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Individuals who invest in or sell capital assets such as property, mutual funds, stocks, or other commodities must calculate tax on their gains. To do this, the government publishes the Cost Inflation Index (CII) number each year to help adjust the price of financial assets for inflation.
In this article, we cover how the CII works, where it applies and how to use CII to calculate long-term capital gains.
The Cost Inflation Index is the value used to adjust the purchase cost of investment assets for inflation. A higher CII in the sales year allows for greater tax savings through indexation. It reflects the annual increase in prices and helps investors align capital gains tax with real returns. The CII is especially relevant for assets held long-term, like real estate, mutual funds, and gold.
The Cost Inflation Index is used when you have to calculate profits from the sale of assets such as property, gold, or mutual funds. By using the method of cost indexation, you can adjust the value as per the time of sale.
The purpose of the Cost Inflation Index is to ensure that you are not taxed on the rise in price due to inflation, but on actual profits, resulting in lower Long-Term Capital Gain (LTCG) taxes for you.
To understand how the Cost Inflation Index works, let’s take an example.
Suppose you invest in a property for INR 20 lakhs in 2005 and sell it for INR 75 lakhs in 2024. It may be assumed that you earned INR 55 lakhs, but this does not account for inflation. For that, let’s assume that the CII for 2005-06 is 117, and for 2024-25 it is 348.
By using the CII indexation, the cost of the property is adjusted to INR 59.48 lakhs. Which makes your taxable profit only INR 15 lakhs (INR 75 – 59.48 lakhs), not INR 55 lakhs.
This lower profit, after adjusting for inflation through the Cost Inflation Index, leads to a reduced taxable amount and ultimately lowers your long-term capital gains tax.
Know More About: Indexation
Use the Cost Inflation Index (CII) to adjust the purchase cost of a long-term investment for inflation.
Indexed Cost of Acquisition = (Purchase Price × CII of Sale Year) ÷ CII of Purchase Year
Let’s understand it better with an example where you invest INR 3,00,000 in a capital asset in 2010 and sell it in 2023 for INR 7,00,000.
Now, if we adjust your taxable gain as per the indexed cost, which is INR 7,00,000 – INR 6,25,449, your taxable gain is INR 74,551
Also Read: Conservative Hybrid Mutual Funds
Every year, the Cost Inflation Index (CII is updated annually by the Income Tax Department to reflect the impact of inflation on asset costs.
Inflation is measured by selecting a specific year as the base for comparison. In FY 2017–18, the government changed the base year for the Cost Inflation Index from 1981–82 to 2001–02 to reflect more recent price levels. This was done to ensure calculations are more accurate. Investors will have to refer to the CII table based on the year of purchase:
Use the old cost inflation index chart (based on the year being 1981–82) for assets bought before April 1, 2001.
Financial Year
CII
1981–82
100
1982–83
109
1983–84
116
1984–85
125
1985–86
133
1986–87
140
1987–88
150
1988–89
161
1989–90
172
1990–91
182
1991–92
199
1992–93
223
1993–94
244
1994–95
259
1995–96
281
1996–97
305
1997–98
331
1998–99
351
1999–00
389
2000–01
406
Use the new cost inflation index chart (based on 2001–02) for assets bought on or after that date.
2001–02
2002–03
105
2003–04
2004–05
113
2005–06
117
2006–07
122
2007–08
129
2008–09
137
2009–10
148
2010–11
167
2011–12
184
2012–13
200
2013–14
220
2014–15
240
2015–16
254
2016–17
264
2017–18
272
2018–19
280
2019–20
289
2020–21
301
2021–22
317
2022–23
2023–24
348
The Cost Inflation Index applies to long-term capital gains. It is used when assets are held by you for than 24 or 36 months, depending on the type. CII index helps you to adjust inflation, however it is not applicable to short-term gains. It also doesn’t apply to some investment assets such as listed equity shares.
The Cost Inflation Index is important in the calculation of how much of a tax you will have to pay on long-term capital gains. Through the use of the index to adjust your cost of purchase, CII indexation prevents inflation from being confused with profit. This can greatly reduce your tax bill under the Income Tax Act.Investors looking to make the most of indexation benefits may consider structured Wealth Management services offered by DBS Treasures to plan and manage long-term capital assets efficiently.
Capital gains are taxed based on how long you hold an asset. The rules and tax rates differ for short-term and long-term gains. Here's a quick comparison:
Feature
Long-Term Capital Gains (LTCG)
Short-Term Capital Gains (STCG)
Holding Period
More than 24/36 months (depends on asset)
Less than 24/36 months
Tax Rate
10% or 20% with indexation
Taxed as per slab or fixed rate
CII Indexation Allowed
Yes – use CII index for cost adjustment
No – indexation not applicable
Impact on Tax
Cost inflation index reduces taxable gain
Higher taxable gain due to no adjustment
Indexation helps reduce taxable long-term capital gains by adjusting your purchase cost for inflation. This is done using the Cost Inflation Index (CII) published by the Income Tax Department.
For example, if your purchase cost was INR 2 lakh in 2010, and the index has nearly doubled since then, your adjusted cost may now be INR 4 lakh. You’ll only be taxed on the gain above INR 4 lakh, not INR 2 lakh. This results in lower long-term capital gains tax. If you're looking to reinvest the proceeds or park them securely, a Premium Savings Account with DBS Treasures offers both liquidity and strategic growth options tailored to your financial goals.
The Cost Inflation Index helps adjust the purchase price of assets for inflation, making capital gains tax calculation more accurate in India. It adjusts the purchase price of long-term assets to account for inflation, which ensures fair taxation.
This means you are taxed only on the real gain, not on the inflated amount. Using cost indexation can lower your taxable income from asset sales, especially when the asset is held for many years. It helps you manage taxes more efficiently and make informed financial decisions.
It is the year from which indexation begins to adjust the purchase price of assets for inflation.
The CBDT under the Ministry of Finance releases the cost inflation index annually.
Consumer Price Index (CPI) tracks retail inflation, while Cost Inflation Index (CII) adjusts asset costs for tax purposes.
It is the inflation-adjusted purchase price used to calculate long-term capital gains.
