Cost Inflation Index Under New Income Tax Rules 2026: How It Works

If you have ever sold a property, gold, or any long-term investment, you have encountered the Cost Inflation Index (CII) — the silent number that can shrink your tax bill by lakhs. CII adjusts your purchase price for inflation so that you pay tax only on real gains, not on the nominal price increase driven by rising prices over the years.

But the rules around CII have changed dramatically. The Finance Act 2024 removed indexation for most assets from 23 July 2024. The Income Tax Act, 2025 takes effect from 1 April 2026 with a new structural framework. And CBDT continues to notify CII every year despite the reduced scope. So what role does CII play now? When can you still use it? And how do you calculate indexed cost correctly?

This guide answers all these questions with the complete CII table, the indexation formula, worked examples, and a clear picture of where CII stands under the new income tax rules.

What Is the Cost Inflation Index (CII)?

The Cost Inflation Index (CII) is a number notified annually by the Central Board of Direct Taxes (CBDT) under Section 48 of the Income Tax Act, 1961, calculated as 75% of the average rise in the Consumer Price Index (CPI–Urban) for the immediately preceding financial year, used to adjust the cost of acquisition and improvement of long-term capital assets for inflation.

In simple terms, CII measures how much prices have risen compared to a base year (FY 2001–02, where CII = 100). When you multiply your original purchase price by the ratio of CII of the sale year to CII of the purchase year, you get the “indexed cost of acquisition” — a higher, inflation-adjusted cost that reduces your taxable capital gain.

Key Terms

• CII (Cost Inflation Index): The inflation-adjustment number notified by CBDT for each financial year.
• Base Year: FY 2001–02, where CII = 100. Changed from 1981–82 by Finance Act 2017 (effective AY 2018–19).
• Indexed Cost of Acquisition: The inflation-adjusted purchase price = (Original Cost × CII of Sale Year) ÷ CII of Purchase Year.
• Indexed Cost of Improvement: Same formula applied to capital expenditure on improvements after 1 April 2001.
• FMV as on 1 April 2001: For assets bought before the base year, the cost is taken as the higher of actual cost or Fair Market Value on 1 April 2001.
• Section 48: The section in IT Act 1961 that defines how capital gains are computed, including the indexation formula.

Who Needs to Understand CII?

• Property owners selling residential, commercial, or agricultural land acquired before 23 July 2024
• Individuals computing LTCG for pre-April 2023 debt mutual fund units
• Taxpayers with inherited or gifted property (CII uses the previous owner’s year of acquisition)
• Tax professionals and CAs computing capital gains for clients during the transitional year
• NRIs selling Indian immovable property

For a broader understanding of how CII fits into the overall capital gains framework, refer to our detailed guide on .

Complete CII Table: FY 2001–02 to FY 2025–26

The following table lists every CII value notified by CBDT since the base year change to 2001–02:

Source: CBDT Notification No. 70/2025 dated 01-07-2025 and preceding notifications. CII for FY 2026–27 has not yet been notified as of February 2026. It is typically published between May and July.

Note: CBDT calculates CII as 75% of the average rise in CPI (Urban Non-Manual Employees) for the immediately preceding year. The 3.3% increase from 363 (FY 2024–25) to 376 (FY 2025–26) reflects moderate urban inflation.

How to Calculate Indexed Cost of Acquisition

The indexation formula is straightforward:

Indexed Cost of Acquisition = (Original Purchase Price × CII of Year of Transfer) ÷ CII of Year of Purchase

Similarly, for improvements:

Indexed Cost of Improvement = (Cost of Improvement × CII of Year of Transfer) ÷ CII of Year of Improvement

Step-by-Step Calculation Process

• Identify the purchase year and find the corresponding CII from the table above. If bought before 1 April 2001, take the higher of actual cost or FMV as on 1 April 2001, and use CII = 100 for the purchase year.
• Identify the year of transfer (sale year) and find the CII for that year.
• Apply the formula. Multiply the purchase price by the ratio of sale-year CII to purchase-year CII.
• Index the cost of improvement (if any), using the CII for the year improvement was made. Only improvements made after 1 April 2001 qualify.
• Compute LTCG. LTCG = Sale Price – Indexed Cost of Acquisition – Indexed Cost of Improvement – Transfer Expenses.
• Apply tax rate. 20% on the indexed gain (for eligible pre-July 2024 property under the transitional rule). Add 4% cess.

When Does CII Still Apply? Post-July 2024 Reality

The Finance Act 2024 fundamentally changed the scope of CII. Here is the current position for FY 2026–27:

Key takeaway: CII is now relevant ONLY for immovable property (land or building) acquired before 23 July 2024, where the individual or HUF taxpayer chooses the transitional option of 20% with indexation. For all other assets and all new acquisitions, CII has no practical application.

The Base Year: Why 2001–02 Matters

The base year for CII was changed from FY 1981–82 to FY 2001–02 by the Finance Act 2017 (effective AY 2018–19). This was done because:

• Determining FMV of assets acquired before 1981 was extremely difficult and unreliable
• Most taxpayers could not produce credible valuation reports for properties bought decades ago
• The 2001 base year brought the starting point closer to modern economic reality

The practical impact: for assets acquired before 1 April 2001, the cost of acquisition is taken as the higher of the actual purchase price or the Fair Market Value (FMV) as on 1 April 2001. This chosen value is then indexed using CII = 100 for FY 2001–02. The cost of improvements incurred before 1 April 2001 is completely ignored.

For inherited or gifted property, the CII of the year in which the previous owner originally acquired the property is used — not the year of inheritance or gift. This is a common source of confusion and errors in ITR filing.

Worked Examples

Example 1: Property Sold in FY 2025–26 (Acquired 2010–11)

Mrs. Kavita purchased a flat in Pune in FY 2010–11 for Rs 30,00,000. She incurred Rs 5,00,000 on renovation in FY 2015–16. She sells the flat in January 2026 for Rs 95,00,000. Brokerage: Rs 1,00,000.

Result: Mrs. Kavita saves Rs 3,70,687 by choosing Option B (20% with indexation). The longer the holding period and the higher the inflation during that period, the more beneficial indexation becomes. For properties held for 10+ years, the transitional option almost always results in lower tax.

Example 2: Inherited Property (Acquired by Father in 1998)

Mr. Arjun inherits a plot of land from his father who purchased it in 1998 for Rs 2,00,000. FMV as on 1 April 2001 is Rs 5,00,000 (per registered valuer). Arjun sells the plot in FY 2025–26 for Rs 60,00,000.

Cost of Acquisition: Higher of actual cost (Rs 2,00,000) or FMV on 01.04.2001 (Rs 5,00,000) = Rs 5,00,000

CII of purchase year: 100 (base year 2001–02, since original acquisition was before 2001)

CII of sale year: 376 (FY 2025–26)

Indexed Cost: 5,00,000 × (376 ÷ 100) = Rs 18,80,000

Taxable LTCG (with indexation): 60,00,000 – 18,80,000 = Rs 41,20,000. Tax @ 20% + 4% cess = Rs 8,56,960

Without indexation: 60,00,000 – 5,00,000 = Rs 55,00,000. Tax @ 12.5% + 4% cess = Rs 7,15,000

In this case, Option A (12.5% without indexation) results in LOWER tax: Rs 7,15,000 vs Rs 8,56,960. This happens when the property appreciation significantly outpaces inflation. Always compute both options before filing your .

Common Mistakes in CII Application

Mistake 1: Using the wrong CII for inherited/gifted assets. The CII of the year the previous owner acquired the asset must be used, not the year of inheritance. This is one of the most common errors that triggers an

notice.

Mistake 2: Indexing improvements made before 1 April 2001. Only capital expenses incurred after 1 April 2001 qualify for indexation. Pre-2001 improvement costs are entirely ignored.

Mistake 3: Applying indexation to listed equity shares or equity mutual funds. CII has never applied to Section 111A/112A assets. LTCG on listed equity is computed without any indexation.

Mistake 4: Not comparing both options for pre-July 2024 property. The transitional rule gives you a choice — 12.5% without indexation or 20% with indexation. Filing without comparing both results in overpayment of tax.

Mistake 5: Using estimated FMV for pre-2001 assets without a valuation report. A registered valuer’s report is critical to establish FMV as on 1 April 2001. Without it, the Assessing Officer may reject your FMV claim during assessment.

CII Under the Income Tax Act, 2025 and Draft IT Rules 2026

From 1 April 2026, the Income Tax Act, 2025 replaces the 1961 Act. Here is what changes for CII:

Section mapping: Section 48 of IT Act 1961 (which defined CII) will be replaced by corresponding provisions in the new Act. The core formula and CBDT’s power to notify CII annually remain intact.

Continued notification: CBDT will continue to notify CII every year via Official Gazette notification. The value for FY 2026–27 is expected between May and July 2026.

Transitional property rule: The option to choose between 12.5% without indexation and 20% with indexation for pre-July 2024 property continues under the new Act.

Draft IT Rules 2026: The Draft Rules do not introduce any new changes to CII computation. However, they codify clearer FMV determination rules for assets acquired before the base year, and standardise valuation methods for unlisted shares and other complex assets.

Reduced practical scope: With indexation removed for most assets, CII’s relevance is now limited to pre-July 2024 immovable property. Over time, as more property is acquired after July 2024, CII will gradually become irrelevant for new transactions.

For business taxpayers, a for FY 2026–27 must reflect the correct section references under the new Act when reporting capital gains computations.

Key Takeaways

• CII for FY 2025–26 is 376 (up from 363 in FY 2024–25). CII for FY 2026–27 has not been notified yet.
• The base year is FY 2001–02 (CII = 100). For pre-2001 assets, use the higher of actual cost or FMV as on 1 April 2001.
• The indexation formula is: Indexed Cost = (Original Cost × CII of Sale Year) ÷ CII of Purchase Year.
• Post Finance Act 2024, CII/indexation is available ONLY for immovable property acquired before 23 July 2024 (transitional rule: choose lower tax between 12.5% without or 20% with indexation).
• For all other assets (equity, gold, debt funds, unlisted shares), indexation has been permanently removed. LTCG is taxed at a flat 12.5%.
• For inherited/gifted property, use the CII of the original owner’s year of acquisition, not the year of transfer.
• CBDT calculates CII as 75% of the average rise in CPI (Urban) for the preceding year, notified annually via Official Gazette.
• Under Income Tax Act 2025 (effective 1 April 2026), CII continues to be notified but its practical scope is limited to pre-July 2024 property only.

Need Help Computing Indexed Capital Gains?

Choosing between the 12.5% and 20% options, obtaining a valuation report for pre-2001 property, and computing indexed cost correctly can save you lakhs in tax. Our CA team at Patron Accounting handles complex capital gains computations as part of .

Call us at +91 945 945 6700 or WhatsApp for a personalised consultation.