Cost Inflation Index,Indexation and Long Term Capital Gains

Cost Inflation Index(CII) is a measure of inflation that is used for computing long-term capital gains on sale of capital assets. It comes under Section 48 of the Income-Tax Act.

Cost Inflation Index from Financial Year 1981-82 to Financial Year 2014-15

FINANCIALYEAR COST INFLATION INDEX
2014-15 1024
2013-14 939
2012-13 852
2011-12 785
2010-2011 711
2009-2010 632
2008-2009 582
2007-2008 551
2006-2007 519
2005-2006 497
2004-2005 480
2003-2004 463
2002-2003 447
2001-2002 426
2000-2001 406
1999-2000 389
1998-1999 351
1997-1998 331
1996-1997 305
1995-1996 281
1994-1995 259
1993-1994 244
1992-1993 223
1991-1992 199
1990-1991 182
1989-1990 172
1988-1989 161
1987-1988 150
1986-1987 140
1985-1986 133
1984-1985 125
1983-1984 116
1982-1983 109
1981-1982 100

Inflation Index is reported in terms of Financial Year, not Assessment Year. In India the year for financial transactions start from 1 st April and ends on 31st March following year. For example For any transaction between 1st April 2010 to 31st Mar 2011 the Indexation for year 2010-2011 i.e 711 would be used.

What are capital assets?

Capital Assets are the assets  which can be held by a person for examples Mutual Funds(Equity, Debt), Real Estate , Shares ,Gold, Fixed Maturity Plan(FMP) , Fixed returns Instruments such as Fixed Deposit.

What are Long Term and Short Term capital assets?

Assets are classified as Long Term or Short Term with reference to the period of holding of the assets till it is transferred. The classification is made on the following basis.

Before July 10, 2014

Nature of Asset Short Term Capital Asset  Long Term Capital Asset
 (i) Shares in a company or any other security listed in a recognised stock exchange in India or a unit of a Unit Trust of India or a unit of a mutual fund specified under section 10(23D). Held for not more than 12 months.  Held for more than 12 months.
 (ii) Assets other than assets mentioned in (i) above.  Held for not more than 36 months. Held for more than 36 months.

After  July 10, 2014

Nature of Asset Short Term Capital Asset  Long Term Capital Asset
 (i) Shares in a company or any other security listed in a recognised stock exchange in India or equity oriented mutual fund Held for not more than 12 months.  Held for more than 12 months.
 (ii) Assets other than assets mentioned in (i) above.  Held for not more than 36 months. Held for more than 36 months.

How does CII help in capital gain/loss computation? 

Cost of acquisition is historical, the concept of indexed cost allows the taxpayer to factor in the impact of inflation on cost. Consequently, a lower amount of capital gains gets to be taxed than if historical cost had been considered in the computations. For example:

If a property is purchased in Financial year 1995-96 for Rs 20 lakh.It is sold  in Financial year(FY) 2011 -12 for Rs 80 lakh.Then Gain would be = Rs 80 lakh – 20 lakh = Rs 60 lakhBut if CII is considered then we need to calculate cost of 20 lakh of 1995-96 in the year 2011-2012From the table Inflation index in year 1995-96 is 281 and year 2011-2012 is 785 So Indexed cost of Rs 20 lakh in the year 2011-2012 is = 20 * (785/281) = 55.871So Long term capital gain = 80-55.871 = 24.128 lakh instead of Rs 60 lakh

In indexation and capital gain parlance, the purchase price is called indexed cost of acquisition

Indexation helps to counter the erosion in the value of the asset over a period of time. Using the inflation index, one needs to increase the purchase price of the asset so that it reflects inflation-adjusted true price in the year in which it is sold.

Can Indexation be used for all asset classes?

No Indexation cannot be used for all classes.

For some asset classes where you have the choice of using Indexation or not Such as: Mutual Funds(Equity, Debt), Real Estate , Shares ,Gold, Fixed Maturity Plan(FMP).

But Fixed returns Instruments such as Fixed Deposit, Recurring Deposit, POMIS, NSC, Interest on Saving Bank Account are NOT part of it.

Tax liability on capital gain with indexation and without indexation

Before July 10 2014,

For Long term Capital Gains for  debt mutual fund units, the  tax rate are: Either 10% without Indexation OR 20% with Indexation. Holding period is more than 12 months.

For long-term gains on property, gold etc the tax rate is 20% with indexation of cost.

Long term capital gains from equities are not taxed if shares are sold through recognized stock exchange and Securities Transaction Tax, or STT, is paid on the sale.

After July 10 2014,

  • Minimum holding period of units (for other than equity oriented) has been increased from 12 months to 36 months.
  • Long Term Capital Gains (for other than equity oriented) will be taxed at a flat rate of 20% with indexation

Is it necessary to use Indexation?

No. You can choose with indexation or without indexation for every asset sale for the total capital gain that you have only in case of listed shares and mutual fund units. In some cases it may be better to pay just 10%. For instance if you bought a stock 10 years ago, chances are it has multiplied so much that any amount of indexation doesn’t cut much into your profits; you are then better off paying 10% of the unindexed gain rather than 20% of indexed gains. Explained with example later.

Calculation of Tax liability for Different Purchase Dates as in case of Stocks

If you have bought :

  • 1000 units at Rs. 10 on 15 Jan 2006,
  • 1000 more units at Rs. 12  on 1 May 2010
  • 1000 more units at Rs. 16  on 1 Feb 2011

and sold

  • 2500 units at Rs. 18  on 20 Feb 2012,

Each purchase/sale transaction is matched on a First-In-First-Out basis(FIFO). So Three cases arise.

No of Shares Purchase Details Sale Details Indexed Purchase Price/share Indexed Capital Gain Non-Indexed Capital Gain
1000 Rs 10 in 15 Jan 2009 Rs 18 on 20 Feb 2012 10*785/497=15.795 (18-15.795)*1000=2205.23  (18-10)*1000=8000
 1000 Rs. 12  on 1 May 2010 Rs 18 on 20 Feb 2012  12*785/711=13.2489  (18-13.2489) *1000=4751.05 (18-12)*1000=6000
 500 Rs. 16 on 1 Feb 2011 Rs 18 on 20 Feb 2012  16*785/711=17.6653  (18-17.6653) *500=167.37  (18-16)*500=1000
Total 7123.65 15000

Tax liability based on indexation and non-indexation.

Indexed Non-Indexed
Total Capital Gain 7123.65  15000
 Tax % 20%  10%
 Tax to be paid 1424.73  1500

You can choose which one of the two you want, and in this case the indexed option is better – you pay lower taxes.

Non-indexation tax liability better than Indexed tax liability

Using the example given in CapitalMind:How To Calculate Long Term Capital Gains Tax If you have bought :

  • 1000 units at Rs. 10 on 1 Jan 2008,
  • 1000 more units at Rs. 15 on 1 May 2008
  • 1000 more units at Rs. 16 on 1 Dec 2008

and sold

  • 2500 units at 17 on 30 December 2009,

Each purchase/sale transaction is matched on a First-In-First-Out basis(FIFO). So Three cases arise.

No of Shares Purchase Details Sale Details Indexed Purchase Price/share Indexed Capital Gain Non-Indexed Capital Gain
1000 Rs 10 on 1 Jan 2008 Rs 17 on 30 Dec 2009 10* (632/551)=11.470 (17-11.470) *1000=5529.95  (17-10)*1000=7000
 1000 Rs. 15  on 1 May 2008 Rs 17 on 30 Dec 2009  15*632/582=16.2887  (17-16.2887) *1000=711.34 (17-15)*1000=2000
 500 Rs. 16 on 1 Dec 2008 Rs 17 on 30 Dec 2009  16*632/582=17.3745  (17-17.3745) *500=-187.285  (18-17)*500=500
Total 6054.01 9500

Tax liability based on indexation and non-indexation.

Indexed Non-Indexed
Total Capital Gain 6054.01  9500
 Tax % 20%  10%
 Tax to be paid 1210.08  950

In this case the non-indexed option is better – you pay lower taxes.

Can there be long term capital loss after indexation?

Yes there can be long term capital loss. For example if you bought FMP at Rs 10 per unit for 2,00,000 in Sep 2010 and it got matured on Oct 2011 at cost of Rs 10.8177. As shown in table below there is a long term capital loss of Rs 4461.75

 Purchase Details  Sale Details  Indexed Cost/Unit Long Term Capital Loss
20,000 units Rs 10/unit on Sep 2010 Rs 10.8177/unit on Oct 2011  10*785/711=11.0408  (10.8177-11.0408)*20000=-4461.75

If the capital loss cannot be set off against the capital gain of that particular year then you can you need to report in your income tax return and can carry forward for the next eight years.

When is CII notified?

It is notified by the Central Government every year taking 1981-82 as base year.. For example: Cost Inflation Index for Financial year 2011-12 was notified by CBDT vide circular 35/2011 dated 23.06.2010

How is CII calculated?

Section 48 of the Income-Tax Act defines the index as what is notified by the Central Government every year, having regard to 75 per cent of average rise in the consumer price index (CPI) for urban non-manual employees for the immediately preceding previous year.

FINANCIAL YEAR Real inflation %  75% of Real Inflation(.75 * Real Inflation) Increase=75% of Real Inflation * CII of previous year
Current CII = Previous Year CII + Increase (Earlier column)
1981-1982 100
1982-1983  12% 9% (.75% of 12) 9% of 100 = 9 109 (100+9)
1983-1984  8.563% 6.422% 6.422% of 109 = 7 116
1984-1985  10.344% 7.7586% 7.7586% of 116 = 9 125
1985-1986  8.5333% 6.4% 6.4% of 125 = 8 133
1986-1987  7.0173% 5.263% 5.263 % of 133 = 7 140
1987-1988  9.5237% 7.1428% 7.1428% of 140 = 10 150
1988-1989  9.7777% 7.333% 7.333% of 150 = 11 161
1989-1990  9.1097% 6.8323% 6.8323% of 161 = 11 172
1990-1991  7.7519% 5.8139% 5.8139% of 172 = 10 182
1991-1992  12.4542% 9.340% 9.340% of 182 = 17 199
1992-1993  16.080% 12.060% 12.060% of 199 = 24 223
1993-1994  12.556% 9.4170% 9.4170% of 223 = 21 244
1994-1995  8.1967% 6.1475% 6.1475% of 244 = 15 259
1995-1996  11.325% 8.494% 8.494% of 259 = 22 281
1996-1997  11.388% 8.5409% 8.5409% of 281 = 24 305
1997-1998  10.473% 7.8549% 7.8549% of 305 = 26 331
1998-1999  8.0564% 6.0423% 6.0423% of 331 = 20 351
1999-2000  14.435% 10.826% 10.826% of 351 = 38 389
2000-2001  5.827% 4.370% 4.370% of 389 = 17 406
2001-2002  6.568% 4.926% 4.926% of 406 = 20 426
2002-2003  6.573% 4.929% 4.929% of 426 = 21 447
2003-2004  4.773% 3.579% 3.579% of 447 = 16 463
2004-2005  4.896% 3.6717% 3.6717% of 463 = 17 480
2005-2006  4.7222% 3.5416% 3.5416% of 480 = 17 497
2006-2007  5.902% 4.4265% 4.4265% of 497 = 22 519
2007-2008  8.221% 6.1657% 6.1657% of 519 = 32 551
2008-2009  7.501% 5.6213% 5.6213% of 551 = 31 582
2009-2010  11.455% 8.591% 8.591% of 582 = 50 632
2010-2011  16.485% 12.36% 12.36% of 632 = 79 711
2011-12  13.8772% 10.44% 10.44% of 711 = 74 785

References:

Note: While efforts have been made to provide correct information, this is our understanding of the CII and  tax law. Apologies upfront for any mistakes. Please let us know and we will correct.

Did it help you in understanding CII, calculation of long term capital gains? Have be missed something or skipped or there are some mistakes please let us know.

18 Responses to Cost Inflation Index,Indexation and Long Term Capital Gains

  1. Ajay says:

    hi,
    Is the option for paying 10% tax on LTCG from property without indextation still allowed for FY 2015-16.

  2. SRS says:

    IS THERE POSSIBILITY REINVEST THE LTCG EARNED OUT OF SALE DEAL OF LAND INTO NEW PURCHASE OF APPARTMENT., WITH IN 3 MONTHS OF THE SALE LAND – ENTER INTO AGRREMENT FOR APPRTMENT WHICH WILL READY FOR POCESSION IN THREE YEARS LATTER.

    OTHER POINT WHTHER DAUGHTER/HUSBAND / SON-IN-LAW CAN JOIN AS CO-INVESTER WITH THE MAIN INVESTOR WHO HAS PALN TO BY AN APPARTMENT.

    JUST FOR THE SAKE REGISTRATIONS THE NAMES OF THE WIFE INSERTED INTO OR INCLDED WITH THE 1ST HOLDER WHILE PURCHASING THE FIRST APPARTMENT JUST AS JOINT SECOND HOLDER BUT THEY HAD NOT PUT ANY MONEY ON IT, ARE THEY BE CONSIDERED TO BE PERSON HAVING ALREADY HOUSE MORE THAN ONE ARE SO., FOR LTCG CONSIDERTIONS UNDER RULE 54F…

    LAND SALE DEED FOR RS. 63 LACS, WHERE AS APPARTMENT COST COMES 108 LACS.
    AMT IN EXCESS OF 63 LACS IS OUT SAVINGS, EANRED INCOME AND THRU ANY LAONS.

    IS THERE ANY TAX LIABILITY ON THIS IF SO TO WHAT EXTENT, HOW TO SAVE THIS TAX LEGALLY

  3. ARVIND PATEL says:

    1DOES SWITCH OUT IN TO OTHER SCHEMME OF SAME FUND WITHIN 1 YR.GET SHORT TERM GAIN? AND LONG TERM GAIN AFTER 1 YEAR?

    • Kirti says:

      Moving either the whole or part of the investment from one mutual fund scheme to another mutual fund scheme within the fund family is called as Switching of Mutual Funds. For example moving some or all your units from HDFC Top 200 to HDFC Balanced Fund would be considered as switching. A switch from one fund (source) to another fund (target) is actually a combination of two transactions:

      Redemption of units in the source or the scheme from where it is switched out
      Fresh purchase of units in the target or the scheme into which it is being switched
      Thus one will be liable for any applicable entry load or exit load. For this option some fund may levy a switching fee.

      Yes there are tax repercussions while switching from one mutual fund scheme to another depending on whether switch is from Equity Fund to Debt Fund or from Debt Fund to Equity Fund.

      Switching from Equity Fund to Debt Fund

      Appropriate Securities Transaction Tax(STT) is levied at the time of the switch on the Equity Fund investment. (STT is deducted at the time of we redeeming the equity fun so what we receive is the amount NET of STT.)
      If the equity fund investment is held for less than a year, short term capital gains would be applicable.
      If the equity fund investment is held for more than a year, it qualifies as long term capital gains. As securities transaction tax(STT), long term capital gains on the equity asset class is waived off over the mutual fund units.
      Switching from Debt Fund to Equity Fund

      No securities transaction tax is payable at the time of redemption of the debt fund units.
      Meaning of Short term capital gains(STCG) and long term capital gains(LTCG) is the same i.e holding period of less than one year is short term gain while holding period of more than one year is long term gain.
      STCG on a debt instrument gets added directly to your overall taxable income in the financial year and LTCG is currently taxed at 10% with indexation plus applicable surcharge.
      Short term capital gains are not deducted at source (like TDS on our salary). We need to show the transaction details, the actual STCG made, as a part of Income Tax Returns and pay appropriate tax. (One can deduct STT from Short term gain earned)

      For example, you invested Rs 1,00,000 in equity fund on June 1, 2013 and when you have 20% gain you redeem or transfer the Rs 1,20,000. The securities transaction tax is 0.125% on the transacted amount; which works out to 0.125%*120000, i.e. Rs.150.

      If the investment is held for less than a year say you sell on Oct 2013. The tax liability would be: 150 (STT = .125% of 20,000 ) + 3000 (STCG = 15% of 20,000)+ 90(Surcharge plus Education Cess : 3% of 15% of 20,000 ) which is: Rs 3240.

      If the investment is held for more than a year say you switch on 10-Aug-2014. As you have held equity investment for one year, it is long term capital gains. All that needs to be paid is the STT, which is Rs. 150 (STT = .125% of 20,000 )

      When you file the IT Returns in July 2014 (for the financial year 1 April 2013 to 31 March 2014) , for redemption from equity fund in Oct 2013 you will have to shell out an additional Rs 3090 as tax (because that STT of Rs. 150 was already deducted at the time of redemption).

      • jiten says:

        Hi Kirti
        Two queries
        1. when we switch from a ” dividend option’ investment into the growth option of the same fund and scheme, from which date is the angle of taxation accounted for ?
        2. From FY 15-16 onwards, for LTCG or > 36 Months in FMP”s, is 20% with idnexation the ONLY option ? or 10% with indexation is there too.
        Thanks
        Jiten

        • Kirti says:

          Sir,
          As the Dividend and Growth options are treated as two different schemes, with different NAVs, a change from Dividend to Growth would be a Switch i.e. redemption from one scheme ex Dividend Payout and a purchase into the other ex Growth. For this change one needs to submit a switch request form.
          Taxation for scheme you switched from ex: dividend option would consider time period from date you invested in Dividend option and date you switched.
          Taxation for scheme you switched to ex:Growth option purchase price would be date of switching.
          Our article Switching of Mutual Funds covers switching in detail.
          From 11 Jul 2014, The Long Term Capital Gain tax rate on non-equity funds is 20% (with Indexation benefit). 10% indexation benefit is not available.
          So if you sell your non equity funds which include FMS before 36 months, the gains will be added to the income and taxed as per your tax slab. This means that for corporates, the tax rate will be 30% plus surcharge and cess. If you sell after 36 months, you will have to pay tax at the rate of 20% after indexation.

  4. rao says:

    u have mentioned in a case worked out in the yr 2011-12 that capital gain tax is 20% with indexation and 10%
    without indexation.Does the % holds good for yr 2014-15 or is there any change?

    • Kirti says:

      Sir there has been change after July 10, 2014.
      From Jul 10,2014
      Minimum holding period of units (for other than equity oriented) has been increased from 12 months to 36 months.
      Long Term Capital Gains (for other than equity oriented) will be taxed at a flat rate of 20% with indexation, whereas earlier it was minimum of 10% (w/o indexation) and 20% (with indexation).

      From Oct 1 2014, From Dividend Distribution tax (for other than equity oriented) has to be calculated on Gross distributed income, whereas, earlier it was calculated on Net distributed income.

  5. [...] cost of improvement if indexation is applied will be indexed cost of improvement. Our post Cost Inflation Index,Indexation and Long Term Capital Gains deals with Cost Inflation Indexation in details including details on when the indexation might not [...]

  6. Cassidy says:

    Its 10% without Indexation and 20% with Indexation…there are atleast two places in the articles where u have written the opposite…
    Headings:
    a) Tax liability on capital gain with indexation and without indexation
    b) Calculation of Tax liability for Different Purchase Dates as in case of Stocks

  7. Shirish says:

    The article mentions that there is a CG tax on LTCG on listed shares and units of MF. This is not correct. Currently, the LTCG tax on shares and units of MF is exempt.
    Ragards,

  8. Paresh says:

    Good Info..
    Little bit surprised as there was no mention of 54EC capital gain Bonds offered by companies like NHAI or REC…

  9. Ram says:

    Nice article. Helped me understand indexation

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