LTCG Tax Relief: How the New Cost Inflation Index Helps Investors

The Income Tax Department has now officially issued the Cost Inflation Index (CII) for the financial year 2025-26. This index is important for calculating long-term capital gains (LTCG) tax, particularly for anyone who has long-term capital assets such as real estate, gold, bonds, or securities and who may want to sell them. The CII for FY 2025-26 (376) has just been notified for assessment year 2026-27. This CII is effective from April 1, 2026.

The Cost Inflation Index is a method that is used to index the original purchase price of an asset for inflation and reduce taxable capital gains. The Income Tax Act‘s indexation benefit is available under Section 48, and can only be used on assets held for more than 24 months prior to being sold. For example, if someone bought a property in FY 2005-06 for Rs 10 lakh and sold it in FY 2025–26, they can take the CII values for those years, which are 117 for FY 2005-06 and 376 for FY 2025–26, in order to account for inflation and adjust the purchase price. Below is the indexation formula:

Indexed Cost = (CII of sale year / CII of purchase year) * Purchase Price.

The cost becomes Rs 32.13 lakh. As a result, when the property was sold for Rs 50 lakh, the long-term capital gain went down to Rs 17.87 lakh from Rs 40 lakh, hence bringing down the amount of tax that needs to be paid.

Just for the record, the CII for the year FY 2024-25 was 363, while for the year FY 2023-24 it was 348. This upward trend is indicative that the government is attempting to relate tax calculations to inflation trends. The new CII will allow investors to reduce their LTCG tax liability by increasing the indexed cost of acquisition, which will directly reduce the net taxable gain.

For a recent change effective July 23, 2024, indexation will not be available for several varieties of capital assets. Under the revised rules, indexation will be available only for house property (your home or investment property) acquired before that date. For these assets, the taxpayer has the option of either paying the capital gains tax at the rate of 20% on the indexed gain or opting to pay the concessional flat 12.5% with no indexation. Therefore, indexation will be an advantage when the indexed gains are significantly lower than the unindexed gains.

This year, the circular for the CII notification arrived later than it did last year. Typically, the index is released by May or June, but this time it was announced on July 1, 2025. This delay caused some challenges for taxpayers who had already sold their assets early in the financial year and were unsure about which index to use for their advance tax calculations. In such cases, many had to estimate the CII based on the previous year’s figure or conservative projections. Incorrect estimates can result in interest penalties or excess tax payments.

Despite the marginal year-on-year rise from 363 to 376, the real benefit of indexation is seen in long-term holdings, where the purchase year’s CII is much lower. This differential significantly increases the indexed cost and helps lower the LTCG burden. The latest index provides a slight relief in terms of reducing tax liabilities and also supports informed tax planning.

In conclusion, the CII of 376 for FY 2025–26 allows eligible long-term investors to benefit from inflation-adjusted tax calculations. It remains a powerful tool for reducing taxable gains and should be strategically used when selling long-held capital assets. Taxpayers are advised to assess both tax options, flat rate versus indexation, before making decisions, especially in light of recent changes to tax laws.