It is a measure of inflation that finds application in tax law, when computing long-term capital gains on sale of assets. Section 48 of the Income –Tax Act defines the index as what is notified by the Central Government every year, having regard to 75 percent of average rise in the consumer price index (CPI) for urban non-manual employees for the immediately preceding previous year. Therefore, if we consider that price of a capital assets has risen in tandem with base price rise, than if one want to sell an asset and replace it, the cost allowed even after indexation will be lesser than the price payable for new asset. However, in case of many capital asset the price rise is lesser than market price and in many cases it is higher. How does CII help in capital gains computation? Capital Gain, as you know, arises when the net sale consideration of a capital asset is more than the cost. Since “cost of acquisition” is historical, the concept of indexed cost allows the taxpayer to factor in the impact of inflation on cost. Consequently, a lower amount of capital gains get to be taxed than if historical cost had been considered in the computation.