If you bought a house in 2010 for ₹40 lakh and sold it in 2026 for ₹1.2 crore, your gain isn't really ₹80 lakh in 'real' terms - a chunk of that is just inflation. Indexation, based on the Cost Inflation Index notified each year by the CBDT, lets you adjust your purchase cost upward for inflation before computing your taxable long-term capital gain.
The Cost Inflation Index (CII) is a number notified annually by the Central Board of Direct Taxes (CBDT) that reflects the average inflation in the economy relative to a fixed base year. It is used to calculate the "indexed cost of acquisition" (and indexed cost of improvement) of a long-term capital asset, so that the portion of your gain attributable purely to inflation is not taxed as if it were real economic profit.
The base year for the current CII series is FY 2001-02, with a base index value of 100. Every subsequent financial year is assigned a CII value reflecting cumulative inflation since the base year. The CBDT notifies the CII for each financial year, typically before the start of that year or shortly into it.
The same formula applies to the cost of improvement (any capital expenditure incurred to improve the asset after acquisition) - each improvement amount is indexed using the CII of the year in which the improvement expenditure was incurred.
Once you have the indexed cost of acquisition and indexed cost of improvement, the long-term capital gain is computed as:
| Particulars | Amount |
|---|---|
| Year of purchase | FY 2010-11 (illustrative CII = 167) |
| Purchase price | ₹40,00,000 |
| Year of sale | FY 2025-26 (illustrative CII = 376) |
| Sale price | ₹1,20,00,000 |
| Indexed cost of acquisition = 40,00,000 × (376 ÷ 167) | ≈ ₹90,05,988 |
| Long-term capital gain (1,20,00,000 − 90,05,988) | ≈ ₹29,94,012 |
Without indexation, the taxable gain would have been the full ₹80,00,000 (sale price minus original cost). With indexation, the taxable gain drops to roughly ₹29.94 lakh - because a large part of the ₹80 lakh difference simply reflects 15 years of inflation, not real profit.
This is the most important - and most frequently misunderstood - part of the indexation rules, because the position changed significantly with the Finance Act, 2024 (effective for transfers on or after 23 July 2024):
| Asset Type | Indexation Available? |
|---|---|
| Listed equity shares / equity mutual funds (LTCG under Section 112A) | No - flat 12.5% (or applicable rate) on gains without indexation |
| Debt mutual funds purchased on or after 1 April 2023 | No - taxed as short-term capital gains at slab rates regardless of holding period (indexation not relevant) |
| Land and buildings (immovable property) acquired before 23 July 2024 | Taxpayers may choose between 12.5% without indexation OR 20% with indexation, whichever results in lower tax (transitional relief for individuals/HUFs) |
| Land and buildings acquired on or after 23 July 2024 | No indexation - flat 12.5% on long-term gains |
| Unlisted shares, gold, and other long-term capital assets | Indexation generally withdrawn for transfers after 23 July 2024; check current-year provisions for the specific asset class |
The CII table is published by the CBDT via notification each year and is widely available on the income tax department's website and tax reference portals. To calculate indexed cost, you need two numbers: the CII of the financial year in which you acquired the asset (or FY 2001-02 if acquired earlier, using the fair market value as on 1 April 2001 as the cost), and the CII of the financial year in which you sold the asset.
If you've incurred capital expenditure on improving the asset (for example, adding a floor to a house, or major structural renovation - not routine repairs), that expenditure can also be indexed, but using the CII of the year in which the improvement cost was incurred, not the year of original purchase. Each tranche of improvement expenditure is indexed separately based on when it was spent.