Cost Inflation Index (CII)

What it means

The Cost Inflation Index (CII) is a number notified by the CBDT every year to measure inflation. It is used to raise the purchase cost of an asset to today’s value, which is called indexation. Indexing the cost reduces the taxable long-term capital gain, so you are not taxed on gains that only come from inflation.

How it works

• Base year: 2001-02 = 100. For assets bought before 1 April 2001, you can use the fair market value as on that date.

• Recent values: 2010-11 = 167, 2015-16 = 254, 2020-21 = 301, 2024-25 = 363, 2025-26 = 376, 2026-27 = 384

• Formula: Indexed cost = original cost x (CII of year of sale divided by CII of year of purchase)

• Where it applies now: since 23 July 2024, most long-term gains are taxed at 12.5% without indexation. Resident individuals and HUFs selling land or a building bought before 23 July 2024 can still pick the lower of 12.5% without indexation or 20% with indexation.

• Indexation still matters for some older cases and for working out the cost of improvement.

Example

Neha bought a flat in FY 2010-11 for ₹30,00,000 and sells it in FY 2025-26 for ₹90,00,000.

• Option 1, with indexation: indexed cost = ₹30,00,000 x 376 / 167 = ₹67,54,491. LTCG = ₹90,00,000 minus ₹67,54,491 = ₹22,45,509. Tax at 20% = ₹4,49,102.

• Option 2, without indexation: LTCG = ₹90,00,000 minus ₹30,00,000 = ₹60,00,000. Tax at 12.5% = ₹7,50,000.

Neha can choose option 1 and pay ₹4,49,102 plus 4% cess, saving about ₹3 lakh. For a flat bought recently, with little inflation in between, option 2 often works out cheaper.

Key points to remember

• Use the CII of the year of sale and the year of purchase, not the calendar years.

• Indexation is not available for listed shares or equity mutual funds. They have their own 12.5% rate and ₹1.25 lakh exemption.

• Cost of improvement is indexed using the CII of the year in which it was spent.

• Keep purchase deeds, stamp duty receipts and improvement bills. Without them, you cannot claim indexed cost.

• Compare both options before you file, because the cheaper one depends on the purchase year and sale price.