Cost Inflation Index(CII) is a measure of inflation that is used for computing long-term capital gains on the sale of capital assets(property, mutual funds, gold) To benefit the taxpayers, cost inflation index to cost price, so purchase price increases, resulting in lesser profits and lesser taxes. It comes under Section 48 of the Income-Tax Act. The Central Government specifies the cost inflation index by notifying in the official gazette.
Cost Inflation Index or CII for the Financial Year 2020-21 is notified as 301. CII was at 289 in the last year 2019-20
Index Purchase Price = (Purchase Price * CII of Year of Sale)/ CII of Year of Purchase
Table of Contents
Cost Inflation Index from Financial Year 2001-02 to Financial Year 2017-18
The CBDT has notified the Cost Inflation Index Applicable from FY/ PY 2020-21 (AY 2021-2022) onwards, with Base Year shifted to 2001-02. Our article Cost of Inflation Index from FY 2017-18 or AY 2018-19 for Long Term Capital Gains discusses it in detail.
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What you could buy some time ago for Rs.10, after some time(days, year) will be available for more than Rs 10, the worth of money has reduced! This is what inflation is, the price of everything goes up or worth of money reduces. The image below shows how the purchasing power of money in India has reduced Rs 100 in 1958 is worth Rs 1.2 only. A famous quote on inflation is
Inflation is when you pay Rs. 100 for the fifty rupee haircut you used to get for 25 rupees when you had hair
Inflation is calculated by government agencies. Two common Inflation we talk of WPI (Wholesale Price Index) and CPI(Consumer Price Index). More details in our article Understanding Inflation
Usage of CII
When the CII applied to “Cost of Acquisition” (purchase price) of the capital asset, it becomes “Indexed Cost of Acquisition”.
Rahul purchased a flat in FY 2001-02 for Rs 10 lakh(10,00,000). He sells the flat in FY 2020-21 for 40 lakh. What will be the indexed cost of acquisition?
In this case, CII for the year 2001-02 and 2017-18 is 100 and 301 respectively.
Hence, the Indexed Cost of Acquisition = 10,00,000 x 301/100 = Rs. 30,10,000
So Profit = 40,00,000 – 30,10,000 = 990,000 instead of 30,00,000(40,00,000 – 10,00,000)
Hence tax which is 20% for property becomes = 198,000 instead of 6,00,000 (6 lakh)
Cost Inflation Index from Financial Year 1981-82 to Financial Year 2016-17
Cost Inflation Index(CII) is a measure of inflation that finds application in tax law, when computing long-term capital gains on sale of assets. Section 48 of the Income-Tax Act defines the index as what is notified by the Central Government every year.
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 2015 to 31st Mar 2016 the Indexation for year 2015-16 i.e 1081 would be used.
For long-term capital gains, indexed cost of acquisition and indexed cost of improvement is deducted instead of cost of acquisition and cost of improvement.
Formula for computing indexed cost =(Index for the year of sale/ Index in the year of acquisition) x cost.
For example, if a property purchased in FY 2003-04 for Rs 40 lakh were to be sold in FY. 2015-16 for Rs 95 lakh, indexed cost = (1081/463) x 40= Rs 93.39 lakh. And the long-term capital gains would be Rs 1.69, that is Rs 95 lakh minus Rs 93.39 lakh.
Cost Inflation index from Year 2016-17 to 1981-82 is given below. You can use our Capital Gain Calculator to calculate Short and Long term capital gains.
To know more about using Cost Inflation Index, how it is calculated, how it is used to calculate Long Term Capital Gains, tax liability with and without indexation, the asset class it can be used for please refer to Cost Inflation Index,Indexation and Long Term Capital Gains
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