Cost Inflation Index
The Cost Inflation Index (CII) is a measure of inflation published annually by the Central Board of Direct Taxes (CBDT) under Notification 63/2017, used to compute the indexation benefit on long-term capital gains under Section 48 of the Income Tax Act.
Understanding Cost Inflation Index
CII enables the indexation calculation: indexed cost = original cost × (CII of sale year / CII of purchase year). The resulting indexed cost is used to compute capital gains, ensuring that only real (inflation-adjusted) gains are taxed.
CII increases roughly with India's inflation rate. From FY 2001-02 (100) to FY 2024-25 (363), the index has tripled — reflecting cumulative inflation of about 7-8% per year. This means an asset held for 23 years would have its purchase cost tripled in indexation terms, dramatically reducing taxable capital gain.
Why it matters
For real estate owners selling pre-2024 property, the right CII calculation can save substantial tax. The 2024 Budget changes complicated this — taxpayers must compute both old (20% with indexation) and new (12.5% without) and choose the lower. Always use a qualified CA for high-value property sales — the math affects ₹1-10 lakh+ of tax liability.
Example
Property purchased FY 2005-06 for ₹40 lakh (CII = 117), sold FY 2024-25 for ₹2.5 crore (CII = 363). Indexed cost = ₹40 lakh × (363 / 117) = ₹1.24 crore. Capital gain = ₹1.26 crore. At 20% LTCG = ₹25.2 lakh tax (pre-Budget 2024 rules); flat 12.5% without indexation = ₹26.2 lakh. Indexation saves ~₹1 lakh.
Property purchased FY 2005-06 for ₹40 lakh (CII = 117), sold FY 2024-25 for ₹2.5 crore (CII = 363). Indexed cost = ₹40 lakh × (363 / 117) = ₹1.24 crore. Capital gain = ₹1.26 crore. At 20% LTCG = ₹25.2 lakh tax (pre-Budget 2024 rules); flat 12.5% without indexation = ₹26.2 lakh. Indexation saves ~₹1 lakh.