Cost Inflation Index (CII)

By Manu Rao | Updated March 2026

What Is the Cost Inflation Index?

The Cost Inflation Index (CII) is an annually notified number published by the Central Board of Direct Taxes (CBDT) that measures inflation for the purpose of computing long-term capital gains tax in India. When you sell a capital asset (property, unlisted shares, gold, bonds) that qualifies as a long-term asset, the CII allows you to inflate — or "index" — the original cost of acquisition to reflect the purchasing power erosion caused by inflation. This indexed cost replaces the original purchase price in the capital gains computation, reducing your taxable gain.

Without indexation, a person who bought a property in 2005 for INR 20 lakh and sold it in 2026 for INR 1 crore would pay tax on INR 80 lakh of gains. With indexation, the cost is adjusted upward to approximately INR 60 lakh, and tax applies only on INR 40 lakh — a substantial difference.

Legal Basis

• Section 48 of the Income Tax Act, 1961 — The primary section governing computation of capital gains. The second proviso to Section 48 provides for indexation of the cost of acquisition and cost of improvement using the CII.
• Section 55(2) — Defines "cost of acquisition" for different types of assets. For assets acquired before April 1, 2001, the taxpayer can substitute the Fair Market Value as of April 1, 2001 as the deemed cost.
• Section 2(42A) — Defines "short-term capital asset" and "long-term capital asset." Only long-term capital assets benefit from indexation.
• Section 112 — Tax rate on long-term capital gains (LTCG) on assets other than listed equity shares and equity mutual funds. The rate is 20% with indexation benefit (12.5% without indexation from AY 2025-26 for certain assets).
• Rule 115 of the Income Tax Rules — Prescribes the formula for computation of indexed cost.
• CBDT Notification (annual) — The CII for each financial year is notified by the CBDT, typically in June of that financial year.

CII Table: FY 2001-02 to FY 2025-26

The base year was reset to FY 2001-02 (index = 100) by Notification No. SO 1790(E) dated June 5, 2017. The complete table:

How to Calculate Indexed Cost of Acquisition

The formula is straightforward:

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

If the asset was acquired before April 1, 2001, the taxpayer can substitute the FMV as of April 1, 2001 as the cost, and use the base CII of 100 for the year of acquisition.

Calculation Example

Rajesh purchased a flat in Mumbai in FY 2010-11 for INR 50 lakh. He sells it in FY 2025-26 for INR 2.10 crore.

• CII for FY 2010-11 (year of purchase) = 167
• CII for FY 2025-26 (year of sale) = 377
• Indexed cost = 50,00,000 x (377 / 167) = INR 1,12,87,425
• Long-term capital gain = 2,10,00,000 - 1,12,87,425 = INR 97,12,575
• Tax at 20% (plus surcharge and cess) on INR 97.13 lakh

Without indexation, the gain would have been INR 1.60 crore — 65% higher. Indexation saves Rajesh approximately INR 12.6 lakh in taxes.

Which Assets Qualify for Indexation?

Indexation benefit is available for long-term capital gains on:

Finance Act 2024 Changes

The Finance (No. 2) Act, 2024, introduced a significant change: for certain asset categories (immovable property and unlisted shares), taxpayers can choose between 20% tax with indexation or 12.5% without indexation. The optimal choice depends on the specific numbers — if inflation-adjusted gains are small (high indexation benefit), the 20% with indexation route may yield lower tax; if gains are large relative to the original cost, 12.5% without indexation may be better.

How This Affects Foreign Investors in India

CII and indexation are directly relevant to foreign investors in several scenarios:

Sale of Unlisted Shares

When a foreign investor exits an Indian company by selling unlisted shares (for example, selling their stake in a Private Limited Company or wholly owned subsidiary), the capital gains computation uses the indexed cost of acquisition. This can significantly reduce the taxable gain, especially for investments held over many years.

Sale of Indian Real Estate

Foreign investors (particularly NRIs and OCI holders) who own property in India benefit from indexation when selling. Given that Indian real estate prices have risen dramatically over the past two decades, indexation often reduces the taxable capital gain by 40-60%.

Currency Conversion Considerations

For non-residents, there is an additional layer: the capital gains can be computed in foreign currency under the first proviso to Section 48. This means the cost of acquisition is converted at the exchange rate prevailing at the date of purchase, and the sale consideration at the exchange rate prevailing at the date of sale. This foreign currency indexation protects against INR depreciation but cannot be combined with CII indexation — the taxpayer must choose one or the other.

For investments made when the INR was stronger (e.g., 2007-08 at ~40 INR/USD vs. 2025-26 at ~85 INR/USD), the foreign currency option may eliminate capital gains entirely. Compare both methods before filing.

Withholding Tax on Sale

When a non-resident sells an Indian asset, the buyer must deduct TDS under Section 195 at applicable rates. The indexed cost should be considered when computing the withholding amount. Non-residents can apply for a lower TDS certificate under Section 197 to avoid excess withholding, presenting the indexed cost calculation to the Assessing Officer.

Indexation for Cost of Improvement

Indexation applies not just to the original purchase price but also to the cost of improvement — any capital expenditure incurred to enhance the value of the asset (renovation, construction, structural modifications). Each improvement is indexed from the year it was incurred. Only improvements made on or after April 1, 2001 are eligible for indexation (improvements before that date are ignored if the FMV as of April 1, 2001 is adopted as the cost).

Common Mistakes

• Using the wrong CII year. The CII of the year of purchase (not the year of payment) applies. If you signed the purchase agreement and took possession in FY 2014-15 but made the final payment in FY 2015-16, the CII of FY 2014-15 applies.
• Claiming indexation on listed equity shares. Listed shares held for more than 12 months are taxed at 12.5% flat with no indexation benefit. Many NRIs incorrectly try to claim indexation on listed share sales.
• Forgetting the April 1, 2001 FMV option. For assets acquired before 2001, you can use the higher of actual cost or FMV as of April 1, 2001. Get a registered valuer's report for property — it often yields a significantly higher base cost.
• Not comparing the 20%-with-indexation vs 12.5%-without-indexation options. Since AY 2025-26, the choice exists for property and unlisted shares. Running both calculations is essential — the optimal route depends on how much the CII has increased relative to the actual price appreciation.
• Ignoring cost of improvement. Renovations and structural improvements are indexable. Many sellers forget to include these, overstating their taxable gains.

Practical Example

Maria, a Portuguese citizen and OCI holder, purchased a residential flat in Goa in FY 2012-13 for INR 35 lakh. She spent INR 8 lakh on renovations in FY 2018-19. She sells the flat in FY 2025-26 for INR 1.20 crore.

Step 1: Indexed Cost of Acquisition

• CII 2012-13 = 200; CII 2025-26 = 377
• Indexed cost = 35,00,000 x (377/200) = INR 65,97,500

Step 2: Indexed Cost of Improvement

• CII 2018-19 = 280; CII 2025-26 = 377
• Indexed improvement = 8,00,000 x (377/280) = INR 10,77,143

Step 3: Capital Gain (with indexation)

• Sale price: INR 1,20,00,000
• Total indexed cost: 65,97,500 + 10,77,143 = INR 76,74,643
• LTCG = 1,20,00,000 - 76,74,643 = INR 43,25,357
• Tax at 20% = INR 8,65,071 + cess

Step 4: Compare with 12.5% without indexation

• Actual cost: 35,00,000 + 8,00,000 = INR 43,00,000
• LTCG = 1,20,00,000 - 43,00,000 = INR 77,00,000
• Tax at 12.5% = INR 9,62,500 + cess

The 20%-with-indexation option saves Maria approximately INR 97,000. She chooses indexation.

Maria files Form 15CA/15CB to repatriate the sale proceeds, and provides the indexed cost calculation to the buyer for TDS purposes under Section 195.

Key Takeaways

• The Cost Inflation Index adjusts an asset's purchase price for inflation, reducing long-term capital gains tax
• Base year is FY 2001-02 (CII = 100); the CII for FY 2025-26 is 377
• Formula: Indexed Cost = Original Cost x (CII of sale year / CII of purchase year)
• Indexation applies to property, unlisted shares, gold, and debt instruments — not to listed equity shares
• From AY 2025-26, taxpayers can choose between 20% with indexation or 12.5% without indexation for property and unlisted shares
• Non-residents can alternatively use the foreign currency conversion method (first proviso to Section 48) — but not both methods simultaneously
• For assets acquired before April 1, 2001, use the higher of actual cost or FMV as of that date

Selling property or shares in India and need to calculate capital gains correctly? Beacon Filing provides capital gains computation, TDS optimisation, and repatriation support for foreign investors and NRIs.