Explainer: What Is Cost Inflation Index?

You might have come across the news recently that the indexation benefit has been removed from debt funds and certain exchange-traded funds (ETFs), thus making them less tax efficient. The indexation benefit, however, continues for assets, such as gold and real estate. So, how is this indexation benefit calculated? The basis on which it is calculated on any asset is the cost inflation index (CII) which is announced annually by the Central Board of Direct Taxes (CBDT). The CII for FY24 has been notified at 348 in April 2023, up from 331 in FY23, a rise of 5.13 per cent. The CII value was first assigned in FY02 at 100; it crossed the 200-mark in FY13 and the 300-mark in FY21. Let’s understand CII in a little more detail and see how it can help reduce the tax liability on gains earned on certain assets for individuals. Why Is CII Important? CII broadly denotes the average price...