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  • Cost Inflation Index

    The value of rupee today will not stay the same for tomorrow. The prices keep increasing due to inflation. It is fair to pay more for toothbrush over the years because of the price rise. Likewise, it is not fair to pay capital gain tax without incorporating the factor of inflation.

    Capital gains is the profit you make on selling an asset. It can be real estate, stock, mutual funds, jewellery etc. If you are selling the asset after 36 months from the date of purchase, it becomes a long term capital gain. If you are selling an asset after one year from the date of its purchase, the profit becomes a short term capital gain. The government charges tax on our sale of the asset and they do not wish to let go of the capital gain. Hence, the government charges capital gains tax. Cost inflation index India is an index issued by the Central Board of Direct Taxes and the figures keep changing every financial year.

    Cost Inflation Index for Financial Year 2015-16:

    Inflation reduces the asset value over a period of time. Indexation helps us to counter the erosion in the value of our assets over time. You can increase the purchase price of the asset using the inflation index. This reflects the inflation-adjusted price in the year the asset is being sold. The cost inflation index for the financial year 2015-16 is 1081.

    If you have sold an asset that you held for more than 3 years, you can take advantage of the indexation.

    Calculate Cost Inflation Index:

    The purchase price of the asset is indexed by the cost inflation index.

    The formula to calculate the cost inflation index is as follows:

    Cost Inflation Index (CII) = CII for the year the asset was transferred or sold / CII for the year the asset was acquired or bought

    Suppose, you purchased an apartment for Rs.20 lakhs in Jan 2000 and sold it for Rs.35 lakhs in Jan 2009. Your profit or capital gain is Rs.15 lakhs.

    The CII for the year the apartment was bought in is 389. The CII for the year the apartment was sold in is 582.

    The cost inflation index is 582/389 = 1.49

    While computing tax, CII is multiplied with the purchase price to arrive at the indexed cost of acquisition. This is the actual cost of the asset.

    Therefore, the indexed cost of acquisition = 20,00,000 X 1.49 = Rs.29,92,288

    The long term capital gain= sale value of the asset- indexed cost of acquisition i.e., 35,00,00- 29,92,288 = Rs.5,07,712

    The tax liability if you use the indexation method is charged at 20 percent. The tax liability will be 20% X 5,07,712 = Rs.1,01,542

    If you do not use the indexation method, the tax is liable at 10% on the capital gain. The capital in this case is sale price of the apartment – cost of acquisition = 35,00,000 – 20,00,000 = Rs.15,00,000. The capital gains tax is 10% X 15,00,000 = Rs.1,50,000.

    When you index, it helps you save taxes. It helps you adjust the purchasing price of the apartment with the current market prices.

    How is CII Useful in Reducing Tax?

    We saw in the earlier example that indexing helps us save a substantial amount of income tax that will be levied on the long term capital gain arising out of selling off your asset. But, indexation is not available for short term capital gain or losses. This benefit is also not available to Non-Resident Indians.

    The indexation for long term capital gain is available only if you meet the following criteria:

    • Cost of acquisition of the asset has to be multiplied with the cost of inflation of the year it was transferred.
    • That figure is to be divided by the cost inflation index for the year in which the asset was acquired.
    • If the asset was purchased before 1981, the cost inflation index of the year 1981 must be taken into consideration.
    • If you have made improvement of the asset, then you need to adjust the cost inflation index with the multiplying with the CII of the year the improvement was made.

    Cost Inflation Index Chart:

    Cost inflation index table is as follows:

    Financial Year Index Financial Year Index
    1981-82 100 1999-00 389
    1982-83 109 2000-01 406
    1983-84 116 2001-02 426
    1984-85 125 2002-03 447
    1985-86 133 2003-04 463
    1986-87 140 2004-05 480
    1987-88 150 2005-06 497
    1988-89 161 2006-07 519
    1989-90 172 2007-08 551
    1990-91 182 2008-09 582
    1991-92 199 2009-10 632
    1992-93 223 2010-11 711
    1993-94 244 2011-12 758
    1994-95 259 2012-13 852
    1995-96 281 2013-14 939
    1996-97 305 2014-15 1024
    1997-98 331 2015-16 1081
    1998-99 351    
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