A Guide to India’s Cost Inflation Index

The Cost Inflation Index (CII) is a measure used to track inflation and adjust the cost of assets over time. It is notified annually by the Income Tax Department of India. The primary purpose of CII is to calculate long-term capital gains more accurately by factoring in inflation. By using CII, taxpayers can increase the purchase cost of assets, which in turn reduces the taxable gain. This makes tax computation more realistic and fair for asset holders. In this blog, you will learn everything about India’s Cost Inflation Index.

What is the Cost Inflation Index (CII)?

The Cost Inflation Index (CII) is a yearly value issued by the Central Board of Direct Taxes (CBDT) to reflect inflation in the economy. It is used to determine long-term capital gains when a capital asset is sold or transferred. Capital gains are the profits earned from selling assets, such as land, property, stocks, shares, trademarks, or patents. CII helps adjust the asset's cost for inflation, reducing tax liability fairly.

Long-term capital assets are usually recorded in financial books at their original purchase cost. Over time, even if the market value of these assets rises, their value in the books remains unchanged. This means there is no revaluation to reflect the increase in asset prices. When such assets are eventually sold, the sale price is often much higher than the original cost. This results in a significant capital gain and a higher income tax liability for the seller. To reduce this burden, the Cost Inflation Index (CII) is used. It adjusts the purchase price for inflation, lowering taxable profits fairly.

Cost Inflation Index Chart for Financial Years 2001–02 to 2025–26

Here is a Cost Inflation Index (CII) table from FY 2001–02 to FY 2025–26:

How to Calculate Indexed Cost Using CII?

The Cost Inflation Index (CII) is an important tool in India’s income tax system that helps adjust the purchase price of capital assets based on inflation. This adjustment ensures that taxpayers pay tax only on actual gains and not on the increase in value due to inflation. When a person sells a long-term asset, the CII helps calculate the adjusted or indexed cost of that asset. The formula used is:

Indexed Cost = (CII of sale year ÷ CII of purchase year) × Actual Cost.

Here, the CII for the sale year is the value set by the government for the year in which the asset is sold. The CII for the acquisition year is the index applicable to the year the asset was bought. The cost refers to the original price paid for the asset. This method reduces the taxable capital gains, which in turn lowers the overall tax burden on the seller.

Concept of the Base Year in Cost Inflation Index

The base year marks the beginning of the Cost Inflation Index and has a fixed value of 100. All other years are compared with this base to measure inflation growth. If someone buys a capital asset before the base year, they can select the higher amount between the actual purchase price and the Fair Market Value (FMV) as of the first day of the base year. This FMV must come from a registered valuer’s report. The selected value becomes the new purchase cost for tax calculation. The indexation benefit applies to this adjusted cost to reduce taxable capital gains fairly.

Why the Income Tax Department Updated the CII Base Year to 2001?

Earlier, the base year for the Cost Inflation Index was 1981–82. However, taxpayers found it difficult to determine the correct value of assets bought before 1st April 1981. Getting a reliable valuation report was also a challenge, and tax officers often faced issues in verifying those values. To solve these problems, the government shifted the base year to 2001. This made it easier to get accurate valuations. Now, if someone owns a capital asset purchased before 1st April 2001, they can consider either the actual cost or the Fair Market Value (FMV) as of that date, whichever is higher, for indexation benefits.

Role of Cost Inflation Index (CII) in Income Tax Calculations

Long-term capital assets appear in financial records at their original purchase price. Their value does not increase over time, even when inflation rises. These assets cannot be revalued in the books. When sold, the selling price is often much higher than the recorded cost. This difference creates large profits, which lead to a higher income tax for the seller.

The Cost Inflation Index provides relief to taxpayers on long-term capital assets. It raises the original purchase cost to reflect inflation. This adjustment reduces the difference between the sale price and the indexed cost. As a result, the capital gain becomes lower. A lower gain means less tax. This method ensures fair and reasonable taxation for asset holders.

Importance of Cost Inflation Index in Taxation

Here are the key importance of Cost Inflation Index (CII) in Taxation:

• Adjusts Asset Cost to Match Inflation

The Cost Inflation Index helps match the original cost of a capital asset with the present value. It increases the purchase price of an asset to reflect current price levels. This makes the capital gain amount more realistic. Without this adjustment, the profit appears higher than it is because the asset cost remains the same while market prices rise.

• Reduces Taxable Capital Gains

When a person sells a long-term asset like land, a building, or gold, they calculate capital gains. CII helps increase the cost of acquisition. A higher cost leads to a lower profit. This reduces the total tax on the gain. It ensures that the person does not pay extra tax due to inflation alone.

• Follows Government-Declared Values

The Central Board of Direct Taxes (CBDT) declares the Cost Inflation Index each financial year. This value applies to long-term capital assets sold in that year.

• Maintains Fairness in Taxation

CII brings fairness to taxation. It ensures that tax applies only to real gains and not to value increases caused by inflation. It protects taxpayers from paying high taxes on gains that do not reflect true profit. This creates a balanced system for both taxpayers and the government.

• Ensures Uniformity in Calculations

The use of the Cost Inflation Index (CII) helps standardize how capital gains are calculated, ensuring consistency for all taxpayers. It removes confusion and errors in tax computation. This makes tax filing easier and more accurate for individuals and professionals.

Conclusion

The Cost Inflation Index (CII) is an important tool that helps adjust the purchase cost of long-term assets to reflect inflation. It ensures that tax is calculated only on real profits and not on inflationary gains. CII increases the cost of acquisition, which reduces the capital gain and lowers the tax burden. This brings fairness and accuracy to the tax system and provides valuable tax relief to investors, property owners, and other taxpayers dealing with long-term capital assets.

FAQ

Q1. What is the Cost Inflation Index (CII)?

The Cost Inflation Index (CII) is a number announced every year by the Indian government. It adjusts the original cost of long-term assets to reflect inflation. This makes capital gains tax calculations more accurate and fair.

Q2. How is CII used to calculate capital gains tax?

By applying this formula:

Indexed Cost = (CII of sale year ÷ CII of acquisition year) × Original purchase cost

This adjustment lowers the capital gain and reduces the tax burden

Q3. What is the current CII value for FY 2025–26?

The Government of India has set the Cost Inflation Index (CII) at 376 for the financial year 2025–26. This index is used for calculating capital gains on assets sold between April 1, 2025, and March 31, 2026.

Q4. Can assets bought before the base year use indexation?

Yes, if someone buys an asset before April 1, 2001, they can choose the higher amount between the original purchase cost and the Fair Market Value (FMV) as of that date. This chosen value becomes eligible for indexation benefits.

Q5. Why was the base year changed from 1981 to 2001?

The government changed the base year to 2001–02 to solve the problems in valuing assets bought before 1981. This made things easier for both taxpayers and officials. From 2001, the Cost Inflation Index starts with a value of 100.