Capital Gain Index - Concepts & Benefits of Capital Gain Indexation
Imagine you bought a small piece of land in your hometown back in 2005 for ₹5 Lakhs. Today, you sell it for ₹20 Lakhs. On paper, it looks like you made a massive profit of ₹15 Lakhs. But wait, is that real profit? Think about the price of milk, petrol, or even a cinema ticket back in 2005 versus today. Because of inflation, the value of ₹1 today is much less than it was twenty years ago. If you pay tax on the full ₹15 Lakhs, you are essentially being punished for the fact that prices went up everywhere.
This is where the Capital Gain Index comes to your rescue. It is a tool that allows you to adjust your old purchase price to match today’s value of money. It’s like a time machine for your investment cost. By using the government’s official Cost Inflation Index (CII), you can show that your ₹5 Lakh investment from 2005 is actually worth, say, ₹16 Lakhs in today’s terms. Now, your taxable profit is only ₹4 Lakhs (₹20L - ₹16L) instead of ₹15 Lakhs. Indexation ensures you pay tax only on the actual growth of your wealth, not just the rising cost of living.
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What is the Cost Inflation Index (CII)?
The Cost Inflation Index (CII) is a number notified by the Central Government every year. It reflects the average increase in prices (inflation) over time. The index starts with a Base Year (2001-02), where the value is set at 100. Every year since then, the number has gone up as inflation rises.
Latest CII Values (2025-2026)
As of early 2026, the government has notified the following recent values for calculation:
Financial Year
Cost Inflation Index (CII)
2001-02 (Base Year)
100
2021-22
317
2022-23
331
2023-24
348
2024-25
363
2025-26 (Latest)
376
How Indexation Works: The Formula
To find out what your old investment is worth in today's rupees, you use the Indexed Cost of Acquisition (ICoA) formula:
Indexed Cost of Acquisition = Actual Purchase Price × (CII of the Year of Sale ÷ CII of the Year of Purchase)
Step-by-Step Calculation Example
Let’s say you bought a house in FY 2012-13 for ₹50 Lakhs, and you are selling it in FY 2025-26.
- Purchase Year CII (2012-13): 200
- Sale Year CII (2025-26): 376
- Calculation:
₹50,00,000 × (376 ÷ 200) = ₹94,00,000
The Result: Even though you paid ₹50 Lakhs, the tax department will treat your cost as ₹94 Lakhs. If you sell the house for ₹1 Crore, you only pay tax on the ₹6 Lakh profit!
The 2026 Rule Change: A Very Important Note
In the recent budgets (2024-2025), the government made a massive change to indexation. It is no longer available for everything.
- For Property (Land/Building): If you bought the property before July 23, 2024, you have a choice. You can either pay 12.5% tax without indexation OR 20% tax with indexation. You should calculate both and pick the one where you pay less.
- For Everything Else: For Gold, Unlisted Shares, and properties bought after July 23, 2024, indexation has been removed. You simply pay a flat 12.5% on your profit.
- For Debt Mutual Funds: Indexation is only available for investments made before April 1, 2023. Newer investments are taxed at your regular slab rate.
Benefits of Capital Gain Indexation
- Lower Tax Outgo: As shown in the example, indexation can reduce your taxable profit by lakhs of rupees, saving you a massive amount in taxes.
- Taxing Real Gains: It prevents you from paying tax on paper profits that are just caused by the currency losing value.
- Hedge Against Inflation: It protects long-term savers. The longer you hold an asset, the more the indexation benefit helps you.
- Fairness for Old Assets: For those selling ancestral property or homes bought decades ago, indexation is the only way to keep the tax bill reasonable.