CBDT raises cost inflation index to 376 for FY26 to ease capital gains tax

CBDT raises Cost Inflation Index to 376 for FY26, offering tax relief on capital gains for assets bought before July 23 2024. New rules reduce indexation scope under Finance Act 2024

The Central Board of Direct Taxes (CBDT) has increased a key index used to adjust the purchase price of assets for inflation, allowing sellers to claim higher tax relief when they sell those assets.

 

According to an official notification issued on July 1, the Cost Inflation Index (CII) has been raised to 376 for the financial year 2025–26, up from 363 the previous year. This index helps adjust the purchase price of assets to account for inflation, which in turn lowers the taxable capital gains on their sale.

 

Capital gains are calculated as the difference between the sale price and the inflation-adjusted purchase price, with the cost of improvements also taken into account.

 

The revised index will be applicable for the current financial year (FY26) and the assessment year 2026–27 onwards. The assessment year is the period when income earned in the previous financial year is assessed and tax returns are filed.

 

The idea behind this mechanism is that long-term capital gains (LTCG) on assets like land and buildings should reflect real profits, not just gains resulting from inflation.

Scope of indexation narrowed

While the indexation benefit has been revised, its availability has been reduced. The Finance Act of 2024 introduced changes to the capital gains tax system as part of the government’s aim to simplify tax laws.

 

Under the new rules, indexation is largely allowed only for assets sold before 23 July 2024. However, a grandfathering provision allows resident individuals and Hindu Undivided Families (HUFs) to continue claiming indexation benefits after this date, as long as the asset was bought before July 23, 2024. In these cases, taxpayers may choose to pay LTCG tax at 20 per cent with indexation or opt for a flat 12.5 per cent rate without indexation.

Impact of CBDT notification on tax-payers

The CBDT move will offer limited but meaningful relief to certain taxpayers — particularly those planning to sell long-held assets like land and buildings acquired before July 23, 2024.

 

The CII has historically been used to adjust the purchase price of assets for inflation when calculating long-term capital gains. This mechanism ensured that taxes applied only to actual gains, excluding inflation-driven increases in asset value. It was relevant for a broad set of assets including real estate, intellectual property, gold, and financial securities, according a LiveMint report quoting sources.

 

However, the Finance Act 2024 significantly reduced the scope of indexation benefits. Since July 23, 2024, most asset classes no longer qualify for inflation adjustment using CII. Despite this change, resident individuals and Hindu Undivided Families (HUFs) selling land or buildings acquired before that cut-off date will continue to have a choice — either pay long-term capital gains tax at a flat 12.5 per cent without indexation, or opt for a 20 per cent rate with indexation. For these cases, the updated CII will still be applicable and useful in reducing the tax burden.

 

While the increase in the index value from 363 to 376 represents a modest rise of 3.3 per cent, it still provides some cushion against inflation for applicable transactions.