Indexed Cost of Acquisition explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
The indexed cost of acquisition adjusts what you originally paid for an asset for inflation, using the Cost Inflation Index, to lower your long-term capital gain.
The formula
Indexed cost of acquisition = original cost × (CII of the year of sale ÷ CII of the year of purchase).
Example
If you bought an asset for ₹10 lakh and the CII has, say, doubled between purchase and sale, the indexed cost becomes about ₹20 lakh — so only the gain over ₹20 lakh (not ₹10 lakh) is taxed.
When it applies
- Applies to long-term capital assets eligible for indexation
- Not available for short-term gains
- Reduces the taxable long-term gain and hence the tax
Frequently Asked Questions
What is indexed cost of acquisition?
The original cost adjusted for inflation using the CII, to reduce the taxable long-term gain.
What is the indexation formula?
Original cost × (CII of sale year ÷ CII of purchase year).
Does indexation apply to short-term gains?
No — indexation applies only to eligible long-term capital assets.
Why is indexed cost important?
It lowers the taxable long-term capital gain and therefore the tax.
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