CBDT Notifies Cost Inflation Index at 376 for FY26 for Capital Gains

Thursday, July 3: The Central Board of Direct Taxes (CBDT) has announced the Cost Inflation Index (CII) for the financial year 2025–26, setting it at 376. This is an increase from 363 in FY25. This updated index will be used to compute long-term capital gains for the assessment year 2026–27 and subsequent years. The notification officially takes effect from April 1, 2026.

Understanding the Cost Inflation Index?

The CII is a vital tool for taxpayers, allowing them to adjust the original purchase price of capital assets to account for inflation. This adjustment helps to significantly reduce the taxable portion of long-term capital gains when assets like land, buildings, securities, and gold are sold. By using the CII, taxpayers are taxed on the real gain after considering the erosion of purchasing power due to inflation.

For example,

Imagine an individual purchased a plot of land in FY 2005-06 for ₹10,00,000. They decide to sell this land in FY 2025-26 for ₹50,00,000.

• Purchase Price: ₹10,00,000
• CII for FY 2005-06: 117 (This would be the CII value for the year of acquisition)
• Sale Price: ₹50,00,000
• CII for FY 2025-26: 376 (The newly notified CII for the year of sale)

To calculate the indexed cost of acquisition:

Indexed Cost = Purchase Price × (CII of Sale Year / CII of Purchase Year)

Indexed Cost =₹10,00,000 × (376 / 117) = ₹32,13,675

Now, to calculate the long-term capital gain:

Long-Term Capital Gain = Sale Price−Indexed Cost

Long-Term Capital Gain = ₹50,00,000−₹32,13,675 = ₹17,86,325

Without indexation, the capital gain would have been ₹40,00,000 (₹50,00,000 – ₹10,00,000). By using the CII, the taxable gain is significantly reduced to ₹17,86,325, demonstrating how the indexation benefit lowers the tax liability by accounting for inflation.

Impact of Finance Act 2024

It’s essential to note that, under the Finance Act 2024, the indexation benefit using CII has been generally withdrawn for all assets sold after July 23, 2024.

However, there’s a crucial exception: if you sell land or buildings acquired before July 23, 2024, you still have a choice:

• Pay 12.5% tax without applying indexation, or
• Pay 20% tax with indexation, utilising the new CII of 376.

Tax experts emphasise that this annual revision of the CII is crucial for ensuring taxpayers are only taxed on inflation-adjusted gains, which brings fairness and accuracy to the capital gains tax system.

Who Benefits from This Revision?

This particular revision of the CII is especially beneficial for:

• Individual and corporate taxpayers who are planning to sell long-term assets that were acquired before July 23, 2024.
• Those who aim to strategically use indexation to legally reduce their tax liabilities on such sales.

Effective Date

• Notification Date: July 2, 2025
• Effective From: April 1, 2026
• Applicable For: Assessment Year 2026–27 and beyond

What’s in the Future? 

The new Cost Inflation Index of 376 for FY26 will help reduce taxable long-term capital gains on assets bought before July 23, 2024. Taxpayers can choose between paying 12.5% tax without indexation or 20% with indexation. This update benefits those planning to sell property, gold, or other capital assets. It offers flexibility to reduce tax burden based on holding period and asset type. Strategic planning using CII can lead to substantial savings. Future changes may further limit indexation benefits, so timely decisions are crucial.

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