver, and other precious metals
• Debt-oriented mutual funds (only under old tax rules)
• Unlisted shares and debentures
• Intellectual property, like patents or trademarks
• Certain bonds and government securities

However, listed equity shares and equity mutual funds are not eligible for indexation.

According to Budget 2024 updates, indexation has been removed for most assets acquired after July 23, 2024, except for immovable property purchased before this date. Taxpayers can choose between a 20% tax with indexation or a 12.5% without indexation in such cases.

Always check current rules before applying indexation.

Also Read:

Income Tax Deduction Under Section 80C

Tax Saving Options Other than 80C

When a property is inherited or received as a gift, it is not taxed at the time of transfer. However, when the recipient sells the property, the gains become taxable as capital gains. In such cases, the Cost Inflation Index (CII) helps reduce the tax burden by adjusting for inflation.

The holding period and purchase cost are calculated from the date the previous owner acquired the property. This means if your parents bought the property in 1998 and gifted or bequeathed it to you later, your holding period starts from 1998, not the date you received it.

For capital gains calculation, you can use CII to index the original cost of acquisition. If the property was acquired before April 1, 2001, you are allowed to take either the actual purchase price or the fair market value (FMV) as of April 1, 2001, whichever is more beneficial.

The indexed cost is then calculated using the formula:

Indexed Cost = (Cost of Acquisition × CII of Sale Year) ÷ CII of Purchase Year or Base Year

Indexation helps reduce the taxable gain by accounting for inflation over the years. This ensures that you are taxed only on the real profit, not on notional gains due to inflation.

Using CII correctly on inherited or gifted property helps lower your LTCG tax liability significantly.

The Income Tax Department has notified the Cost Inflation Index (CII) for the financial year 2025–26 (assessment year 2026–27) as 376. This figure was announced through a CBDT notification dated July 1, 2025.

The CII will be used for calculating the indexed cost of acquisition for long-term capital gains (LTCG) incurred in FY 2025–26. The updated index will take effect on April 1, 2026.

Applicability of CII Post July 2024 Tax Rule Changes

While the Finance Act 2024 removed indexation benefits for most assets acquired after July 23, 2024, CII continues to be applicable under specific conditions. If house property, land, or buildings were acquired on or before July 22, 2024, and sold thereafter, taxpayers can choose between:

• 20% LTCG tax with indexation, or
• 12.5% LTCG tax without indexation.

This flexibility helps taxpayers lower their tax outgo based on whichever option is more favourable.

Why the New CII Matters

The rise in CII from 363 to 376 (a 3.58% increase) allows taxpayers selling older assets like land, buildings, trademarks, or patents to adjust for inflation and reduce taxable gains. It ensures tax is levied only on real income, not on inflation-driven appreciation.

Also Read: Short-Term Capital Gain Tax

The Cost Inflation Index (CII) is a valuable tool that allows taxpayers to reduce their long-term capital gains (LTCG) tax liability by accounting for inflation. It helps ensure that the gains taxed are real profits, not just inflation-driven increases.

Proper use of the cost inflation index India helps assessees save tax by recognising the impact of inflation and ensuring only real gains are taxed. Here is how:

Adjusting the Cost of Acquisition

When you sell a capital asset after holding it for more than the prescribed period (24 or 36 months), it qualifies as a long-term capital asset. In such cases, the purchase price can be indexed using the CII. It means the original cost is adjusted upwards based on inflation, effectively reducing the profit amount on which tax is charged.

Adding Related Expenses

Taxpayers can include related expenses like stamp duty, brokerage, legal fees, and registration charges in the purchase cost before applying inflation adjustment. This increases the total acquisition cost, further reducing taxable gains.

Applying Indexation to Improvements

If the asset has undergone any capital improvements, such as renovations or modifications, those costs are also eligible for indexation. This benefit applies only when proper documentation is maintained for improvement costs.

Choosing the Most Beneficial Tax Option

In cases like the sale of house property acquired before July 23, 2024, assessees can choose between paying 20% LTCG tax with indexation or paying 12.5% tax without indexation. Choosing the option that results in lower tax outgo can significantly reduce liability.

Also Read: Holding Period For Capital Gains Tax

The Cost Inflation Index (CII) is a useful tool for reducing long-term capital gains (LTCG) tax liability. However, incorrect use can lead to higher taxes, penalties, or delayed filings. Here are some common mistakes taxpayers should avoid:

Using the Wrong Base Year

Many taxpayers mistakenly use the old base year 1981-82 instead of the revised base year 2001-02, which was updated in Budget 2017. If your asset was acquired before April 1, 2001, you must choose between the actual purchase price or the fair market value (FMV) as of April 1, 2001, whichever is lower. Using outdated values can lead to incorrect tax calculations.

Ignoring Related Costs

Another common error in CII of income tax is not adding acquisition-related expenses, such as brokerage, stamp duty, legal fees, or registration charges, before applying indexation. These should be added to the purchase cost, as they increase the indexed cost and reduce taxable gains.

Forgetting to Index Improvement Costs

If you spent money on improving the asset (like property renovation), you can claim an indexed cost of improvement. Many forget to index this cost separately, leading to higher LTCG.

Applying Indexation to Ineligible Assets

Indexation is available only for long-term capital assets. Applying CII to short-term assets or equity shares (after LTCG exemption limits) can lead to incorrect filing and potential rejection of claims.

Using Incorrect CII Values

Always refer to the official CBDT notification for the correct CII values for the purchase year, improvement year, and sale year. A mismatch in index numbers can result in incorrect inflation adjustment and tax computation.

The Cost Inflation Index (CII) ensures fair and inflation-adjusted taxation on long-term capital gains. It helps taxpayers reduce their tax liability by adjusting the purchase price of assets to reflect real value over time. CII is especially useful for assets like property inherited, offering relief by taxing only actual profits, not inflation-driven gains.

At TATA AIG, we believe in securing not just your finances but also your health. With our cashless health insurance, you can access quality healthcare across 12,000+ network (and even more non-network) hospitals without paying upfront.

We also make it easy to buy health insurance online, a quick, hassle-free process designed for your convenience. Our wide range of health insurance plans offers tailored coverage for individuals, families, and senior citizens.
With TATA AIG, you receive not just financial coverage, but also dependable support throughout your healthcare journey. From hospitalisation to preventive care, we ensure every aspect of your health is protected.

Explore our health insurance options today and choose a plan that protects your future.