If you've ever sold a mutual fund investment in India and heard your CA mention "indexation" or "Cost Inflation Index," you've probably nodded along without being entirely sure what it means — or whether it still applies to you. That confusion is fair. The rules around CII changed twice in quick succession, in 2023 and again in 2024, and most of what investors assume about indexation on mutual funds is now out of date.

01   What Is the Cost Inflation Index (CII)?

The Cost Inflation Index is a number notified every year by the Central Board of Direct Taxes (CBDT) under Section 48 of the Income Tax Act, 1961. Its job is simple: it adjusts the original purchase price of a long-term capital asset for inflation, so that when you calculate your taxable capital gain, you're taxed on your real profit — not on the portion of your gain that merely reflects rising prices over the years.

Without this adjustment, an asset bought for ₹5 lakh in 2005 and sold for ₹15 lakh in 2025 would show a ₹10 lakh "gain" on paper, even though a large chunk of that increase is just the rupee being worth less today than it was two decades ago. Indexation corrects for that by inflating the purchase cost using the CII before the gain is computed.

02   A Short History: Why the Base Year Changed

CII was first introduced in 1981, using 1981-82 as the base year (index value 100). Over time, valuing assets purchased before 1981 became genuinely difficult — old records were unreliable and disputes over fair market value were common.

The Finance Act, 2017 fixed this by resetting the base year to FY 2001-02, again starting at an index value of 100. For any asset acquired before 1 April 2001, taxpayers can now use either the actual cost or the fair market value as on 1 April 2001, whichever is higher, as the starting point for indexation.

03   How Is CII Calculated?

Under Section 48 of the Income Tax Act, the CII for a financial year is based on 75% of the average rise in the Consumer Price Index (CPI-Urban) for the preceding financial year. The CBDT notifies the final figure through an official gazette notification, typically between May and July each year, just ahead of the tax-filing season for the previous year.

04   Latest CII Figures: FY 2025-26 and Recent Years

The CBDT notified the CII for FY 2025-26 as 376 via Notification No. 70/2025, dated 1 July 2025 — up from 363 for FY 2024-25, a rise of roughly 3.6%. Here is the verified index for recent years, with the base year for reference:

Source: CBDT Notification No. 70/2025 dated 1 July 2025, and prior CBDT gazette notifications under Section 48, Explanation (v), Income Tax Act, 1961.

05   The Big Shift: Why CII Barely Touches Mutual Funds Anymore

Here's the part most articles gloss over. Two rounds of tax reform — one in the Finance Act, 2023 and a bigger one in the Finance (No. 2) Act, 2024 — have steadily stripped indexation away from mutual fund taxation. If you're investing in Indian mutual funds today, understanding this shift matters more than memorising the CII formula itself.

▍ Round 1 — Budget 2023: Debt Funds Lose Indexation Entirely

Effective 1 April 2023, any "specified mutual fund" that invests more than 65% of its assets in debt and money-market instruments lost long-term capital gains treatment altogether. Regardless of how long you hold units bought on or after this date, the entire gain is treated as short-term and taxed at your applicable income-tax slab rate. Indexation, which previously reduced the taxable gain on debt funds held over 36 months, no longer applies to these units at all.

▍ Round 2 — Budget 2024: Indexation Removed Across the Board

The Union Budget of July 2024 went further, restructuring capital gains rules for nearly every asset class effective 23 July 2024:

• Equity-oriented mutual funds: LTCG (holding period over 12 months) is taxed at 12.5%, up from 10%, with the tax-free exemption raised from ₹1 lakh to ₹1.25 lakh per financial year. STCG rose from 15% to 20%. Indexation was never applicable to equity funds in the first place, so this part is a rate change, not a loss of a benefit.

• Non-equity assets in general (gold, debt instruments, unlisted shares, and debt mutual fund units bought before 1 April 2023): LTCG is now taxed at a flat 12.5% without indexation, once the holding period is over 24 months.

• Immovable property is the one narrow exception: resident individuals and HUFs selling land or a building acquired before 23 July 2024 can still choose between 12.5% without indexation or 20% with indexation, whichever works out cheaper. This grandfathering clause applies specifically to land and buildings — not to mutual fund units.

▍ So Does CII Still Matter for Mutual Fund Investors?

In practice, for FY 2025-26, indexation no longer reduces the tax on any mutual fund category — equity, debt, gold, hybrid, or fund-of-funds. CII is still notified annually because it remains relevant for one meaningful case: sale of immovable property (land or a house) acquired before 23 July 2024. If your mutual fund CA still talks about "indexed cost" for a fund redemption today, it's worth double-checking which asset and purchase date they mean.

06   Worked Example: How Indexation Used to Work on Debt Funds

It still helps to understand the mechanics, since indexation continues to apply to eligible property sales and helps explain why the rule change matters so much for long-term debt fund investors. Here's how it worked under the pre-2023 rules, using CII:

Compare that to today's reality: an identical debt fund bought after 1 April 2023 and sold at any point would have its entire ₹3,00,000 gain added to the investor's income and taxed at their slab rate — with no indexation cushion at all, potentially at 30% for those in the highest bracket.

07   Current Mutual Fund Capital Gains Tax Rules (FY 2025-26)

Rates exclude applicable surcharge and 4% health & education cess. Source: Finance (No. 2) Act, 2024; Sections 111A, 112, 112A and 50AA, Income Tax Act, 1961.

08   Worked Example: Equity Mutual Fund LTCG Today

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09   Key Takeaways for Indian Mutual Fund Investors

• CII for FY 2025-26 is 376, notified by CBDT via Notification No. 70/2025 dated 1 July 2025 — a 3.6% rise over FY 2024-25's 363.

• Indexation no longer applies to any mutual fund category in India as of FY 2025-26 — not equity funds, not debt funds, not gold or hybrid funds.

• Debt mutual funds bought on or after 1 April 2023 are always taxed as short-term capital gains at your slab rate, regardless of holding period.

• Equity mutual funds enjoy a ₹1.25 lakh annual LTCG exemption, taxed at 12.5% beyond that; short-term gains (under 12 months) attract 20%.

• The only place CII still meaningfully reduces tax today is on the sale of land or a building bought before 23 July 2024 — not on mutual fund units.

• Because rules keep shifting, always check the fund's purchase date and category before assuming an old tax rule still applies — and consult a qualified chartered accountant or SEBI-registered advisor for decisions specific to your portfolio.

Disclaimer: This article is for general informational purposes only and does not constitute tax, legal, or investment advice. Tax rules can change; please verify current provisions with a qualified professional or the Income Tax Department before making financial decisions.