CBDT Raises Cost Inflation Index to 376 for FY 2025-26

In a move aimed at adjusting capital gains taxation in line with inflation, the Central Board of Direct Taxes (CBDT) has notified an increase in the Cost Inflation Index (CII) from 363 to 376 for the financial year 2025-26. The new index will be applicable for assessment year 2026-27 and beyond, providing some tax relief to individuals selling capital assets like land, buildings, patents, and trademarks.

Understanding the Cost Inflation Index (CII) Hike

The CII is a key metric used to calculate the inflation-adjusted purchase price of capital assets. A higher CII raises the adjusted purchase price, thereby reducing taxable long-term capital gains (LTCG). This system ensures that taxpayers are taxed only on real profits, excluding the impact of inflation.

However, due to the Finance Act 2024, the scope of indexation benefits has been narrowed significantly. The revised CII of 376 will primarily benefit sellers of land and buildings acquired before July 23, 2024. In these cases, taxpayers can choose to pay LTCG tax at 20% with indexation or opt for a lower flat 12.5% tax without indexation.

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For assets purchased on or after July 23, 2024, indexation benefits have been discontinued altogether, and a 12.5% LTCG tax will apply without adjusting for inflation.

Expert Opinions and Implications

Tax experts believe the increase in CII provides only modest relief. Amit Maheshwari, Tax Partner at AKM Global, highlighted that while the CII revision is useful for assets acquired before July 23, 2024, the overall scope for indexation has been reduced.

Similarly, Rajat Mohan, Senior Partner at AMRG & Associates, noted that the 3.3% increase over the previous CII of 363 offers partial relief against inflation. However, the delayed notification may disrupt early tax planning, advance tax estimation, and audit preparations.

Historically, CII applied to long-term capital gains on assets such as land, buildings, gold, patents, and securities. But after the Finance Act 2024, the indexation benefit is only available to a limited set of taxpayers under specific conditions.

Conclusion

While the CII hike to 376 offers limited tax relief for sellers of land and buildings acquired before July 23, 2024, the broader removal of indexation benefits reflects the government's shift toward simplifying the capital gains tax structure. Taxpayers planning to sell assets soon must factor in these changes and choose their tax options carefully.