The Cost Inflation Index (CII) is a government-notified index published annually by the Central Board of Direct Taxes (CBDT) under the Income Tax Act, 1961, used to calculate the inflation-adjusted cost of acquisition of certain long-term capital assets for the purpose of computing Long-Term Capital Gains (LTCG) tax. By indexing the original purchase price of an asset to inflation using the CII, investors can reduce their taxable capital gains — a benefit known as indexation. The indexed cost is calculated as: Indexed Cost = Original Cost × (CII of Sale Year ÷ CII of Purchase Year). For example, property or debt mutual fund units purchased in FY2015-16 with a CII of 254 and sold in FY2024-25 with a CII of 363 would have the purchase cost inflated proportionally, reducing the taxable gain. Note that following the Finance Act 2024 amendments, the indexation benefit for debt mutual funds has been removed for units purchased after April 1, 2023, making the CII primarily relevant for physical real estate and gold investments for most Indian investors going forward.
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