Cost Inflation Index for 2016 and last 30 years: Updated

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 Figure is announced for each Financial Year and 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 2013 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 2013, 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 by the applying the Cost Inflation Index Factor 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:-

1. Assets acquired directly by the taxpayer himself.
2. Asset which was not directly acquired by the taxpayer himself but was acquired by the previous owner and the taxpayer 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 year of Sale

                                                                                   Cost Inflation Index of year of Purchase

Therefore for an asset which was acquired in the year 2005-06 for Rs. 100 and sold in the year 2013-14 for Rs 200, the Indexed Cost of Acquisition would be

Capital Gains      = Sale Price – Indexed Cost of Acquisition

   = 200-188.93

    = Rs. 11.07

Asset which was not directly acquired by the assessee himself

Where the asset was not acquired by the taxpayer himself and the taxpayer became its rightful owner by means of gift/ succession/ will/ inheritance etc, no tax would be levied at the time of receiving the asset by means of gift/ succession/ will/ inheritance etc.

• Recommended Read: Income Tax on Gifts and 7 Exemptions

However, Capital Gains Tax would be levied when the person who has received the gift sells this Asset. The indexed cost of acquisition in this case shall be:-

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 15^th November 2013 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:-

 Capital Gains   = Sale Price – Indexed Cost of Acquisition

= 25,00,000-10,50,335

= Rs. 14,49,665

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 01-04-1981, the fair market value of the assets as on 01-04-81 shall be taken into account. The taxpayer shall be given the option to either take the Fair Market Value as on 01-04-81 as the Cost of Acquisition or consider the actual purchase price as the cost of acquisition.

The taxpayer can choose any of these values as the cost of acquisition. 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.

Budget 2017 Update: Cost of Acquisition of Properties purchased before 01/04/2001

Finance Act 2017 has inserted an amendment which says that for Properties purchased before 01/04/2001 – the Cost of Acquisition of such properties shall be either the Actual Purchase Price or the Fair Market Value of the Asset as on 01/04/2001.

This amendment will be applicable from Financial Year 2017-18 onwards and would be applicable in the same manner as explained above.

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. The reason for ignoring expense incurred before 1-4-81 is because it would automatically get reflected in the Fair Market Value of the Asset as on 1-4-81.

However, for expenses incurred after 1-4-81, the Fair Market Value is not to be considered and the Cost Inflation Index is to be considered and therefore both the Cost of Acquisition and the Cost of Improvement i.e. Expenses would be indexed.

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

Solution:

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:

1. Exemption under Section 54 from Long Term Capital Gains
2. Capital Gains Account Scheme to save Tax on Long Term Capital Gains

Please Note: This Cost Inflation Index is only applied to long term capital assets i.e. only to those assets which have been held by the taxpayer for more than 36 months. For Assets held by the taxpayer for less than 36 months, the benefit of Indexation wont be available.