Everything you need to know about Cost inflation Index for Capital gain Calculation 

Introduction

The Cost Inflation Index (CII) uses the CPI calculate the inflation in order to determine the long-term capital gains earned from the sale of an asset. The calculation of inflation helps reduce the amount of tax payable on long-term capital gains. It is also called Capital Gain Index.

The value of rupee today will not stay the same for tomorrow. The prices keep increasing due to inflation. It is not fair to pay Capital Gain Tax without incorporating the factor of inflation.

Capital gains are the profit you make on selling an asset. It can be real estate, stock, mutual funds, jewellery etc. If you are selling the asset after 36 months from the date of purchase, it becomes a long term capital gain. If you are selling an asset after one year from the date of its purchase, the profit becomes a short term capital gain. The government charges tax on our sale of the asset and they do not wish to let go of the capital gain. Hence, the government charges capital gains tax. Cost inflation index India is an index issued by the Central Board of Direct Taxes and the figures keep changing every financial year.

What is cost inflation index (CII)?

Cost Inflation Index basically means the index notified by the Central Govt. with reference to average rise in the consumer price index, during the year immediately proceeding the relevant previous year. However, indexed cost of acquisition is arrived at by multiplying the cost of acquisition with the change in cost inflation index since the year of acquisition or 1 April, 2001 whichever is later.

It may be noted that Budget 2017/ Finance Act 2017 has proposed amendments in provisions relating to indexation for the purpose of determining long term capital gains. Base year has been shifted from FY 1981-82 to FY 2001-02. In respect of assets acquired prior to 1 Apr. 2001, the assesses now has the option to use FMV/ Indexed Cost of Acquisition for arriving at the figure of long term capital gains. It’s likely that investors in property will stand to gain in most of the cases with shifting of the base year for the purpose of indexation.

What does CII do?

Inflation reduces the rupee value over a period of time. Indexation helps us to counter the erosion in the value of our assets over time. You can increase the purchase price of the asset using the inflation index. This reflects the inflation-adjusted price in the year the asset is being sold.

If you have sold an asset that you held for more than 3 years, you can take advantage of the indexation.

How to Calculate Cost Inflation Index?

To understand about CII, below is the example that will help you to easily understand calculation for CII:

How can Cost Inflation Index (CII) help in reducing my income tax?

As evident from above table indexing helps you save a good amount of Income Tax that will be charged on the long term capital gain arising out of selling off your asset. However, indexation is not available for short term capital gain or losses. This benefit is also not available to Non-Resident Indians.

The indexation for long term capital gain is available only if you meet the following conditions:

• Cost of acquisition of the asset has to be multiplied with the cost of inflation of the year it was transferred.
• That figure is to be divided by the cost inflation index for the year in which the asset was acquired.
• If the asset was purchased before 2001, the cost inflation index of the year 2001-02 must be taken into consideration.
• If you have made improvement of the asset, then you need to adjust the cost inflation index with the multiplying with the CII of the year the improvement was made.

Cost Inflation Index Chart:

CBDT has notified the Cost Inflation Index (CII) for all years with new Base Year 2001-02 (cost inflation index=100) in line with the amendments made in Budget 2017, as under:

Cost inflation index chart for all financial years is as follows:

Suggested read: Cost Inflation Index for the financial year 2019-20