What Is Cost Inflation Index (CII)?
Cost Inflation Index (CII) is a measure of inflation published annually by the Income Tax Department of India. It is used to adjust the purchase price of assets for inflation when calculating long-term capital gains tax. CII helps reduce tax liability by accounting for the impact of inflation on asset prices over time, ensuring that investors pay tax only on real gains (after adjusting for inflation) rather than nominal gains. The base year for CII is 2001-02 (CII = 100), and it is updated annually based on the Consumer Price Index (CPI).
How Cost Inflation Index Works
CII is used to calculate the indexed cost of acquisition, which adjusts the purchase price for inflation.
Indexation Formula
Indexed Cost of Acquisition = (Purchase Price × CII of Sale Year) / (CII of Purchase Year)
Indexed Cost of Improvement = (Improvement Cost × CII of Sale Year) / (CII of Improvement Year)
Taxable Capital Gains = Sale Price - (Indexed Cost of Acquisition + Indexed Cost of Improvement)
Cost Inflation Index Values (Recent Years)
CII values are updated annually by the Income Tax Department. Here are recent CII values:
| Financial Year | Cost Inflation Index (CII) |
|---|---|
| 2001-02 | 100 (Base Year) |
| 2015-16 | 254 |
| 2018-19 | 280 |
| 2020-21 | 301 |
| 2021-22 | 317 |
| 2022-23 | 331 |
| 2023-24 | 348 |
Note: CII values are updated annually. Please refer to the latest Income Tax Department notification for current year CII.
Benefits of Indexation
Reduced Tax Liability
Indexation significantly reduces taxable capital gains by adjusting purchase price for inflation, resulting in lower tax liability compared to calculating gains without indexation.
Tax on Real Gains
Indexation ensures you pay tax only on real gains (after inflation adjustment) rather than nominal gains, making taxation fairer for long-term investors.
Encourages Long-term Investment
By reducing tax liability for long-term investments, indexation encourages investors to hold assets for longer periods, promoting long-term wealth creation.
Lower Effective Tax Rate
With indexation, the effective tax rate on long-term capital gains is often much lower than the nominal 20% rate, sometimes even resulting in zero or negative gains after indexation.
Assets Eligible for Indexation
| Asset Type | Holding Period for LTCG | Indexation Available | Tax Rate (LTCG) |
|---|---|---|---|
| Debt Mutual Funds | 3 years or more | Yes | 20% (with indexation) |
| Real Estate | 2 years or more | Yes | 20% (with indexation) |
| Gold & Precious Metals | 3 years or more | Yes | 20% (with indexation) |
| Equity Shares | 1 year or more | No | 10% (above ₹1 lakh, no indexation) |
| Equity Mutual Funds | 1 year or more | No | 10% (above ₹1 lakh, no indexation) |
Final Thoughts
Cost Inflation Index is a crucial tool for reducing capital gains tax liability on long-term investments. By adjusting the purchase price for inflation, indexation ensures that investors pay tax only on real gains, making long-term investments in debt funds, real estate, and gold much more tax-efficient. Understanding how to use CII and calculate indexed cost can significantly impact your tax planning and investment decisions. It's important to keep track of the CII values for the years you purchased and sold assets, and to ensure you're using the correct CII values when filing your tax returns. Consulting with a tax advisor can help you maximize the benefits of indexation in your investment strategy.