Cost Inflation Index

Cost Inflation Index is a number published annually by India's Income Tax Department, used to adjust the purchase price of certain long-term capital assets for inflation before calculating taxable gains. Without it, you'd be taxed on gains that are partly just the rupee losing value over time, not real profit.

Indexation works by scaling your original purchase price up using the ratio of CII values between the year of sale and the year of purchase. This raised "indexed cost" is subtracted from the sale price to arrive at a smaller, more accurate taxable gain. Current rules limit indexation to specific asset categories, so check whether it applies before assuming it does for equity investments. The Capital Gains Tax Calculator applies indexation automatically where relevant.

Indexed Cost of Acquisition = Original Purchase Price × (CII of Year of Sale / CII of Year of Purchase)

A property bought for ₹30,00,000 in a year when CII was 200, sold years later for ₹75,00,000 when CII was 340.

• Indexed cost: ₹30,00,000 × (340 / 200) = ₹51,00,000
• Taxable gain with indexation: ₹75,00,000 − ₹51,00,000 = ₹24,00,000

Without indexation, the taxable gain would have been the full ₹45,00,000 difference between sale and purchase price, nearly double.

• CII only moves in one direction: up. Since it tracks cumulative inflation, each year's published value is higher than the last.
• Not every asset qualifies for indexation. Equity shares and equity mutual funds are generally taxed without indexation under current long-term capital gains rules.
• Cost of improvement can also be indexed. Money spent improving a property, not just the original purchase price, gets its own indexation treatment based on when the improvement occurred.
• The base year matters for older assets. Assets acquired before the index's base year use a fair market value as of the base year instead of the original purchase price.
• Rules around indexation have changed in recent budgets. Since options and eligibility shift with tax law updates, verify current-year rules for your specific asset type rather than assuming indexation automatically applies.