The Capital Gain Index, also known as the Cost Inflation Index (CII) in some countries, is a financial indicator used to calculate the inflation-adjusted value of an asset for taxation purposes. It is primarily employed in the context of capital gains taxation.

When an individual or entity sells an asset such as real estate, stocks, or other investments, they may incur a capital gain if the selling price exceeds the original purchase price. In many countries, including India, the tax authorities apply a capital gains tax on the profit made from such transactions. However, to account for the impact of inflation on the asset's value over time, tax authorities use the Capital Gain Index.

The Capital Gain Index assigns a specific index number to each financial year, representing the prevailing inflation rate during that period. When calculating the taxable capital gain, the original purchase price of the asset is multiplied by the Capital Gain Index of the year of purchase, and the result is divided by the Capital Gain Index of the year of sale. This process adjusts the purchase price for inflation, effectively reducing the taxable capital gain and, consequently, the amount of tax owed.

Using the Capital Gain Index helps prevent individuals from paying higher taxes due to inflationary effects on asset values over time. By adjusting for inflation, the tax system aims to provide a fair and accurate representation of the actual gain made on the asset's sale, making it a valuable tool in capital gains taxation.