Cost Inflation Index and Indexation on Property
When you sell a property you have held for years, part of the "profit" is just inflation. Prices went up, but so did the value of money. The Cost Inflation Index (CII) is the tool the income tax law uses to adjust for this. It can lower your capital gains tax, but only in certain cases now. This guide explains how indexation works, the latest CII numbers, and when you can still use it.
Quick summary
- CII is a number the government sets each year to track inflation for tax purposes.
- Indexation raises your purchase cost using CII, so your taxable gain drops.
- CII for FY 2025-26 is 376. For FY 2024-25 it was 363. The base year 2001-02 is 100.
- Big change: from 23 July 2024, indexation was removed for most assets. For property, only resident individuals and HUFs who bought before that date can still choose it.
What is the Cost Inflation Index
The CII is a yearly figure notified by the Central Board of Direct Taxes. It measures how much prices have risen since the base year. The base year is 2001-02, fixed at 100. Every later year has a higher number. When the index doubles, it means prices have roughly doubled since 2001. You use this number to "index" your old purchase price to today's value.
Latest CII values
| Financial year | CII |
|---|---|
| 2001-02 (base) | 100 |
| 2015-16 | 254 |
| 2020-21 | 301 |
| 2023-24 | 348 |
| 2024-25 | 363 |
| 2025-26 | 376 |
How indexation lowers your tax
The formula is simple:
Indexed cost = Purchase price × (CII of sale year ÷ CII of purchase year)
Your taxable gain is then the sale price minus this indexed cost. Because the indexed cost is higher than the original price, the gain is smaller. A smaller gain means less tax.
Worked example
Say you bought a house in FY 2015-16 for Rs 50 lakh and sold it in FY 2025-26 for Rs 1.2 crore.
- Indexed cost = 50,00,000 × (376 ÷ 254) = about Rs 74 lakh.
- Indexed gain = 1,20,00,000 minus 74,00,000 = Rs 46 lakh.
- Without indexation, the gain would look like Rs 70 lakh.
So indexation cut the taxable gain by about Rs 24 lakh in this case.
The big change from 23 July 2024
The Finance Act 2024 removed indexation for most long-term assets. The new long-term rate is 12.5% without indexation. But there is relief for property.
If you are a resident individual or HUF and you bought the land or building before 23 July 2024, you can choose the option that gives lower tax:
- 12.5% without indexation, or
- 20% with indexation.
You compute both and pay the smaller one. For property bought on or after 23 July 2024, only the 12.5% no-indexation method applies. Companies and non-residents do not get the choice for property.
When indexation still helps
Indexation tends to win for older properties bought many years ago, where inflation has done a lot of work. The 12.5% flat rate tends to win for recent purchases with high price growth. There is no single answer. You must run both numbers for your own case. Our detailed guide on how to save capital gains tax on property shows how to compare and reduce the final bill.
Indexation and inherited property
If you inherited a property, you use the previous owner's purchase date and cost for indexation. For anything bought before 1 April 2001, you can use the fair market value as on 1 April 2001 as your cost. Read our note on tax on sale of inherited property for the full method.
Points to remember
- Indexation applies only to long-term assets. Property held over 24 months is long term.
- Short-term gains never get indexation. They are taxed at your slab rate.
- You can also index the cost of improvements, using the CII of the year you spent the money.
- Keep purchase deeds, improvement bills and dates safe. You need them to prove your cost.
Frequently asked questions
What is the CII for FY 2025-26?
It is 376, notified by the CBDT. The previous year, FY 2024-25, was 363.
What is the base year for CII?
The base year is 2001-02, set at 100. For property bought before April 2001, you can use its fair market value as on 1 April 2001 as the cost.
Is indexation still allowed on property?
Only for resident individuals and HUFs who bought the property before 23 July 2024. They can choose 20% with indexation or 12.5% without, whichever is lower.
Does indexation apply to short-term gains?
No. Indexation is only for long-term assets. Short-term gains are taxed at your income slab rate.
What holding period makes property long-term?
More than 24 months. If you sell within 24 months, the gain is short-term.
Can I index the cost of renovation?
Yes. Cost of improvement can be indexed using the CII of the year you spent the money, as long as the work added to the property's value.
Which method should I pick, 12.5% or 20% with indexation?
Calculate both. Older properties usually gain more from indexation. Recently bought, fast-appreciating property often does better at the flat 12.5% rate.
Do NRIs get the indexation choice on property?
No. The choice between 12.5% and 20% with indexation is only for resident individuals and HUFs.
Where does the government publish the CII?
The CBDT notifies it each year, usually mid-year. It is available on the income tax department website.
Can indexation make my gain negative?
It can reduce the gain to a small figure, and in rare old cases show a loss. A long-term capital loss can be set off against other long-term gains under the rules.
Indexation is a small calculation that can save lakhs. Before you sell, run both methods and pick the lower tax. When you reinvest the proceeds, explore current projects that suit your budget.
