CBDT raises cost inflation index to ease capital gains tax burden
The Central Board of Direct Taxes (CBDT) has revised a crucial metric employed to determine the inflation-adjusted purchase price of assets, thereby facilitating sellers to claim enhanced tax relief during asset sales. An official notification indicated that the cost inflation index (CII), utilised to neutralise the impact of inflation on asset prices, has been elevated to 376 from the preceding 363. A higher index augments the inflation-adjusted purchase price of an asset, consequently reducing the taxable capital gains. Capital gain is calculated as the difference between the sale price and the indexed purchase price, incorporating the cost of improvements. The revised index applies to the current financial year (FY26) and the corresponding assessment year 2026-27 and beyond. However, the scope of indexation benefits has been restricted. The Finance Act of 2024 restructured capital gains tax provisions as part of the government’s broader initiative to simplify the tax system. Under the revised regulations, indexation benefits are broadly applicable for assets sold prior to July 23, 2024. A grandfathering provision enables resident individuals and Hindu Undivided Families (HUFs) to continue claiming indexation even on sales made after this date, provided the asset was acquired before July 23, 2024. In such instances, they have the option to pay LTCG tax at 20% with indexation, rather than the newly implemented flat 12.5% rate without indexation. This option, however, is not available to non-resident Indians, companies, or limited liability partnerships. The concept of indexation employing the CII was removed from the Finance Act 2024. Consequently, after July 23, 2024, none of the assets are eligible for CII benefit. Nevertheless, a choice was provided to taxpayers in the event of the sale of land and building that was acquired prior to July 23, 2024. In such cases, taxpayers have the option to pay tax at 12.5% without indexation or 20% with indexation. Therefore, the revised CII of 376 is beneficial for taxpayers who intend to sell the land and building pertaining to the period before July 23, 2024.