Cost Inflation Index

Tax

Quick Definition

Cost Inflation Index (CII) is an index used to adjust the purchase price of assets for inflation when calculating capital gains tax.

Detailed Explanation

CII helps taxpayers reduce taxable capital gains by accounting for inflation. It increases the original purchase cost of an asset, thereby lowering the profit calculated at the time of sale.

In India, CII is notified annually by the Income Tax Department India.

Indexed Cost Formula

👉 Indexed Cost = (Cost of Acquisition × CII of Sale Year) ÷ CII of Purchase Year

Where CII is Used

  • Long-term capital gains (LTCG)
  • Sale of property, gold, or other assets
[Image comparing capital gains calculation with and without indexation benefits]

Benefits of CII

  • Reduces taxable capital gains
  • Accounts for inflation impact
  • Encourages long-term investment

Important Points

  • Applicable only for long-term assets
  • Not applicable to short-term capital gains

Example

"<ul> <li>Purchase price: ₹10 lakh (CII = 100)</li> <li>Sale year CII: 300</li> </ul> <p>👉 Indexed cost = ₹10 lakh &times; (300 &divide; 100) = ₹30 lakh<br /> 👉 Tax is calculated on reduced profit</p>"

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