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Understand the capital gain index to explore how inflation-adjusted values help calculate tax on long-term asset gains.
The Capital Gain Index, commonly known as the Cost Inflation Index (CII), is a government-notified index used to adjust the purchase price of a long-term capital asset for inflation. This adjustment helps calculate inflation-adjusted capital gains, ensuring that taxpayers are taxed only on real gains rather than nominal increases caused by inflation. The index is essential for fair taxation under India’s Income Tax Act.
The Capital Gain Index represents the increase in inflation over the years and is used to compute the indexed cost of acquisition and indexed cost of improvement for long-term capital assets such as real estate, gold, debt funds, and other assets. Indexation benefits for mutual fund units classified as debt funds apply only to units acquired before 1 April 2023, as per tax rule changes introduced in 2023.
Helps adjust the purchase price based on inflation.
Helps determine long-term capital gains in an inflation-adjusted manner
Reflects yearly inflation trends notified by the Central Board of Direct Taxes (CBDT).
The index is especially important when the holding period of an asset spans several years, allowing taxpayers to compute a more accurate taxable capital gain.
Below is a sample Cost Inflation Index (CII) table used for capital gains calculation.
| Financial Year | Cost Inflation Index (CII) |
|---|---|
2017–18 |
272 |
2018–19 |
280 |
2019–20 |
289 |
2020–21 |
301 |
2021–22 |
317 |
2022–23 |
331 |
2023–24 |
348 |
2024–25 |
363 |
The formulas are as follows:
Indexed Cost of Acquisition = (Cost of Acquisition × CII of Sale Year) ÷ CII of Purchase Year
Indexed Cost of Improvement = (Cost of Improvement × CII of Sale Year) ÷ CII of Improvement Year
Example:
If an asset was purchased for ₹10,00,000 in FY 2018-19 (CII = 280) and sold in FY 2023-24 (CII = 348):
Indexed Cost = 10,00,000 × 348 / 280 = ₹12,42,857
To calculate inflation-adjusted capital gains, apply the index to the purchase price.
Identify the purchase year and sale year.
Refer to the CII table for both years.
Apply the indexed cost formula.
Compute taxable capital gain:
Taxable LTCG = Sale Price − Indexed Cost of Acquisition − Indexed Cost of Improvement
The detailed calculation method is as follows:
Collect the asset’s purchase price and year of acquisition.
Identify the CII for the purchase year and CII for the sale year.
Multiply the original cost by the CII of the sale year.
Divide the result by the CII of the purchase year.
The result is the inflation-adjusted cost.
This indexed value ensures that gains are calculated fairly by incorporating inflation effects.
Consider the following example:
Example Scenario:
Purchase Year: 2019–20 (CII = 289)
Sale Year: 2023–24 (CII = 348)
Purchase Price: ₹15,00,000
Sale Price: ₹25,00,000
Step 1: Indexed Cost
Indexed Cost = 15,00,000 × (348 ÷ 289) = ₹18,06,228
Step 2: Long-Term Capital Gain
LTCG = 25,00,000 − 18,06,228 = ₹6,93,772
Tax applies only on ₹6,93,772, not the nominal gain of ₹10 Lakhs.
The Capital Gain Index plays an important role in taxation:
Ensures inflation-adjusted and fair taxation.
Reduces tax liability for long-term asset holders.
Helps maintain accuracy of real gains vs nominal gains.
Protects investors from paying tax on inflation-driven price increases.
Essential for calculating LTCG on real estate, gold, and other long-term assets.
It offers several benefits, such as:
Adjusts cost for inflation, ensuring fairness.
Useful for long-term assets held for many years.
Prevents over-taxation on nominal gains.
Helps in accurate financial and tax planning.
Transparent and government-notified.
Here are the key drawbacks to keep in mind:
Applies only to long-term assets, not short-term.
Annual CII changes require updated tables.
Does not consider actual market fluctuations.
May not reflect volatility or sector-specific inflation.
The Capital Gain Index (CII) ensures fair taxation by adjusting the purchase cost of long-term assets for inflation. It helps taxpayers calculate real gains rather than inflation-driven increases. Knowing how to use the CII table and apply the indexed cost formula is especially important for individuals dealing with property, gold, and other long-term capital assets.
Key points to remember:
CII adjusts asset costs for inflation to compute long-term capital gains
It ensures fair and accurate taxation on real gains
Essential for real estate, gold, and long-term capital asset transactions
Requires applying the indexed cost formula correctly
Helps taxpayers reduce tax impact through lawful indexation benefits
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
The capital gain index in India refers to the Cost Inflation Index, which is used to adjust the purchase cost of eligible assets for inflation when calculating long-term capital gains.
The capital gain index is applied through the indexed cost formula, where the original cost of an asset is multiplied by the Cost Inflation Index of the year of sale and then divided by the Cost Inflation Index of the year of purchase.
The capital gain index table is a government-notified compilation of Cost Inflation Index values released for each financial year, providing the benchmark figures needed for indexing asset costs.
The capital gain index is used to ensure that long-term capital gains reflect actual appreciation by adjusting for inflation, allowing taxation to be based on real gains rather than inflation-driven increases in value.
The capital gain index applies primarily to long-term capital assets that qualify for indexation benefits, while short-term capital assets are generally excluded from this adjustment.
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