Cost Inflation Index (CII) is an Index which finds its utility in the income tax act at the time of computation of Long Term Capital Gains to be disclosed in the Income Tax Return. The Cost Inflation Index is issued by the Central Board of Direct Taxes (CBDT) and the figures that have been issued by the CBDT till date have been disclosed herewith for your Ready Reference.
The Cost Inflation Index Figures as released by CBDT for the previous years has been disclosed below
What is Cost Inflation Index?
An asset that was purchased in the year 2011 would normally be more expensive than an Asset that was purchased in the year 2005. The reason for the same is that Inflation keeps on increasing year after year as a Result of which Prices of most of the Assets increase year after year.
For eg: -Ram purchased an Asset in the year 2005 for Rs. 100. Now in the year 2011, he sells this for Rs. 200. Simple mathematics says that the Profit on such a transaction is Rs. 100 but would it be justifiable to enforce taxes on this Rs. 100 as the sale price also includes a component of Inflation?
To remove the Inflation component from this profit, the Govt. has introduced the concept of indexing the cost to adjust for inflation in the value of Assets held for more than 36 months. The Indexing shall be done to the Cost of Acquisition and Cost of Improvement as explained below.
Computation of Indexed Cost of Acquisition
The following are the 2 ways through which an asset can be acquired by an assessee:-
- Assets acquired directly by the assessee himself
- Asset which was not directly acquired by the assessee himself but was acquired by the previous owner and the assessee became its rightful owner through transfer by means of gift/ succession/ will/inheritance etc.
Cost of Acquisition of Assets directly purchased by Assessee
The cost of acquisition shall be the amount which the assessee has paid to acquire that asset. Cost Inflation Index would be applied in this case as follows:-
Indexed Cost of Acquisition = Actual Cost of Acquisition * Cost Inflation Index of the year of Sale
Cost Inflation Index of the year of Purchase
Therefore for an asset which was acquired in the year 2005-06 for Rs. 100 and sold in the year 2011-12, the Indexed Cost of Acquisition would be
|Indexed Cost of Acquisition =||
Cost Inflation Index of Year of Sale
Cost Inflation Index of year of Purchase
Capital Gains = Sale Price – Indexed Cost of Acquisition
= Rs. 42.06
Asset which was not directly acquired by the assessee himself
Where the asset was not acquired by the assessee himself and the assessee became its rightful owner by means of gift/ succession/ will/ inheritance etc, the indexed cost of acquisition in this case shall be:-
|Cost of Acquisition to the previous owner *||CII of the year of SaleCII of the year in which the asset became the property of the assessee|
In case the asset was not acquired directly by the assessee but was acquired by the previous owner, the Cost Inflation Index of the year in which the asset became the property of assessee should be taken into account and not the Cost Inflation Index of the year in which the asset was acquired by the previous owner. This can be illustrated with the help of an example:-
Eg: Mr A acquired a property in the year 1982-83 for Rs. 5,00,000. Mr A died on 15-9-2002 and the property was transferred to his son Mr. B through inheritance. The market value of the property as on 15-9-2002 was Rs. 10,00,000. Mr B sold this property on 15th November 2011 for Rs. 25,00,000. Compute the Capital Gains
Solution: No Capital Gains would arise in the hands of Mr A
Capital Gains would only arise in the hands of Mr. B and the Capital Gains in this case would be computed as follows:-
|Indexed Cost of Acquisition =||5,00,000*||CII of Year of Purchase|
|CII of the year in which the property
became the asset of the assessee
Capital Gains = Sale Price – Indexed Cost of Acquisition
= Rs. 17,04,698
Cost of Acquisition of properties purchased before 01-04-1981
As the Cost Inflation Index only shows figures starting from 1981-82, for assets purchased before 01-04-1982, the fair market value of the assets which were purchased before 1981-82 should be taken into account. This can be explained with the help of an example.
Eg: Mr. R purchases a property on 01-08-1974 for Rs. 50,000 and this property is sold on 04-03-2008 for Rs. 28,00,000. The Fair market value of the property on 01-04-1981 was Rs. 2,00,000.
In the above example, indexing the cost of acquisition is impossible as the property has been purchased before 01-04-1981 and cost inflation index figure for properties purchased before 1981 is not available. In such a case, for the purpose of computing long term capital gains, the cost inflation index of 1981-82 shall be used and the cost of acquisition shall be taken to be the fair market value i.e. Rs. 2,00,000 on this date i.e. on 01-04-1981.
Indexed Cost of Improvement
Cost of improvement would be indexed in the same manner as the cost of acquisition. Any expense incurred before 1-4-81 is to be completely ignored and only the expense incurred on improvement after 1-4-81 is to be taken into account for the purpose of indexation.
Indexed Cost of Improvement = Cost Inflation Index of the year of transfer
Cost Inflation Index of the year of improvement
The above can be explained with the help of an example
Eg: Mr E purchased a house on 28-6-1990 for Rs, 1,10,000. On 15-06-1991, he spent Rs. 80,000 on improvement of the house. The house was sold on 21-10-2005 for Rs, 6,00,000. Commission of Rs. 4,000 was paid at the time of sale of the house. Compute the capital gains
|(Less)||Expense on Transfer||6000|
|(Less)||Indexed Cost of Acquisition (120000 * 497/182)||327692|
|(Less)||Indexed Cost of Improvement (80,000 * 497/199)||199799|
|Long Term Capital Gains||68509|
Various exemptions are also available from the Long Term Capital Gains computed above, provided the Capital Gains are reinvested in the specified mode of investments.
- Recommended Read: Exemption under Section 54 from Long Term Capital Gains
This Cost Inflation Index is only applied to long term capital assets i.e. only to those assets which have been held by the assessee for more than 36 months.