Cost Inflation Index (CII)

Cost Inflation Index (CII) is a number notified by the government each year to adjust the cost of a capital asset for inflation.

It is used to calculate the indexed cost of acquisition, which helps reduce taxable long-term capital gains.

Why CII Exists

If you bought an asset years ago, its price increase isn’t entirely “profit”—a part of it is just inflation.

CII helps:

• Adjust purchase cost to current value
• Ensure tax is levied only on real gains, not inflationary gains

Where CII is Used

CII is applied in:

• Long-Term Capital Gains (LTCG)
• Assets like property, bonds, and certain investments
• Cases where indexation benefit is allowed

(It does not apply to short-term capital gains or certain assets like equity shares under specific tax rules.)

How Indexation Works

The formula is:

Indexed Cost =
Original Cost × (CII of year of sale / CII of year of purchase)

This adjusted cost is then used to calculate capital gains.

What This Really Means

Let’s say:

• You bought a property for ₹10 lakh years ago
• Due to inflation, its indexed cost becomes ₹18 lakh
• You sell it for ₹25 lakh

Your taxable gain is not ₹15 lakh—it’s ₹7 lakh.

That’s a big difference.

Who Notifies CII

CII values are notified annually by the Central Board of Direct Taxes.

Each financial year has a specific index number used for calculations.

Common Mistakes

• Not applying indexation where eligible
• Using incorrect CII values
• Applying CII to assets where it’s not allowed
• Ignoring year of improvement for cost adjustments

Key Point to Remember

CII adjusts your cost, not your sale price.
It reduces taxable gains by factoring in inflation.