The Cost Inflation Index (CII) is a measure of inflation that is used in India for the purpose of taxation. When figuring out capital gains tax on the sale of a long-term asset, it is utilised to account for inflation in the cost of the item. Thus taxpayers are not taxed on the portion of the gain that is related to inflation, it is used to determine the asset's inflation-adjusted cost when it is sold.
Following are two tables illustrating new and old cost inflation index for the last ten rfinancial years
Old CII Table:
| Financial Year | CII |
| 2007-08 | 551 |
| 2008-09 | 582 |
| 2009-10 | 632 |
| 2010-11 | 711 |
| 2011-12 | 785 |
| 2012-13 | 852 |
| 2013-14 | 939 |
| 2014-15 | 1024 |
| 2015-16 | 1081 |
| 2016-17 | 1125 |
New CII Table:
| 2009-10 | 148 |
| 2010-11 | 167 |
| 2011-12 | 184 |
| 2012-13 | 200 |
| 2013-14 | 220 |
| 2014-15 | 240 |
| 2015-16 | 254 |
| 2016-17 | 264 |
| 2017-18 | 272 |
| 2018-19 | 280 |
| 2019-20 | 289 |
| 2020-21 | 301 |
| 2021-22 | 317 |
| 2022-23 | 331 |
Purpose of Cost Inflation Index
When determining capital gains tax on the sale of a long-term asset, the Cost Inflation Index (CII) is used to account for inflation in the item's cost. So that taxpayers are not taxed on the percentage of the gain that is related to inflation, the CII is used to determine the inflation-adjusted cost of an asset when it is sold. To put it another way, the CII works to prevent taxpayers from suffering an inflation penalty when they sell long-term assets like real estate, stocks, or mutual funds. Without the CII, taxpayers risk being forced to pay capital gains tax on gains that are solely attributable to inflation rather than an increase in the asset's value. The Consumer Price Index (CPI), which analyses the typical change in the prices of goods and services consumed by families, serves as the basis for the Central Board of Direct Taxes' (CBDT) annual publication of the Consumer Index of India (CII). By dividing the CPI for the current year by the CPI for the base year and multiplying the result by 100, one can determine the CII for a given year. Taxpayers can accurately determine their tax obligation on the sale of a long-term asset by adjusting the cost of acquisition for inflation using the CII. This makes it possible to prevent them from being taxed on profits that are solely the consequence of inflation and instead only on gains that they have actually made.What does a base year in CII mean?
The base year is the year against which the cost inflation index (CII) calculates the rate of inflation. The Consumer Price Index (CPI) of the current year is compared to that of the base year to determine the CII. The base year is selected, taking into account a variety of elements, such as data accessibility, stability, and representativeness. India's base year, 2001–2002, was selected because it was a year of comparatively stable economic conditions, with minimal inflation and a stable exchange rate. The advantage of indexation is then added to the estimated asset acquisition price. FMV, however, is determined using the asset's valuation report that was provided by a registered valuer.How is Indexation Applied to Long-Term Capital Assets?
Indexation is a method used to adjust the cost of acquisition of a long-term capital asset for inflation in order to arrive at the inflation-adjusted cost of the asset. When the asset is sold, the capital gains tax obligation is then determined using this modified cost. Only long-term capital assets, or assets held for longer than a year, are subject to indexation. The cost of acquisition of the asset must first be adjusted for any acquisition-related costs, such as brokerage fees or legal fees before indexation can be applied. After that, the result is multiplied by the cost inflation index (CII) for the year the asset is sold and divided by the CII for the year it was purchased. The following formula can be used to determine the indexed cost of acquisition: (CII for year of sale or transfer x Cost of asset acquisition) / CII for the first year in the holding period of asset or year 2001-02, whichever comes later Let's take the scenario where you bought a house in India in the financial year 2010–11 for a cost of Rs. 10 lakh and sold it for Rs. 20 lakh in the financial year 2021–22. Assume that the CII for the year of selling was 317 and that the CII for the year of the acquisition was 184. The indexed cost of acquisition would be as follows using the calculation above: Indexed Cost of Acquisition = 10,00,000 x (317/184) = Rs. 17,31,521 Based on the CII for the year of the sale, this indicates that the property's inflation-adjusted cost of acquisition is Rs. 17,31,521. This figure is then deducted from the sale price of Rs. 20 lakh to arrive at the capital gains amount of Rs. 2,68,479. This capital gains amount is then taxed at the applicable rate of long-term capital gains tax, which is currently 20% in India.Things to Note about Cost Inflation Index in India
There are a few important considerations that assessees should make when figuring out their indexed cost of asset purchase. These are:- If an asset is acquired through an assessee's will, CII is taken into account for that year. The asset's actual purchase year is not relevant in this situation.
- Before April 1, 2001, any improvement costs incurred are not eligible for indexation.
- Except for sovereign gold bonds or capital indexation bonds issued by the RBI, the benefits of indexation are not applicable to debentures or bonds.
How Can Indexation Reduce Tax Liabilities on LTCG for Assesses?
By applying indexation, you can decrease your overall tax obligation by modifying the original purchase price of the asset or investment. This can allow you to achieve greater profits, as you are able to adjust them according to the inflation rate during the year of purchase and sale. Indexation refers to the process of adjusting the purchase price of an asset for inflation, based on the cost inflation index (CII) published by the Income Tax Department. The CII is a measure of inflation that takes into account the changes in the prices of goods and services over time.Conclusion
In summary, the cost inflation index is a useful tax instrument that helps in adjusting the asset purchase price for inflation. It makes sure that taxpayers are not taxed on the profit gained from the sale of an asset's inflation-adjusted component and helps in determining the fair market value of assets by taking inflation into account. Now that you have learned about the Cost Inflation Index, open a Demat account with Angel One and start building your wealth.
FAQs
What is the Cost Inflation Index (CII)?
A long-term capital asset's acquisition cost is adjusted for inflation using the Cost Inflation Index (CII), a measure of inflation. When the asset is sold, it is utilised to determine the capital gains tax obligation.
How is the CII calculated?
The Consumer Price Index (CPI) of the current year is compared to that of the base year to determine the CII (which is currently 2001-02 in India). The CPI calculates the average change in prices for household consumption of goods and services. The CPI for the base year is subtracted from the CPI for the current year, and the result is multiplied by 100 to determine the CII.
What is the purpose of the CII?
In order to avoid taxation on the inflation-related portion of capital gains when an asset is sold, the cost of purchase of long-term capital assets is adjusted for inflation using the CII. When an asset is sold, the capital gains tax obligation is determined using the CII.
