Definition
The Cost Inflation Index (CII) is a number used to adjust the purchase price of an asset for inflation. It helps in calculating the real profit (capital gain) by considering the rise in prices over time.
Example
Imagine you bought a property for Rs 5 lakh many years ago, its value needs to be adjusted for inflation using CII. After adjustment, the cost may become Rs 8 lakh, which reduces your taxable profit when you sell the property.
Caution
CII is used only for specific types of assets and mainly for long-term capital gains. Investors should use the correct index values for the relevant years to calculate accurate tax.