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Guide to Cost Inflation Index | Company Vakil

INFLATION

Inflation is the rate at which the general level of prices for goods and services is increasing and, subsequently, the purchasing power of currency is declining. Central banks try to limit inflation  and avoid deflation in order to keep the economy running smoothly.

Inflation is usually painful when you are the buyer, but it is equally pleasant when you are the seller as you are about to make gains of the asset that you owned. The concept of inflation is hence very important in computing the tax liability on the capital gains. The Cost Inflation Index(CII) is used for computing the gains and taxes on the capital assets.

Cost Inflation Index

Cost Inflation Index (CII) is an index which shows the impact of inflation in the prices of the Capital Assets. It is a technique which is used to compute the real gains by the sale of an asset with the effect of inflation. CII is calculated by the Government of India and Central Board of Direct Taxes (CBDT) using the Consumer Price Index (CPI) for a given particular year and discloses the index prior to the Financial Year ending. This Cost Inflation Index (CII) is then used for calculation of Capital Gains and related Taxes. If the index is not used, the inflated prices amplify your gains and more gains results into increase in the tax payable amount. As a result, use of cost inflation index (CII) is advantageous for a taxpayer. Thus, the cost inflation index (CII) describes the current market value of an asset which has amplified due to inflation. Company Vakil is a leading legal registration platform that helps in solving all your legal queries

Important terms related to Cost Inflation Index (CII)

Capital Assets and Capital Gains

It is an asset like a movable and immovable property, equity shares etc. which at time of sale produces gains or loss. The gains on the capital assets are recognized as capital gains.

Indexed cost of acquisition

The value of purchase cost during sale of an asset which is re-computed using the cost inflation index (CII) is known as the indexed cost of acquisition. It means adjusting the original cost through the rate of inflation.

Indexed cost of improvement

Whenever an asset particularly house property is being reconstructed or renovated, the cost incurred on such renovations is treated as a cost of the improvement. This cost is further indexed as per the cost inflation index (CII) to arrive at the indexed cost of the improvement.

Cost Inflation Index for Different Years

The following table below represents the value of Cost Inflation Index (CII) from the base year 2001-02. The Cost Inflation Index Value in the next financial year depends on the sum of inflation the country faces in the current year.

Financial Year Cost Inflation Index Financial Year Cost Inflation Index
2001-02 100 2010-11 167
2002-03 105 2011-12 184
2003-04 109 2012-13 200
2004-05 113 2013-14 220
2005-06 117 2014-15 240
2006-07 122 2015-16 254
2007-08 129 2016-17 264
2008-09 137 2017-18 272
2009-10 148

Calculation of Cost Inflation Index (CII)

The formula gives the cost inflation index (CII)

CII = CII for the year of sale of asset/ CII for the year of purchase of that particular asset.

Example: suppose a capital asset were purchased in the year 2007-08 and then sold in the year 2011-12, the cost inflation index (CII) factor for the capital asset would be:

= CII of the year 2011-12 / CII of the year 2007-08
= 184/129
= 1.43

thus, if the purchase price in the year 2007-08 is Rs. 100, the CII signifies that the purchase price of the that particular asset in the year 2011-12 is Rs 100 x 1.43 which is Rs 143

Computation of Capital Gains using Cost Inflation Index

Indexed Cost of Acquisition

This formula calculates indexed Cost of Acquisition (COA)

Purchase price of the asset in year of purchase x (CII for the year of sale of the asset/ CII for the year of purchase of that particular asset)

Indexed Cost of Improvement

Indexed Cost of Improvement is calculated by this formula

Improvement cost of the asset in year of improvement x (CII for the year of sale of asset/ CII for the year of improvements)

Capital Gain on an asset

This formula calculates capital Gain on the asset

Capital gain = Net selling price of asset – (indexed cost of acquisition (COA) + indexed cost of improvement (COI))

Calculation of Capital Gains – Various Scenarios

Consider the following illustration for computation of capital gains

Description Value
Year of purchase of property 2007-08
The purchase price of the property Rs 1,00,000
Year of improvement of the property 2012-13
Cost of improvement Rs 50,000
Year of the sale of the property 2015-16
The selling price of the property Rs 6,50,000
CII for 2007-08 129
CII for 2012-13 200
CII for 2015-16 254

Calculations

Scenario 1: When the person himself does the purchase and sale:

Indexed cost of acquisition(COA) = 1,00,000 x (254/129) = Rs 1,96,899
Indexed cost of improvement(COI) = 50,000 x (254/200) = Rs 63,500
Capital Gains(CG) = 6,50,000 – (1,96,899 + 63500) = 6,50,000 – 2,60,399 = Rs 3,89,601

Scenario 2: When the purchase and sale are done other than the original owner i.e. the 3rd party:

If the property is transfer from one person, under gift, will or inheritance, to the other, the calculation of gains will be same, but the gains will be received by the new owner but not the original owner.

Indexed cost of acquisition(COA) = 1,00,000 x (254/129) = Rs 1,96,899
Indexed cost of improvement(COI) = 50,000 x (254/200) = Rs 63,500
Capital Gains(CG) = 6,50,000 – (1,96,899 + 63500) = 6,50,000 – 2,60,399 = Rs 3,89,601

Scenario 3: When the purchase is earlier than 2001-02 and sale is done on or after 1st of April, 2001

When the purchase of the asset is earlier than the base year, the purchase price of the asset will be taken as the fair market value of the asset in that base year and the CII for purchase year is taken as the CII for the base year. In the above example, let us presume that the fair market value (FMV) of the property in 2001-02 is Rs 2, 00,000.

Indexed cost of acquisition (COA) = 2,00,000 x (254/100) = Rs 5,08,000
Indexed cost of improvement (COI)= 50,000 x (254/200) = Rs 63,500
Capital Gains (CG) = 6,50,000 – (5,08,000 + 63500) = 6,50,000 – 5,71,500 = Rs 78,500

Tax on Capital Gain

  1. If the sale of the asset occurs within two years w.e.f. F.Y. 2017-18 from the year of purchase, the gain earned on that asset is a short-term capital gain. It will be taxed as per the tax slabs under which the individual falls.
  2. If the sale of the asset like immovable property and shares, takes place after two years w.e.f. F.Y. 2017-18 from the year of purchase; the gain earned on the asset is long-term capital gain.

 

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