In this Article
- What is Cost Inflation Index (CII)?
- What is the Purpose of Cost Inflation Index?
- How does Cost inflation Index (CII) help in capital gains computation?
- What is the Formula for Computing Indexed Cost?
- What Does a Base Year in Cost Inflation Index Mean?
- Cost Inflation Index Table (Before 01.04.2017)
- Cost Inflation Index Table (On or after 01.04.2017)
- Things to Note about Cost Inflation Index India
- How Can Indexation Reduce Tax Liabilities on LTCG for Assesses?
What is Cost Inflation Index(CII)?
The global economy is dynamic and constantly changing. A loss in the purchasing power of money as a result of a continuous rise in the cost of goods and services reflects this shift. Inflation is defined as a decrease in the value of money that leads to an increase in an individual’s cost of living.
The Cost Inflation Index, or CII, is a technique for estimating the annual rise in the price of an asset due to inflation. For the purpose of measuring inflation, the Central Government establishes this index and publishes it in its official gazette. Section 48 of the Income Tax Act of 1961 defines this index, which the government publishes each year.
Cost Inflation Index is a measure of inflation used in tax legislation to calculate long-term capital gains on the sale of assets. The index is defined under Section 48 of the Income-Tax Act as what is notified by the Central Government every year, taking into account 75% of the average rise in the consumer price index (CPI) for urban non-manual employees for the previous year. As a result, if the price of a capital asset has risen in lockstep with the base price, the cost allowed to sell an asset and replace it, even after indexation, will be less than the price payable for a new asset. However, the price rise for many capital assets is less than the market price, and in many situations, it is more.
What is the Purpose of Cost Inflation Index?
The long-term capital gains from a transfer or sale of capital assets are calculated using a Cost Inflation Index table. The profit earned through the sale or transfer of any capital assets, such as land, property, stocks, shares, trademarks, and patents, is referred to as capital gain.
Long-term capital assets are frequently documented in books at their cost price in accounting. As a result, despite rising asset values, capital assets cannot be revalued.
As a result, when these assets are sold, the profit or gain realised remains high due to their high sale price compared to their acquisition price. As a result, assessees must pay a higher income tax rate on these assets’ gains.
When the Cost Inflation Index is used for capital gains, the purchase price of assets is changed according to their sale price over time, resulting in smaller earnings and lower tax amounts.
How does Cost Inflation Index (CII) help in Capital Gains computation?
As you may be aware, capital gain occurs when the net sale consideration of a capital asset exceeds the cost. Because “cost of acquisition” is historical, the concept of indexed cost allows the taxpayer to account for inflation. As a result, capital gains are taxed at a lesser rate than if historical cost was factored into the calculations.
What is the Formula for Computing Indexed Cost?
Formula for computing indexed cost is (Index for the year of sale/ Index in the year of Acquisition) x cost.
For example, if a property purchased in 2003-04 for Rs 10 lakh were to be sold in FY 2021-22 for Rs 40 lakh, indexed cost = (317/109) x 10 = Rs 29.08 lakh. And the long-term capital gains would be Rs 10.92 lakhs, that is Rs 40 lakh minus Rs 29.08 lakh.
What Does a Base Year in Cost Inflation Index Mean?
The base year is the index’s initial year, with a value of 100. The indexation of years after the base year is done in accordance with the base year to ensure that the inflation percentage does not grow.
Assessees can use the higher of their Fair Market Value and the actual cost of the asset on the first day of the base year to calculate their purchase price for assets purchased before the CII base year. The indexation advantage is then applied to the computed asset acquisition price. FMV, on the other hand, is derived using a registered valuer’s valuation report for the asset.
Cost Inflation Index:- Cost inflation index (CII) as notified by Central Government alongwith analysis of the same is as under:
Cost Inflation Index Table (Before 01.04.2017)
|FINANCIAL YEAR||COST INFLATION INDEX||Increase in CII and 75% of percentage of real inflation allowed||Real inflation % of CII Increase allowed / 3 X 4|
|1982-1983||109||9 = 9%||12%|
|2012-2013||852||67 = 8.54%||11.38%|
|2014-2015||1024||85 = 9.05%||12.07%|
|2015-2016||1081||57 = 5.57%||7.42%|
|2016-2017||1125||44 = 4.07%||5.43%|
Cost Inflation Index Table (On or after 01.04.2017)
Cost Inflation Index from Financial Year 2001-02 to Financial Year 2021-22
Section 55 of the Income Tax Act of 1961 was amended by the Finance Act of 2017 to provide that the cost of acquisition of an asset acquired before 01.04.2001 may be taken as fair market value as of 1st April 2001, and the cost of improvement shall only include capital expenses incurred after 01.04.2001.
Cost Inflation Index for Long Term Capital Assets sold after 01.04.2017 as notified by CBDT Notification No. 44/2017 dated 05.06.2017-
|SI. No.||Financial Year||Cost Inflation Index|
Things to Note about Cost Inflation Index India
There are a few key considerations to keep in mind when computing an assessee’s indexed cost of asset acquisition. The following are —
- If an asset is received as a result of an assessee’s will, Cost Inflation Index is applied in the year it is received. The asset’s actual acquisition year is ignored in this scenario.
- Any upgrade costs incurred before to April 1, 2001 are not indexable.
- Except for RBI-issued sovereign gold bonds and capital indexation bonds, indexation benefits are not available for debentures or bonds.
How Can Indexation Reduce Tax Liabilities on LTCG for Assesses?
The CBDT has set the Cost Inflation Index for FY 2019-20 at 289, up from 280 in the previous fiscal year. Because the CII is used to compute the inflation-adjusted cost of asset purchase for calculating LTCG, this indexation can help minimise tax liability.
Assessees can reduce the amount of tax they pay on long-term capital gains from the sale of assets such as debt mutual funds, real estate, and other assets by reducing their total invested amount in line with the CII of the asset purchase and sale years.
For example, any gain realised by an assessee as a result of the transfer or sale of a property, whether long or short term, will be subject to capital gains taxes. The gains deriving from a transfer of these assets are deemed short term capital gains and are not indexable if the holding duration of said property is shorter than 24 months.
Assessees who have owned an asset for more than 24 months at the time of sale or transfer, on the other hand, will be taxed at a rate of 20% under the CII.
When CII is applied to property gains, the profit amount is immediately lowered. As a result, the amount on which taxes will be assessed will be lowered, lowering an assessee’s LTCG tax liability.
By Team hypertax
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