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Cost Inflation Index (CII) - Explained!

02 Jul 2025 GS 3 Economy

What is the Cost Inflation Index (CII)?

  • CII is a tool used to adjust the purchase price of long-term capital assets to reflect inflation.

  • This reduces taxable capital gains and hence the tax liability when assets like land, buildings, patents, shares, trademarks, etc., are sold.

  • It is especially relevant for long-term capital gains (LTCG) tax computation.

How is CII Used?

  • It is primarily used for indexation in the computation of Long-Term Capital Gains on the sale of capital assets like:

    • Land and buildings

    • Jewellery and gold

    • Trademarks and patents

    • Unlisted shares and securities

CII for FY 2025–26

  • The Cost Inflation Index for FY 2025–26 is 376, up from 363 in FY 2024–25.

  • This reflects a 3.58% rise year-on-year.

Who Notifies the CII?

  • The Central Government, through the Central Board of Direct Taxes (CBDT), notifies the CII annually via the Official Gazette.

  • The CII is based on 75% of the average rise in the Consumer Price Index (CPI - Urban) for the preceding year.

Base Year for CII

  • The base year is 2001–02, with an index of 100.

  • The concept of CII has been in place since the Financial Year 1981–82.

  • Originally, 1981–82 was used as the base year for cost inflation calculations.

  • From Finance Act 2017, the base year was revised to 2001–02 to make capital gains computation easier and reflect more realistic asset valuations.

Indexation and Taxation Rules (Post Finance Act 2024)

  • From July 23, 2024, indexation benefits are withdrawn for most capital assets.

  • Exception: For land or building acquired before July 23, 2024, taxpayers can choose:

    • 12.5% tax without indexation or

    • 20% tax with indexation using CII

  • For assets purchased on or after July 23, 2024, only 12.5% tax without indexation is applicable (for qualifying long-term assets).

Application of Indexation

  • Indexed Cost of Acquisition =(CII of year of sale ÷ CII of year of purchase) × Actual cost of acquisition

  • Similar formula applies for cost of improvement, but improvements made before April 1, 2001 are ignored.

Exemptions from Indexation

  • Indexation is not available for:

    • Debt mutual funds (from April 1, 2023)

    • Bonds and debentures (except capital indexation bonds and sovereign gold bonds)

    • Any assets acquired on or after July 23, 2024

Importance of CII

  • Prevents over-taxation by neutralizing inflation impact.

  • Ensures only real gains (not notional) are taxed.

  • Brings fairness and efficiency to the capital gains tax regime.



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