Govt raises cost inflation index for FY27 to 384, lowering long-term capital gains tax

Long-term capital gain liability on the sale or transfer of any capital asset, such as land, property, trademarks and patents, is expected to be lower this year as Cost Inflation Index (CII) for financial year 2026-27 has been fixed at 384 as against 376 of financial year 2025-26. This shows a rise of 2.12 per cent.

The Central Board of Direct Taxes (CBDT) has notified the index. Historically, this index has been the base for adjusting the cost of acquisition of capital assets for inflation while computing long-term capital gains (LTCG), resulting in a more equitable tax outcome. However, with the withdrawal of indexation benefits under the Finance Act, 2024, its significance has come down, still it will be useful for land or building purchased before July 23, 2024.

“This notification shall apply to the tax year 2026-27 on and from the 1st day of April 2026 and subsequent tax years,” it said. The CII number assists in determining the long-term capital gains on which an assessee is required to pay taxes when she/he files income tax returns (ITR) next year.

CII is a way to calculate inflation, that is, an estimated increase in the price of a good or service over the years. Indexation is used to adjust the purchase price of an investment to reflect the effect of inflation on it. A higher purchase price means lesser profits, which effectively means a lower tax.

With the help of indexation, one will be able to lower her/his long-term capital gains, which brings down taxable income. The rate of inflation to be used for indexation can be obtained from the government’s CII.

The Central government notifies the index. Usually, for the calculation of CII, gains on long-term capital are considered. To benefit the taxpayers, the CII is applied to the long-term capital assets, due to which purchase cost increases, resulting in lesser profits and lesser taxes.

The indexation was in news in 2023 as Finance Act removed this for debt mutual funds. From April 1 and onwards gain for funds are taxed at the investor’s tax slab rates, rather than the previous 20 per cent with indexation benefit and 10 per cent without that as a result, if the investor is subject to the highest tax bracket, this rate would be 35.8 per cent (including surcharge and cess). This mechanism got changed further in 2024.

Notably, the concept of indexation using CII was removed in Finance Act 2024 as post July 23, 2024, none of assets were eligible for CII benefit. However, a choice was provided to taxpayers in case of sale of land and building which was acquired prior to July 23, 2024. In that case, taxpayers have option to pay tax at 12.5 per cent without indexation or 20 per cent with indexation. Hence, revised CII of 384 is useful for taxpayers who will sell the land and building pertaining to period before July 23, 2024, experts added.