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Cost Inflation Index

The price of a product increase overtime, and this brings down the purchasing power of money. Say, if 5 items can be bought for Rs. 500 today, tomorrow you may only be able to buy 4 items at the same rate on account of inflation. Cost inflation index calculates the estimated rise in the cost of goods and assets year-by-year as a result of inflation. It is fixed by the central government in its official gazette to measure inflation. Section 48 of the Indian Income Tax Act, 1961, defines the index as notified by the government every year.

Cost Inflation Index is a measure of inflation, used to calculate long-term capital gains from sale of capital assets. Capital gains is the profit that you make from selling an asset, which can be real estate, jewellery, stock, etc. The entire process - where the capital asset’s cost price is adjusted with the effect of inflation using the cost inflation index number - is referred to as indexation.

New Cost Inflation Index (CII) From FY 2001-02 To FY 2018-19

Current CII:

Financial Year (FY)Assessment Year (AY)Cost Inflation Index
2001-022002-03100
2002-032003-04105
2003-042004-05109
2004-052005-06113
2005-062006-07117
2006-072007-08122
2007-082008-09129
2008-092009-10137
2009-102010-11148
2010-112011-12167
2011-122012-13184
2012-132013-14200
2013-142014-15220
2014-152015-16240
2015-162016-17254
2016-172017-18264
2016-172017-18264
2017-182018-19272
2018-192019-20280

Old CII:

Financial YearCost Inflation IndexFinancial YearCost Inflation Index
1981-821001999-00389
1982-831091999-00406
1983-841162001-02426
1984-851252002-03447
1985-861332003-04463
1986-871402004-05480
1987-881502005-06497
1988-891612006-07519
1989-901722007-08551
1990-911822008-09582
1991-921992009-10632
1992-932232010-11711
1993-942442011-12785
1994-952592012-13852
1995-962812013-14939
1996-973052014-151024
1997-983312015-161081
1998-993512016-171125

Base Year In Cost Inflation Index

The government has set a specific calendar year as the base year, and accordingly calculates the CII beginning from base year. To ascertain the rise in inflation percentage, index of the other years is compared to the base year. Finance Minister, Arun Jaitley, recently announced the change in base year from 1981 to 2001.

For the purpose of computing long term capital gains, the property seller has to calculate the indexed cost of purchasing the property. To assess the indexed cost, the seller needs to multiply the property's cost of acquisition with the cost inflation index, as notified by the tax authorities for the year of transfer. This figure then has to be divided by the cost inflation index of the year of purchase. But, should the property be purchased prior to the base year of cost inflation index, one needs to know the property's fair market value for the base year.

Calculate Cost Inflation Index

To know how you can calculate cost inflation index, consider the following example:

Example

  • Purchased property on August 1, 2004 = Rs. 30 lakhs Sold property on April 1, 2018 = Rs. 85 lakhs

  • Indexed cost of acquisition = Rs. 30 lakhs x 280 / 113 = 74.33 lakh

  • Capital gain = Rs. 85 lakh - Rs. 74.33 lakh = Rs. 10.67 lakhs

Shift In Cost Inflation Index Base Year From 1981 To 2001

Earlier, 1981-82 was regarded as the base year. However, taxpayers started facing problems in getting their properties valued for purchases prior to April 1, 1981. Tax authorities were also facing difficulties relying on the valuation reports. Thus, the government decided to shift the base year to 2001, so that valuations can be done accurately and faster. In case of capital assets bought before April 1, 2001, taxpayers can take higher of actual cost or fair market value as on April 1, 2001, as the purchase price and enjoy the benefit of indexation.

Changing the base year helps capture the property's inflated cost in a better manner, bringing down the capital gains and the tax burden.

Frequently Asked Questions

What is cost inflation index?

CII is a measure of inflation, used to calculate long-term capital gains from sale of capital assets. Capital gains is the profit that you make from selling an asset, which can be real estate, jewellery, stock, etc. The entire process - where the capital asset’s cost price is adjusted with the effect of inflation using the cost inflation index number - is referred to as indexation.

What is base year in cost inflation index?

The government has set a specific calendar year as the base year, and accordingly calculates the CII beginning from the base year. To ascertain the rise in inflation percentage, index of the other years is compared to the base year. Finance Minister, Mr. Arun Jaitley, recently announced the change in base year from 1981 to 2001.

Changing the base year helps capture the property's inflated cost in a better manner, bringing down the capital gains and the tax burden.

What is the formula for calculating indexed cost of acquisition?

To derive the indexed cost, the seller needs to multiply the property's cost of acquisition with the cost inflation index, as notified by the tax authorities for the year of transfer. This figure then has to be divided by the cost inflation index of the year of purchase.

Who notifies the CII?

Every year, the central government specifies the CII by notifying in the official gazette. Section 48 of the Indian Income Tax Act, 1961, defines the index as notified by the government.

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