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Cost of Acquisition – Indexed & Non-Indexed

Bought property for ₹50L in 2015, sold for ₹1 cr in 2024 - capital gain = ₹50L? Not if you use indexation! With Cost Inflation Index, indexed cost = ₹73L, gain = only ₹27L! Let's master this tax-saving concept.

What is Cost of Acquisition?

Purchase price of capital asset + expenses incurred to acquire

Includes:

  • Purchase price paid
  • Brokerage/commission
  • Registration charges
  • Legal fees
  • Stamp duty

Formula:

Capital Gain = Sale Price - Indexed Cost of Acquisition - Indexed Cost of Improvement - Expenses on Transfer

Indexation - What & Why?

Adjust cost for inflation over the years

Why?: ₹50L in 2015 ≠ ₹50L in 2024 (inflation!)

Benefit: Reduces taxable capital gain by inflating the cost

Applicable to: LTCG only (on property, gold, unlisted shares, debt funds)

NOT applicable to: Listed equity shares (taxed @ 10% flat without indexation)

Cost Inflation Index (CII)

Government-notified index for each financial year

Purpose: Measure inflation

FY 2024-25 (Latest):

Financial YearCost Inflation Index (CII)
2024-25363 (AY 2025-26)
2023-24348
2022-23331
2021-22317
2020-21301
2019-20289
2018-19280
2017-18272
2016-17264
2015-16254
2014-15240
2013-14220
2012-13200
2011-12184
2010-11167
2001-02100 (Base year)

Note: For assets bought before April 1, 2001, use Fair Market Value (FMV) as on April 1, 2001

Indexed Cost Calculation

Formula:

Indexed Cost = Actual Cost × (CII of Sale Year / CII of Purchase Year)

Example:

Property purchased: ₹50,00,000 (FY 2015-16) Sold: FY 2024-25

Calculation:

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Benefit: Cost increased from ₹50L to ₹71.46L (₹21.46L indexation benefit!)

Cost of Improvement

Expenses to improve asset after purchase

Examples:

  • Adding floor to building
  • Renovating property
  • Major repairs that enhance value

Indexed separately using CII of improvement year

Example:

Property:

  • Purchased: ₹40L (FY 2016-17, CII 264)
  • Improvement: ₹10L (FY 2020-21, CII 301)
  • Sold: FY 2024-25 (CII 363)

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Special Cases - Cost of Acquisition

Case 1: Inherited Property

Cost to you: Cost to previous owner (who purchased it)

Holding period: From previous owner's purchase date

Example:

Father bought house: ₹30L (FY 2010-11, CII 167) You inherited: FY 2020-21 You sold: ₹1 cr (FY 2024-25, CII 363)

Your cost: ₹30L (father's cost) CII: 167 (father's purchase year)

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Without indexation: ₹70L gain → ₹14L tax (double!)

Case 2: Gift from Relative

Cost: Same as donor's cost (carry-forward basis)

Example:

Mother bought: ₹20L (FY 2012-13, CII 200) Gifted to you: FY 2018-19 You sold: ₹60L (FY 2024-25)

Your cost: ₹20L (mother's cost) CII: 200 (mother's purchase year)

Indexed cost: ₹20L × (363/200) = ₹36,30,000

###Case 3: Property Purchased Before April 1, 2001

Two options:

  1. Actual cost (with indexation from FY 2001-02, CII 100)
  2. Fair Market Value (FMV) as on April 1, 2001

Choose higher for lower tax!

Example:

Bought: ₹5L (1995) FMV on April 1, 2001: ₹12L Sold: ₹50L (FY 2024-25)

Option 1: Indexed cost = ₹5L × (363/100) = ₹18.15L

Option 2: Indexed cost = ₹12L × (363/100) = ₹43.56L (choose this!)

LTCG: ₹50L - ₹43.56L = ₹6.44L (vs ₹31.85L if used actual cost!)

Non-Indexed Cost (Listed Equity)

Listed equity shares: No indexation (LTCG taxed @ 10% flat)

Example:

Shares purchased: ₹10L (FY 2020-21) Sold: ₹18L (FY 2024-25)

LTCG: ₹18L - ₹10L = ₹8L (no indexation!)

Tax: (₹8L - ₹1L exemption) × 10% = ₹70,000

Why no indexation?: Flat 10% rate compensates (simpler)

Complete Example - Property Sale

Mr. Verma:

Property details:

  • Purchased: ₹60,00,000 (FY 2017-18, CII 272)
  • Improvement (addition): ₹15,00,000 (FY 2021-22, CII 317)
  • Sold: ₹1,40,00,000 (FY 2024-25, CII 363)
  • Brokerage on sale: ₹1,00,000

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Without indexation: ₹1.39 cr - ₹75L = ₹64L gain → Tax ₹12.8L (50% more!)

Indexation Not Allowed

No indexation for:

  1. Listed equity shares (flat 10%)
  2. Equity mutual funds (flat 10%)
  3. STCG (short-term, taxed at slab)
  4. Bonds/Debentures (from FY 2023-24, subject to latest amendments)

Check latest rules for debt funds!

Summary Table

ScenarioCost of AcquisitionIndexation
Self-purchasedActual purchase price + expensesYes (LTCG on property/gold)
InheritedPrevious owner's costYes, from previous owner's year
Gift (relative)Donor's costYes, from donor's year
Pre-2001 assetHigher of (actual cost, FMV on Apr 1, 2001)Yes, from FY 2001-02 (CII 100)
Listed equityActual costNo (10% flat rate)

Key Points Summary

✅ Indexation: Adjusts cost for inflation, reduces taxable gain

✅ CII: Official inflation index (FY 2024-25 = 363)

✅ Formula: Indexed Cost = Actual Cost × (CII sale year / CII purchase year)

✅ Inherited: Use previous owner's cost and purchase year CII

✅ Pre-2001: Choose higher of (actual cost, FMV Apr 1, 2001)

✅ Improvement: Indexed separately from improvement year CII

✅ Listed equity: No indexation (10% flat LTCG rate)

Summary

  • Cost of acquisition: Purchase price + brokerage + registration + stamp duty
  • Indexation: Inflation adjustment for LTCG (property, gold, unlisted shares) - NOT for listed equity
  • CII (Cost Inflation Index): Govt index for each FY (FY 2024-25 = 363, base FY 2001-02 = 100)
  • Formula: Indexed Cost = Actual Cost × (CII sale year / CII purchase year)
  • Inherited property: Use previous owner's cost and purchase year CII (holding period also from previous owner)
  • Gifted property: Donor's cost and CII (carry-forward basis)
  • Pre-April 2001: Choose higher of (actual indexed cost, FMV on Apr 1, 2001 indexed from CII 100)
  • Improvement cost: Indexed separately using improvement year CII
  • Benefit: ₹50L actual cost becomes ₹71L indexed (FY 2015-16 to 2024-25) - saves ₹4.2L tax!

Quiz Time! 🎯

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Next Chapter: LTCG Computation - Complete Format! 📊

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