Government hikes cost inflation index to 376 for FY26; bigger tax relief on long-term capital gains

The Central Board of Direct Taxes (CBDT) has revised the Cost Inflation Index (CII) to 376 for the financial year 2025-26 (FY26), up from 363 in FY25. This adjustment will apply to income assessments for the assessment year 2026-27.

The CII is a crucial metric used to calculate inflation-adjusted asset prices, particularly for computing long-term capital gains. By allowing taxpayers to adjust the original purchase price of an asset for inflation, it helps lower the taxable gains and, in turn, reduces the tax burden.

A higher CII means a higher inflation-adjusted cost, leading to a smaller capital gains tax liability. The increase in CII is especially beneficial for those selling long-term assets such as real estate, gold, or securities, and who remain eligible for indexation benefits under existing rules.

However, recent amendments through the Finance Act of 2024 have brought changes to indexation eligibility. Under the updated norms:

• Indexation benefits will largely apply to asset sales made before July 23, 2024.
• For sales after July 23, 2024, only resident individuals and Hindu Undivided Families (HUFs) can opt for indexation, and only if the asset was acquired before the cutoff date.
• In such cases, taxpayers can choose between a 20% tax rate with indexation  or a flat 12.5% without indexation.
• Non-resident Indians (NRIs), companies and LLPs are not eligible for indexation and must follow the flat-rate regime.
• The updated CII provides welcome support to taxpayers planning to sell long-held assets before or under the new grandfathering provisions, allowing them to optimise their tax planning in FY26.