The Central Board of Direct Taxes (CBDT) has officially announced the Cost Inflation Index (CII) for the Financial Year 2025-26 as 376. This notification, which was issued on July 1, 2025, is a crucial update for taxpayers dealing with long-term capital gains (LTCG). It will come into effect from April 1, 2026, and will be applicable for Assessment Year 2026-27 and subsequent years.
The Cost Inflation Index is a vital tool used by the Income Tax Department in India to adjust for inflation when calculating long-term capital gains on the sale of capital assets. These assets include real estate, shares, debentures, gold, and other long-term investments. The CII helps in indexing the original cost of an asset, adjusting it for inflation over the period it was held. This ensures that taxpayers are taxed on the real appreciation of their assets, rather than on nominal gains resulting from inflation.
A higher CII generally translates to a lower taxable long-term capital gain. The formula for calculating the indexed cost of acquisition is: Indexed Cost of Acquisition = Original Cost of Acquisition * (CII of the year of sale / CII of the year of purchase). By increasing the CII of the year of sale (376 in this case), the indexed cost of acquisition of the asset also increases. When this higher indexed cost is subtracted from the sale price to determine the capital gain, the resulting taxable gain is lower, leading to a reduced tax liability. For example, someone selling a property in FY 2025-26 that was purchased years ago can factor in a higher inflation adjustment, resulting in a smaller taxable capital gain and lower tax outflow.
The notification of CII at 376 reflects the underlying inflation in the economy. This allows taxpayers to adjust the purchase price of an asset to account for inflation, reducing the taxable profit. The indexation benefit is available only on long-term capital gains.
Here's a simplified example:
Without indexation, the capital gain would be Rs. 15,00,000 (Rs. 35,00,000 - Rs. 20,00,000).
However, with indexation (using assumed CII values for simplicity), the indexed cost of acquisition would be Original Cost of Acquisition * (CII of the year of sale / CII of the year of purchase). This indexed cost is then subtracted from the sale price to arrive at the long-term capital gain.
The tax liability is then calculated on this reduced capital gain.
It is important to note that the government has eliminated the indexation benefit with effect from July 23, 2024, on long-term capital gains. As a result, investors can no longer adjust the purchase price of their assets for inflation when calculating capital gains tax. This change may lead to higher taxable gains and increased tax liability. For land or buildings acquired before July 23, 2024, taxpayers can choose between a 12.5% tax rate without indexation, or a 20% rate with indexation. However, for land or buildings purchased on or after July 23, 2024, a 12.5% tax rate without indexation will apply to long-term assets.
In conclusion, the Cost Inflation Index of 376 for FY 2025-26 provides a fair tax framework that accounts for inflation's impact on asset values, potentially easing the tax burden on long-term investors. Taxpayers should carefully consider the implications of the CII and the rules regarding indexation when calculating their long-term capital gains tax liability.
