Indexed cost of acquisition
To arrive at this, one has to take the CII for the year in which the asset is sold and divide it by the CII for the year in which it was bought.
So let's say you bought an asset in 1996-97 (CII = 305) and sold it in 2004-05 (CII = 480). That would amount to 1.5737.
This is now multiplied by the cost of acquisition to arrive at the indexed cost of acquisition.
So let's assume you bought it for Rs 2 lakh and sold it for Rs 4 lakh. Hence 2,00,000 x 1.573 would amount to Rs 3,14,740. This is your indexed cost of acquisition.
Capital gains would now equal to the indexed price being subtracted from the selling price of the asset: Rs 4,00,000-Rs 3,14,740 = Rs 85,260.