Income Tax Department sets cost inflation index for FY 2025-26, key for LTCG tax

The Income Tax Department has announced the Cost Inflation Index (CII) for FY 2025-26, set at ‘376’, which is crucial for calculating long-term capital gains (LTCG) during asset sales. The CII adjusts the purchase price of long-term assets for inflation, aiding taxpayers in managing taxable profits and liabilities. Assets retain their original cost in financial records, resulting in high profits upon sale due to increased sale prices. The CII serves to inflate the purchase cost, thus reducing taxable profits and overall tax burdens for asset sellers.

The CII’s importance is highlighted in LTCG calculations amid changing capital gains regulations. Although most assets saw the removal of indexation benefits, house properties are still eligible under specific conditions. Homeowners who acquired properties before July 22, 2024, and sold them after July 23, 2024, can choose between old and new tax rules—20% tax with indexation under the old rule or 12.5% without under the new rule. The current CII is necessary for calculating LTCG with indexation for these homeowners.

The CII’s application uses a formula for inflation-adjusted pricing. With a base year index value of 100, CII helps in effectively applying indexation benefits through the actual cost or Fair Market Value (FMV). The updated CII figure of ‘376’, effective from April 1, 2026, will facilitate accurate inflation representation in financial and tax assessments, making it essential for fair taxation of long-term assets.