All about Cost Inflation Index for the FY 2021-22 (The assessment Year 2022-23)

The Cost Inflation Index analyses the projected annual increase in the cost of goods and assets due to inflation. It is determined by the Central Government and published in the official gazette to be used to measure inflation. It is announced for each Financial Year, rather than the Assessment Year. As a result, the appropriate CII rate is appropriate Financial Year (FY), rather than Assessment Year (AY).  In this article we will look into the CII for the FY 2021-22.

When the price of a commodity rises over time, the purchasing power of money decreases. For example, if you can buy 10 products for INR 2000 now, you might only be able to buy 8 items tomorrow due to inflation.

What is CII (Cost Inflation Index)?

 Long-term capital gains on the sale of capital assets are calculated using the CII. The profit you make from selling an asset, such as real estate, jewellery, or shares, is known as capital gains. Indexation refers to the process of adjusting the cost price of a capital asset to account for inflation using the cost inflation index number.

Cost Inflation Index for the FY 2021-22

The Central Board of Direct Taxes every year notifies the Cost Inflation Index rate. This year the Cost Inflation Index (CII) has been notified by the Ministry of Finance. The Finance Minister stated that CII for FY 2021-22 has been set as 317. For the previous financial year, i.e. 2020-21 CII was 301.

How to Calculate the Cost Inflation Index (CII)?

The discrepancy in the numbers is significant because it will be used to calculate inflation-adjusted asset purchases and, as a result, long-term capital gains.

For example, suppose you bought a house for 50 lakh in FY 2002-03 and wish to sell it today, in FY 2021-22. Now, the CII was 105 in 2002-03, and when you want to sell the property in FY 2021-22, the CII will be 317, so the Index cost will be (317/105) x 50 = 15,095,200. As a result, the long-term capital gain would be INR 10,095,200 which is equal to the Index cost less the actual price (purchase price).

Points to keep in mind while calculating CII (Cost Inflation Index)

• To begin, this value would be used to calculate inflation-adjusted costs solely for those assets that allow for inflation-adjusted (indexation benefit) expenses. As a result, the CII value on equity mutual funds could not be used to calculate LTCG/LTCL.

• Second, this CII number is required to calculate the LTCG for the Financial Year 2021-22. You will pay the taxes on these gains when you file your Income Tax Returns (ITR) for Fiscal Year 2021-22. (AY 2022-23), or the following year.

Related read: ITR Filing Online for FY 2021-22 (AY 2022-23)

Conclusion

The Cost Inflation Index is used to correlate prices to the rate of inflation. To put it another way, if the inflation rate rises over time, prices will rise as well. In simple terms CII is used to measure the increase in the prices of assets and goods year by year due to inflation.