If you are planning to sell a piece of land, a house, or long-held shares this year, you are likely to come across the term Cost Inflation Index (CII) while calculating your capital gains. But what exactly is this index, and how does it impact your tax liability?The government has recently notified the CII for FY 2025-26 as 376. Here’s what you need to know:
What is the Cost Inflation Index (CII)?The Cost Inflation Index (CII) is a number issued annually by the Central Board of Direct Taxes (CBDT). It helps taxpayers adjust the purchase price of certain assets for inflation before calculating long-term capital gains tax.In simple terms, it ensures that you’re taxed only on the real profit — not on the price rise due to inflation over time.How does the CII work?CII adjusts the original purchase cost of a long-term asset to reflect inflation over the years. This revised (indexed) cost is then used to calculate capital gains at the time of sale.Example:Suppose you bought a property in 2005 for ₹1,00,000 when the CII was 100.You plan to sell it in 2025-26 when the CII is 376.Indexed cost = ₹1,00,000 × (376 / 100) = ₹3,76,000Sale price = ₹10,00,000Capital gain = ₹10,00,000 – ₹3,76,000 = ₹6,24,000Without indexation, the capital gain would have been ₹9,00,000. The CII thus helps reduce the taxable gain and save tax.
What changed this year in the CII?The government has notified the Cost Inflation Index for FY 2025-26 as 376, up from 363 in FY 2024-25 — a 3.58% increase.This updated index will be used to compute the indexed cost of acquisition for long-term capital assets sold during FY 2025-26.Is indexation available for all assets sold after July 23, 2024?No. A key policy change has been introduced.Amit Maheshwari, Tax Partner, AKM Global, a tax and consulting firm states,”The revision of the Cost Inflation Index to 376 for FY 2025–26 is an annual update, as it enables taxpayers to adjust their capital gains for inflation more accurately every year. This effectively reduces the tax liability on long-term capital assets and ensures that individuals and businesses are taxed only on real gains, not on notional appreciation due to inflation. It is a key mechanism that brings fairness and efficiency to India’s capital gains tax regime.Historically, CII was used in the case of long-term capital gain for assets such as land, buildings, patents, gold, securities etc. Notably, the concept of indexation using CII was removed in the Finance Act 2024, as, post July 23, 2024, none of the assets were eligible for the CII benefit. However, a choice was provided to taxpayers in case of the sale of land and building that was acquired before July 23, 2024.In that case, taxpayers have the option to pay tax at 12.5% without indexation or 20% with indexation. Hence, a revised CII of 376 is useful for taxpayers who will sell the land and building pertaining to the period before July 23, 2024.”Which Income Tax Return (ITR) form should I use?There is no separate form for claiming CII. You must report it in the applicable ITR form based on your income type.Tax experts suggest the following forms:
ITR-2: For individuals and HUFs with capital gains (non-business)
ITR-3: For individuals with capital gains and business/professional income
ITR-5 / ITR-6: For firms and companies
In the capital gains section of the form, you need to fill in:
Sale value of the asset
Indexed cost of acquisition (using CII)
Cost of improvement (if applicable)
Net long-term capital gain
Why is the CII important for taxpayers?The CII:
Lowers tax liability by adjusting the asset’s cost for inflation
Makes tax calculations more accurate and fair
Encourages long-term asset holding
Is especially useful for assets purchased long ago or inherited
Therefore, the CII of 376 for FY 2025-26 will play a key role for those selling land or buildings acquired before July 23, 2024. It ensures you are taxed on actual gains, not just inflated values over time.ALSO READ | Income Tax Dept rolls out ‘TAXASSIST’ campaign to support ITR filing and notice compliance
