Cost Inflation Index for Capital Gain Calculation in India

Introduction

Cost Inflation Index (CII) helps adjust the cost of an asset for inflation while calculating eligible capital gains. Since the value of money changes over time, CII provides a more realistic cost of acquisition or improvement. The Central Government notifies the index every financial year, and for FY 2026-27, the CII is 384.

However, after the capital gains changes effective from 23 July 2024, indexation is no longer available for all long-term capital assets and can be used only where permitted under the Income-tax provisions.

What is Cost Inflation Index?

The Cost Inflation Index (CII) is an index notified by the Central Government for measuring inflation for capital gains purposes.

It helps determine the inflation-adjusted cost of acquiring or improving an eligible capital asset. This adjusted amount is known as the indexed cost of acquisition or the indexed cost of improvement.

The base year for CII is FY 2001-02, for which the index value is 100.

The base year was shifted from FY 1981-82 to FY 2001-02 through the Finance Act, 2017. For eligible capital assets acquired before 1 April 2001, the cost of acquisition may generally be taken as the actual cost or the fair market value as on 1 April 2001, at the taxpayer’s option. In the case of land or building, the fair market value is subject to the applicable stamp duty value restriction.

To understand how gains from the sale of different capital assets are taxed, read our detailed guide on Capital Gain Tax in India.

Why is Cost Inflation Index Used?

Suppose a property was purchased many years ago for ₹30 lakh and is later sold for ₹80 lakh. The difference of ₹50 lakh may appear to be the economic gain. However, a part of this increase may simply be due to inflation. Where indexation is legally available, CII increases the eligible purchase cost according to inflation.

As a result, the taxable long-term capital gain may be reduced. In simple terms, the Cost Inflation Index helps distinguish actual appreciation in the value of an asset from the increase attributable to inflation.

How Does Cost Inflation Index Work?

The indexed cost of acquisition can generally be calculated using the following formula:

Indexed Cost of Acquisition = Cost of Acquisition × CII of Year of Transfer ÷ CII of First Year in Which the Asset Was Held, or FY 2001-02, whichever is later

Where indexation of improvement cost is permitted:

Indexed Cost of Improvement = Cost of Improvement × CII of Year of Transfer ÷ CII of Year of Improvement

The resulting indexed cost is used while calculating long-term capital gains only where the relevant provisions allow indexation.

Example of Cost Inflation Index Calculation

Consider an asset purchased during FY 2013-14 for ₹31,00,000 and sold during FY 2018-19 for ₹61,25,000.

The CII for FY 2013-14 was 220.

The CII for FY 2018-19 was 280.

Indexed Cost of Acquisition

₹31,00,000 × 280 ÷ 220

= approximately ₹39,45,455

Long-Term Capital Gain

Sale Price: ₹61,25,000

Less: Indexed Cost of Acquisition: ₹39,45,455

Long-Term Capital Gain: ₹21,79,545

This example explains how CII was traditionally used to adjust the purchase cost for inflation.

Taxpayers should remember that whether indexation can actually be claimed depends on the type of asset and the date of transfer under the current capital gains provisions.

Changes in Capital Gains and Indexation Rules from 23 July 2024

The Finance (No. 2) Act, 2024 significantly changed the taxation of capital gains.

For transfers from 23 July 2024, the general long-term capital gains regime was changed to 12.5% without indexation for most assets. For Tax Year 2026-27 onwards, the corresponding provisions are contained in Section 197 of the Income-tax Act, 2025.

The earlier general system of paying tax at 20% after indexation was therefore discontinued for many capital assets.

There is, however, an important relief for certain property transactions.

For a resident individual or Hindu Undivided Family transferring a long-term capital asset, being land or building or both, acquired before 23 July 2024, the law provides protection where tax calculated under the new provisions exceeds the tax that would have been payable under the earlier indexed method. In such qualifying cases, the taxpayer can effectively compare the new 12.5% tax calculation without indexation with the earlier 20% tax calculation using indexation.

Therefore, CII remains relevant even after the 2024 amendments, but its application is now more limited than before.

Long-Term and Short-Term Capital Asset Rules

The earlier blog rule stating that an asset becomes long-term after 36 months is no longer correct as a general rule.

For transfers on or after 23 July 2024, the holding-period structure has largely been simplified to 12 months or 24 months.

Generally:

• Listed securities become long-term when held for more than 12 months.
• Other capital assets generally become long-term when held for more than 24 months.
• Immovable property such as land or buildings, continues to require a holding period of more than 24 months.
• Unlisted shares generally require a holding period of more than 24 months.
• Certain assets are subject to special provisions and may be treated differently irrespective of their period of holding.

To understand how profits from share investments are taxed based on the holding period, read our detailed guide on Short Term Capital Gain Tax (STCG) and Long Term Capital Gain Tax on Shares.

Can Cost Inflation Index Reduce Taxable Capital Gains?

CII can reduce taxable capital gains when indexation is available because it increases the eligible acquisition cost to account for inflation.

For example, without indexation:

• Sale Price = ₹80 lakh
• Original Cost = ₹30 lakh
• Capital Gain = ₹50 lakh

If the indexed cost increases to ₹45 lakh:

• Sale Price = ₹80 lakh
• Indexed Cost = ₹45 lakh
• Capital Gain = ₹35 lakh

The taxable capital gain is therefore reduced from ₹50 lakh to ₹35 lakh.

However, after the changes effective from 23 July 2024, taxpayers should not automatically apply CII to every long-term capital asset. Indexation should be claimed only where the relevant tax provisions permit it.

Cost Inflation Index Chart from FY 2001-02 to FY 2026-27

The following is the updated Cost Inflation Index chart:

The Cost Inflation Index for FY 2026-27 has been officially notified at 384 through CBDT Notification No. 85/2026 dated 15 July 2026. The Income Tax Department’s updated CII table also reflects the index values from FY 2001-02 onward.

Get Support for Capital Gains Tax Filing

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Conclusion

The Cost Inflation Index has traditionally played an important role in calculating inflation-adjusted capital gains. It allows the acquisition or improvement cost of an eligible asset to be adjusted according to inflation, which can reduce the taxable capital gain.

However, the role of CII has changed after the capital gains amendments effective from 23 July 2024. Indexation is no longer generally available for every long-term capital asset. Taxpayers should therefore first determine the type of asset, holding period, acquisition date, transfer date, residential status, and applicable capital gains provision before using CII.

Frequently Asked Questions