Long-term capital gain liability on the sale or transfer of any capital asset, such as land, property, trademarks and patents is expected to be lower this year as Cost Inflation Index (CII) for Financial Year 2025-26 has been fixed at 376 as against 363 for Financial Year 2024-25. This shows a rise of 3.58 per cent.
The Central Board of Direct Taxes (CBDT) has notified the index. It will be useful for land or building purchased before July 23. 2024
“This notification shall come into force on the 1st day of April, 2026 and shall accordingly apply to the Assessment Year 2026-27 and subsequent years,” it said. The CII number assists in determining the long-term capital gains on which an assessee is required to pay taxes when she/he files income tax returns (ITR) next year.
CII is a way to calculate inflation, that is, an estimated increase in the price of a good or service over the years. Indexation is used to adjust the purchase price of an investment to reflect the effect of inflation on it. A higher purchase price means lesser profits, which effectively means a lower tax.
With the help of indexation, one will be able to lower her/his long-term capital gains, which brings down taxable income. The rate of inflation to be used for indexation can be obtained from the government’s CII.
The Central government notifies the index. Usually, for the calculation of CII, gains on long-term capital are taken into account. To benefit the taxpayers, the CII is applied to the long-term capital assets, due to which purchase cost increases, resulting in lesser profits and lesser taxes.
The indexation was in news last year as Finance Act 2023 removed this for debt mutual funds. From April 1 and onwards gain for funds are taxed at the investor’s tax slab rates, rather than the previous 20 per cent with indexation benefit and 10 per cent without that as a result, if the investor is subject to the highest tax bracket, this rate would be 35.8 per cent (including surcharge and cess). This mechanism got changed further last year.
Amit Maheshwari, Tax Partner, AKM Global, said that the revision of the Cost Inflation Index to 376 for FY 2025–26 is an annual update, as it enables taxpayers to adjust their capital gains for inflation more accurately every year. This effectively reduces the tax liability on long-term capital assets and ensures that individuals and businesses are taxed only on real gains, not on notional appreciation due to inflation. It is a key mechanism that brings fairness and efficiency to India’s capital gains tax regime. Historically, CII was used in case of long term capital gain for assets such as land, building, patents, gold, securities etc.
Notably, the concept of indexation using CII was removed in Finance Act 2024 as post July 23, 2024, none of assets were eligible for CII benefit. However, a choice was provided to taxpayers in case of sale of land and building which was acquired prior to July 23, 2024. In that case, taxpayers have option to pay tax at 12.5 percent without indexation or 20 percent with indexation. Hence, revised CII of 376 is useful for taxpayers who will sell the land and building pertaining to period before July 23, 2024.”
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