What Is Cost Inflation Index (CII)?

The Cost Inflation Index (CII) is used to adjust the purchase price of assets for inflation when calculating capital gains tax. Issued annually by the Central Board of Direct Taxes, it ensures taxes reflect real value rather than nominal amounts.

For example, if 4 peppermints once cost 5 paisa but now cost ₹2 each, inflation has raised prices over time. The same applies to assets like property, gold, and shares. Indexing the cost reduces taxable gains by accounting for inflation-driven increases in asset values.

What Is the Purpose of CII?

CII is designed to adjust the purchase price of capital assets to account for inflation. This ensures taxpayers are taxed only on actual gains rather than on the notional increase caused by rising prices. CII is applied when calculating long-term capital gains tax on assets like property, gold, debt mutual funds, and shares. By indexing the cost of acquisition, the tax liability reduces because the adjusted cost reflects present value instead of historical value. Without this mechanism, the taxable profit would be artificially inflated, leading to higher taxes.

CII thus creates a fairer tax system, aligns with economic realities, and helps investors plan finances better. Its core purpose is to shield taxpayers from paying tax on inflation-driven increases in asset prices.

What Is a Base Year in CII?

A base year in CII is the starting reference year with a CII value fixed at 100. Currently, the base year is FY 2001-02. All future CII values are calculated in relation to it, making inflation adjustment simpler and more uniform. For assets bought before April 1, 2001, taxpayers are allowed to use either the actual cost or the fair market value (FMV) as of the base year. This provision prevents unfairly high capital gains on older assets. Changing the base year from 1981-82 to 2001-02 in Budget 2017 eased valuation difficulties, improved accuracy, and gave taxpayers a practical way to calculate indexed costs.

CII Table from FY 2004-05 to 2024-25

How to Calculate the Cost Inflation Index?

CII indexes the purchasing price of any asset. Hence, investors need to use the following formula for calculating CII:

CII = Cost Inflation Index for that particular year when an asset was sold or transferred/ CII for that year when an asset was purchased or acquired.

Say, an investor purchased an apartment for an amount of Rs 20 lakh in the month of January 2000 and later sold the same for a sum of Rs 35 lakh in the month of January in 2009. Then the profit or the capital gain incurred would be Rs 15 lakh. Now, the Cost Inflation Index when the flat was purchased was 389 whereas the same for when the flat was disposed of was 582.

As a result, their CII would then be 582/389 = 1.49. When it comes to calculating the tax, CII needs to be multiplied with the purchasing price that would finally yield the cost of purchasing that was indexed. This will give investors the real cost of their asset. Hence, the indexed acquisition cost would be 20,00,000 X 1.49 = Rs 29, 92,288

The long-term capital gain will be calculated as:

Asset’s selling price – cost of acquisition indexed = 35, 00,00 – 29,92,288 = Rs 5,07,712

With the earlier long-term capital gains tax of 20%, the taxation liability would be 20% x 5,07,712 = Rs 1,01,542.

However, from April 1, 2024, indexation for real estate has been done away with. According to the new rules, LTCG on property is taxed at 12.5%. What this means is that while the earlier method allowed investors to adjust for inflation and reduce their taxable gains, the new regime removes this cushion. For properties acquired before July 23, 2024, sellers have the option to choose between paying 12.5% tax without indexation or 20% tax with indexation.

How Is CII Used in Income Tax?

CII is mainly used to calculate long-term capital gains (LTCG) when selling assets like property, gold, or debt mutual funds. It helps adjust the original purchase price for inflation through indexation, ensuring tax is paid only on real gains. The indexed cost is computed using the formula: Cost × (CII of year of sale ÷ CII of year of purchase). This increases the cost base and reduces taxable gains, lowering overall tax liability.

Under the new tax rules from FY 2023-24, indexation benefits are no longer available for debt mutual funds purchased after April 1, 2023, if less than 35% of an investor’s portfolio is in equities. However, indexation still applies to real estate, gold, unlisted bonds, and debt funds bought before the cut-off. This distinction ensures clarity on which assets qualify for inflation adjustment.

What Is Capital Gains Tax?

Capital gains refer to the profits that investors incur on account of disposing of their asset such as stocks, real estate, jewellery, mutual funds, etc. In case they choose to sell their asset after a period of thirty six months of purchasing, it is considered as long-term capital gain. However, if they sell the asset only a year later from the purchase date, it is regarded as short-term capital gain.

Do note that until March 31, 2024, the capital gains tax was not charged on the plain difference between the sale price and the purchase price. The purchase price was multiplied with the cost inflation index and the difference was considered as capital gains by the IT department.

From April 1, 2024, however, the new budget has withdrawn indexation benefits for real estate, gold, and certain other long-term assets. LTCG on these assets is now taxed at a flat 12.5% without indexation.

Things to Note About CII

• The Cost Inflation Index (CII) is a government-published inflation adjustment factor used for computing long-term capital gains tax under Section 48 of the Income Tax Act. It aligns historical purchase prices with current values, reducing taxable gains.
  

• If you inherited or received an asset as a gift, the indexation year is when you received it – not when it was originally bought.
  

• Improvements to assets made before April 1, 2001, aren’t eligible for indexation.
  

• Indexation doesn’t apply to debentures or bonds—unless they’re RBI-issued sovereign gold bonds or capital indexation bonds.
  

• As of July 23, 2024, indexation benefits are discontinued for assets acquired on or after that date. Pre-cut off land/buildings still offer a choice: 20% tax with indexation or 12.5% without.
  

Conclusion

CII exists to stop investors from paying tax on phantom gains created by inflation. It adjusts the cost of acquisition to reflect real value – reducing base capital gains. However, note that improvements before 2001 don’t count, and inherited assets use the year investors received them. Bondholders? Only RBI sovereign gold bonds or capital indexation bonds qualify. CII helps fairness – but only when the rules let it.