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NISM-Series-X-B: Investment Adviser (Level 2) · Capital Gains

Indexation and Cost Inflation Index for Capital Gains

Updated 11 October 2026 · Fact-checked

Indexation raises the purchase cost of an asset using the Cost Inflation Index (CII), so you are taxed only on gain above inflation. Indexed cost = cost × CII of transfer year ÷ CII of acquisition year. Since 23 July 2024, it is allowed only for land or buildings bought before that date, held by resident individuals and HUFs, who may choose it.

Understand Indexation and Cost Inflation Index

Prices rise over time. If you buy a plot for ₹10 lakh and sell it years later for ₹20 lakh, part of that gain is just inflation. Indexation adjusts your cost upward so that only the real gain is taxed.

The tool for this is the Cost Inflation Index (CII). The government notifies one number for each financial year. The base year is 2001-02, with CII = 100. Recent values include 2015-16 = 254, 2019-20 = 289, 2023-24 = 348 and 2024-25 = 363. The exam usually gives you the CII values it needs.

Indexation applies only to long-term capital gains. It adjusts the cost of acquisition and the cost of improvement. It never adjusts the sale price. If the asset was bought before 1 April 2001, you may use its fair market value on 1 April 2001 as the cost, and 2001-02 as the base year. Improvements made before that date are ignored.

The law changed for transfers on or after 23 July 2024. Long-term gains on most assets are now taxed at 12.5% without indexation. Listed equity shares and equity mutual funds also attract 12.5%, with the first ₹1,25,000 of such gains in a year exempt. There is one relief. A resident individual or HUF that acquired land or a building before 23 July 2024 may pay either 20% with indexation or 12.5% without it, on that asset.

So for the exam, ask two things. Is the transfer before or after 23 July 2024? And is the asset land or building bought before that date by a resident individual or HUF? The answers decide whether indexation exists at all.

Key formulas to remember

Indexed cost of acquisition
Indexed cost = Cost of acquisition × CII of year of transfer ÷ CII of year of acquisition
If the asset was acquired before 1 April 2001, use cost (or FMV on 1 April 2001) with CII of 2001-02 = 100 as the denominator.
Indexed cost of improvement
Indexed improvement = Cost of improvement × CII of year of transfer ÷ CII of year in which the improvement was made
Index each improvement separately using its own year. Improvements before 1 April 2001 are ignored.
Long-term capital gain with indexation
LTCG = Sale consideration − Expenses on transfer − Indexed cost of acquisition − Indexed cost of improvement
Sale price is never indexed. Transfer expenses are deducted as incurred.
Post-Budget 2024 tax choice (land or building)
Tax = lower of: 20% × gain with indexation, or 12.5% × gain without indexation
Available only to resident individuals and HUFs for land or buildings acquired before 23 July 2024. Other assets: 12.5% without indexation.
CII base
CII (2001-02) = 100
Use the year of the financial year, not the calendar year. The year of transfer is the year in which the sale occurs.

How to solve Indexation and Cost Inflation Index questions

Follow this order for any indexation question. It also stops you from indexing when the law does not allow it.

  1. 1Identify the asset, the buyer or seller type, and the dates of purchase and transfer. Check that the asset is long-term.
  2. 2Check eligibility. For transfers on or after 23 July 2024, indexation applies only to land or buildings acquired before that date, held by a resident individual or HUF.
  3. 3Convert each date to a financial year (April to March) and pick the matching CII values.
  4. 4Compute the indexed cost of acquisition: cost × CII of transfer year ÷ CII of acquisition year.
  5. 5Compute each indexed improvement separately with its own year's CII, then add them.
  6. 6Subtract indexed costs and transfer expenses from the sale price to get LTCG.
  7. 7Apply the tax rate: 20% with indexation, or 12.5% without it. If the choice is offered, compute both and take the lower tax.
  8. 8Check the answer: indexed cost must be higher than actual cost, and the sale price must not be indexed.

Quickest way: Ratio-first shortcut

When to use it: Use when the question gives CII values and asks only for indexed cost or the gain, and the options are far apart.

  1. Write the ratio first: CII of transfer year ÷ CII of acquisition year. Check that it is above 1.
  2. Multiply the cost by that ratio. Round only at the end.
  3. Eliminate options that use the ratio upside down (these come out below the actual cost).
  4. Eliminate options that use the wrong year's CII, such as the sale year's CII taken from the previous year.
  5. For the tax-choice question, compute 12.5% × (sale − cost) first. It is fast, then test whether indexed tax at 20% is lower.

Common mistakes in Indexation and Cost Inflation Index

  • Indexing the sale price as well as the cost

    Students think the whole transaction is inflation-adjusted.

    Fix: Only cost of acquisition and cost of improvement are indexed. Sale consideration stays as is.

  • Turning the ratio upside down

    Students mix up which year's CII goes on top.

    Fix: The transfer year CII is always the numerator. Indexed cost must come out higher than the actual cost.

  • Allowing indexation for every asset after 23 July 2024

    Students remember the old rule where indexation applied to all long-term assets other than some securities.

    Fix: After that date, indexation is a special choice for land or buildings bought before 23 July 2024 by resident individuals and HUFs. Everything else is taxed at 12.5% without indexation.

  • Using the calendar year to pick the CII

    CII is shown against years like 2024-25 and students read it as a calendar year.

    Fix: Convert dates to the financial year from 1 April to 31 March. A sale on 10 February 2025 falls in 2024-25.

  • Indexing improvements using the purchase year's CII

    Students treat the asset as one block.

    Fix: Each improvement uses the CII of the year in which that improvement was made.

  • Ignoring the holding period test

    Students jump to the formula.

    Fix: Indexation applies only to long-term gains. Land, buildings and unlisted shares need more than 24 months. Listed shares need more than 12 months.

Worked examples

Example 1

Rohit, a resident individual, bought a flat in FY 2015-16 for ₹40,00,000 (CII 254). In FY 2019-20 (CII 289) he spent ₹5,00,000 on improvements. He sold the flat on 1 October 2024 (FY 2024-25, CII 363) for ₹90,00,000. Ignore transfer expenses and cess. Find the tax payable using the better option.

Show the solution
  1. The flat was held for more than 24 months, so the gain is long-term. It is a building bought before 23 July 2024 by a resident individual, so he can choose.
  2. Indexed cost of acquisition = 40,00,000 × 363 ÷ 254 = ₹57,16,535 (rounded).
  3. Indexed improvement = 5,00,000 × 363 ÷ 289 = ₹6,28,028 (rounded).
  4. Total indexed cost = 57,16,535 + 6,28,028 = ₹63,44,563.
  5. LTCG with indexation = 90,00,000 − 63,44,563 = ₹26,55,437. Tax at 20% = ₹5,31,087 (rounded).
  6. Without indexation: cost = 40,00,000 + 5,00,000 = ₹45,00,000. Gain = ₹45,00,000. Tax at 12.5% = ₹5,62,500.
  7. Compare: 5,31,087 is lower than 5,62,500.

Answer: He should choose indexation. Tax is about ₹5,31,087, before cess.

Example 2

A resident individual bought land in FY 2005-06 for ₹2,00,000 (CII 117) and sold it in FY 2024-25 (CII 363). What is the indexed cost of acquisition? (a) ₹5,94,872 (b) ₹6,20,513 (c) ₹7,26,000 (d) ₹64,463

Show the solution
  1. Indexed cost = cost × CII of transfer year ÷ CII of acquisition year.
  2. = 2,00,000 × 363 ÷ 117.
  3. = 7,26,00,000 ÷ 117 = ₹6,20,513 (rounded).
  4. Option (a) uses CII 348 instead of 363, which is the wrong year.
  5. Option (c) divides by 100, the base year, instead of 117.
  6. Option (d) turns the ratio upside down (2,00,000 × 117 ÷ 363).

Answer: (b) ₹6,20,513

Exam tips

  • First check the date of transfer. The date 23 July 2024 decides which regime applies.
  • Remember who can choose: resident individuals and HUFs, for land or buildings bought before 23 July 2024. Companies, NRIs and other assets get 12.5% without indexation.
  • In a CII question, check that your answer is above the actual cost. If it is below, you inverted the ratio.
  • When both options are offered, compute both taxes and pick the lower one rather than assuming indexation wins. Low inflation or a big gain can flip the answer.
  • NISM X-B has negative marking of 25% of the marks of a question. On a 2-mark caselet question, avoid guessing when you cannot tell whether indexation is allowed.

Practice questions from Capital Gains

Indexation and Cost Inflation Index in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Indexation and Cost Inflation Index: frequently asked questions

How do I calculate the indexed cost of acquisition?

Multiply the purchase cost by the CII of the year of transfer and divide by the CII of the year of acquisition. For assets bought before 1 April 2001, use cost or FMV on 1 April 2001 and divide by 100. Index each improvement separately using the CII of its own year.

Is indexation available after Budget 2024?

For transfers on or after 23 July 2024, long-term gains on most assets are taxed at 12.5% without indexation. The exception is land or buildings acquired before that date by a resident individual or HUF. They can choose 20% with indexation or 12.5% without it.

What is the base year of the Cost Inflation Index?

The base year is 2001-02, with CII = 100. This is why assets bought before 1 April 2001 are handled using their value on that date. Improvements made before that date are ignored.

Is indexation allowed on sale price or transfer expenses?

No. Only the cost of acquisition and the cost of improvement are indexed. Sale consideration and transfer expenses are used at actual amounts.