WHAT?

The Cost Inflation Index (CII) is a measure used in India to adjust the cost of assets for inflation, facilitating the calculation of long-term capital gains (LTCG) tax under the Income Tax Act, 1961.

It reflects the general rise in prices over time, allowing taxpayers to account for the eroded value of money when selling capital assets like property, gold, or stocks held for more than 36 months (or 24 months for certain assets like securities).

Key Details

1. Purpose: The CII adjusts the purchase price (cost of acquisition) of an asset to its inflation-adjusted value, reducing the taxable capital gain.
2. Legal Basis: Governed by Section 48 of the Income Tax Act and notified annually by the Central Board of Direct Taxes (CBDT) under Section 48 read with Section 155(7A).
3. Base Year: The CII is based on a base year, which was revised from 1981 to 2001 with effect from April 1, 2001. The index value for FY 2001-02 (Assessment Year 2002-03) is set at 100.
4. Calculation:  LTCG = Sale Price - Indexed Cost of Acquisition - Indexed Cost of Improvement - Expenses on Transfer.
5. Indexed Cost of Acquisition = (Original Cost of Acquisition × CII for the year of sale) ÷ CII for the year of acquisition.
6. Indexed Cost of Improvement = (Cost of Improvement × CII for the year of sale) ÷ CII for the year of improvement.
7. CII Values (Notified Up to 2025) : The CBDT notifies the CII annually. As of the latest updates

• FY 2024-25: 363
• FY 2023-24: 348
• FY 2022-23: 331
• FY 2021-22: 317
• FY 2001-02 (Base Year): 100

How It Works

1. If you bought a property in FY 2001-02 for ₹10 lakh and sold it in FY 2024-25 for ₹50 lakh:
2. Indexed Cost of Acquisition = (₹10 lakh × 363) ÷ 100 = ₹36.3 lakh.
3. LTCG = ₹50 lakh - ₹36.3 lakh = ₹13.7 lakh (taxable at 20% + surcharge + cess, i.e., ~20.8% = ₹2.85 lakh tax).
4. Without indexing, LTCG would be ₹40 lakh, increasing the tax burden significantly.