Cost Inflation Index
The Cost Inflation Index (CII) is a government-notified index used to adjust the purchase price of a capital asset for inflation, thereby reducing the taxable capital gain under the indexation method available for specified long-term assets under Section 48 of the Income Tax Act.
The Cost Inflation Index is published annually by the Central Board of Direct Taxes (CBDT), with the base year set at FY 2001-02 (CII = 100). Each subsequent year's CII reflects the cumulative inflation since the base year. When computing indexed cost of acquisition, the original purchase price is multiplied by the CII of the year of transfer and divided by the CII of the year of acquisition (or the base year, whichever is later).
Budget 2024 made a significant change to indexation benefits. For real estate assets, Budget 2024 initially proposed removal of indexation entirely (shifting LTCG rate to 12.5% without indexation), but a subsequent amendment restored the choice for properties acquired before July 23, 2024 — taxpayers can choose between 20% LTCG with indexation or 12.5% LTCG without indexation, whichever results in lower tax. For properties acquired on or after July 23, 2024, the rate is 12.5% without indexation.
For listed equities and equity mutual funds, indexation is not available at all — LTCG on these assets is computed on the actual gain without any inflation adjustment. Indexation is relevant primarily for real estate, gold, unlisted shares, and debt mutual funds purchased before April 1, 2023 (debt fund taxation was fundamentally revised from FY 2023-24).
The indexed cost of acquisition formula is: Indexed Cost = Actual Cost × (CII of Year of Transfer ÷ CII of Year of Acquisition). For example, a property purchased in FY 2005-06 when CII was 117 and transferred in FY 2024-25 when CII is approximately 363 would have its cost nearly tripled for tax computation purposes, significantly reducing the taxable gain.
A common misconception is that indexation always reduces taxes. This is true when the asset has appreciated modestly relative to inflation. However, for assets with very high nominal appreciation (e.g., a property that tripled in value over 10 years in a high-growth city), the indexed cost may still be much lower than the sale price, resulting in a substantial taxable gain even after indexation. Comparing both options — with and without indexation — is advisable before finalising the tax computation method.