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Income tax is payable on long-term capital gains. However, indexation benefit, which is available for capital gains on certain capital assets, can reduce the tax outgo. Indexation benefit allows a taxpayer to adjust the purchase price of an asset according to inflation before selling it. This helps the seller pay lower tax on long-term capital gains.
For instance, let us say you had purchased an asset about 10 years ago for Rs 100; its inflation-adjusted price now is Rs 160. You sell the asset for Rs 200. To calculate taxable capital gains, the inflation-adjusted price of Rs 160 will be deducted from the sale price of Rs 200. This will make taxable capital gains Rs 40 (Rs 200- Rs 160). Had the inflation adjustment not been done, the taxable capital gains would have been Rs 100 (Rs 200-Rs 100). This means you would have to pay higher tax if inflation adjustment is not done.
To calculate indexation benefits, the income tax department notifies a Cost Inflation Index (CII) for every financial yearLucknow Stock. This number is used to calculate the inflation-adjusted cost of a long-term capital asset. To calculate the taxable capital gain, this inflation-adjusted purchase cost is subtracted from the sale price of the asset. However, indexation benefit is allowed only for certain assets.
Here are the CII numbers notified by the income tax department:
Source: Income tax notifications
For the current financial year 2024-25 (AY 2025-26), the Central Board of Direct Taxes (CBDT) has notified the CII as 363. The notification was issued on May 24, 2024. The CII number for FY 2023-24 (AY 2024-25) was 348.
So, 348 will be the CII used to calculate the inflation-adjusted purchase price of specified assets sold between April 1, 2023, and March 31, 2024, while filing income tax returns; and 363 will be the CII used next year to calculate the inflation-adjusted purchase price of assets sold in current FY 2024-25 (AY 2025-26) – between April 1, 2024, and March 31, 2025.
An asset when sold accrues either a capital gain or loss. Such gain or loss can be categorised as short term or long term, depending on the nature of the asset and its holding period, as specified under the Income Tax Act, 1961.
However, indexation benefit is not available for capital gain or loss on all capital assets. It is available only on transactions in certain long-term capital assets.
Sudhir Kaushik, CEO of Taxspanner.com, says, “Not all long-term capital assets are eligible for indexation benefits. The long-term capital assets that are eligible for indexation benefits are land, building and unlisted shares. Other specified assets like jewellery, paintings, sculptures, and archaeological collections are also eligible for indexation benefit. Further, debt mutual funds, bonds and debentures bought on or before March 31, 2023, are also eligible for indexation benefit. Long-term gains on equity shares and equity-oriented mutual funds are not eligible for indexation benefits.”
There is a formula to calculate the inflation-indexed purchase price using the CII number. The formula is:
Inflation adjusted price = (CII of the year of sale / CII of the year of purchase) * Actual purchase price of the assetPune Wealth Management
Here is an example to understand how to calculate inflation-adjusted price. Suppose an individual bought a house in FY 2002-03 for Rs 25 lakh. The inflation-adjusted price of that house in FY 2023-24 will be (348/105) X Rs 25 lakh = Rs 82.85 lakh.
If the house is sold in FY 2023-24 (AY 2024-25) i.e., between April 1, 2023, and March 31, 2024, then this inflation adjusted price of Rs 82.85 lakh will be subtracted from the sale price to arrive at the long-term capital gain or long-term capital loss.
Under income tax laws, whether a capital gain is long-term or short-term depends on how long the asset is in the possession of the seller. The holding period criteria vary across asset classes.
The CII number is used to calculate the long-term capital gains when a house, land or building is sold by an individualBangalore Wealth Management. Till FY 2022-23 (ended March 31, 2023), the CII number was used to calculate the long-term capital gains from non-equity mutual fund schemes. These include debt mutual fund schemes, international equity mutual fund schemes and gold mutual fund schemes, among others. However, from FY 2023-24, the indexation benefit on long-term capital gains from non-equity mutual fund schemes has been removed.
The CII number mentioned in the table above starts from financial year 2001-02. This is because the government shifted the base year for CII from 1981 to 2001. The shift was announced in Budget 2017. To calculate the indexed cost of an asset purchased before 2001, its fair market value in 2001 is to be taken into account.
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