Cost Inflation Index for the FY 2020-21 AY 2021-22

What is Cost Inflation Index?

Cost Inflation Index (CII) is calculated to match prices at the inflation rate. In simple words, an increase in the inflation rate over time will lead to a rise in prices. CII is used to estimate the increase in the prices of goods and assets year-by-year due to inflation. In this article we will look in to the CII for the FY 2020-21

The price of a product increases overtime, and this brings down the purchasing power of money. For e.g. if 10 items can be bought for Rs. 10 Today, tomorrow you may only be able to buy 8 items at the same rate on account of inflation.

What is the use of the CII?

The CII is used to calculate long-term capital gains from the sale of capital assets. Capital gains is the profit that you make from selling an asset, which can be real estate, jewelry, stock, etc. The entire process – where the capital asset’s cost price is adjusted with the effect of inflation using the cost inflation index number is referred to as indexation.

Cost Inflation Index for the financial year 2020-21:

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. In the notification dated 12 June, 2020, the finance minister stated that CII for FY 2020-21 has been set as 301. For the previous financial year, i.e. 2019-20 CII was 289.

How to calculate the Cost Inflation Index?

The difference in the number is important as it would be used to arrive at the inflation adjusted while purchasing of assets and there by long term capital gains.

For e.g. you purchased a house in FY 2002-03 at the price of 50 lakh and want to sell it today i.e. FY 2020-21. Now the CII in 2002-03 was 105 and in FY 2020-21 when you want to sell the property the CII is 301 here the Idex cost would be (301/105) x 50 = 14,333,333. Hence, the Long term capital gain would be 9,333,333 i.e Index cost minus actual price(purchase price).

Things to keep in mind while calculating the CII:

• Firstly, this number would be utilized to compute inflation-adjusted costs only for those assets where inflation-adjusted (indexation benefit) is permitted. Thus, the CII value could not be used to reach LTCG/LTCL on equity mutual fund.

• Secondly, this CII number would be necessary to compute LTCG for Financial Year 2020-21. The taxes on these gains would be paid by you while filing your income tax returns (ITR) for Financial Year 2020-21. (AY 2021-22), that is, next year.

Suggested read: Cost Inflation Index for capital gain calculation