Cost Inflation Index : New and old : Income Tax Act of India

By | March 26, 2018
(Last Updated On: March 26, 2018)

New Cost Inflation Index

NOTIFIED COST INFLATION INDEX UNDER SECTION 48, EXPLANATION (V) –

New cost inflation index for FY 2017-18 onwards

As per Notification no. So 1790(e)[no. 44/2017 (f. No. 370142/11/2017-tpl)], dated 5-6-2017, following table should be used for the Cost Inflation Index  for calculating long term capital gains for FY 2017-18 (AY 2018-19 ) onwards under Income Tax Act of India:-

Sl. No.Financial YearCost Inflation Index
(1)(2)(3)
12001-02100
22002-03105
32003-04109
42004-05113
52005-06117
62006-07122
72007-08129
82008-09137
92009-10148
102010-11167
112011-12184
122012-13200
132013-14220
14;2014-15240
152015-16254
162016-17264
172017-18272

Cost inflation index ( CII )  upto Financial Year 2016-17

Following table should be used for the Cost Inflation Index  for calculating long term capital gains upto FY 2016-17 (AY 2017-18 )  under Income Tax Act of India

COST INFLATION INDEX

Financial YearCII
Before 1/4/1981100
1981-82100
1982-83109
1983-84116
1984-85125
1985-86133
1986-87140
1987-88150
1988-89161
1989-90172
1990-91182
1991-92199
1992-93223
1993-94244
1994-95259
1995-96281
1996-97305
1997-98331
1998-99351
1999-00389
2000-01406
2001-02426
2002-03447
2003-04463
2004-05480
2005-06497
2006-07519
2007-08551
2008-09582
2009-10632
2010-11711
2011-12785
2012-13852
2013-14939
2014-151024
2015-161081
2016-171125

What is cost inflation index?

The cost inflation index (CII) is a means to measure inflation, which is used in the computation of long-term capital gains with regard to the sale of assets. Cost inflation takes into account the Consumer Price Index (CPI) for a given year for urban non-manual employees for the preceding year. As the price of a capital asset is likely to rise in the years between the purchase and its sale, selling the asset would net the owner a significant amount.

Since the government levies a tax on such transactions, the owner would be required to pay a hefty sum as tax. In order to avoid paying a large sum towards tax, the sale price of the asset can be indexed to demonstrate the asset’s value as per its current value, taking into account inflation reducing its value. In this manner, the profit derived from the sale would be lower, thus reducing the capital gains payable.

Thus, indexation helps reflect the actual value of the asset at present market rates, taking into account the erosion of value due to inflation.

When selling an asset, the purchase price is referred to as the indexed cost of acquisition. The cost inflation index (CII), therefore, is the indexed price that the asset is purchased at. The CII for a particular year is fixed by the government and released before the accounting year ends, for the purpose of tax computation.

As per Explanation (v) to Section 48 of Income Tax Act 1961 :- [Substituted by the Finance Act, 2000, w.r.e.f. 1-4-1993.  ] :

“Cost Inflation Index”, in relation to a previous year, means such Index as the Central Government may, having regard to seventy-five per cent of average rise in the 1[Consumer Price Index (urban)] for the immediately preceding previous year to such previous year, by notification in the Official Gazette, specify, in this behalf.

Note :

1 Substituted for “Consumer Price Index for Urban non-manual employees” by the Finance (No. 2) Act, 2014, w.e.f. 1-4-2016.

As per Explanation (iii) to Section 48 of Income Tax Act 1961

indexed cost of acquisition” means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, a[1981], whichever is later;

Notes :-a.  Figures “2001” shall be substituted for “1981” by the Finance Act, 2017, w.e.f. 1-4-2018.

How to Calculate Cost Inflation Index

Mr. Raja purchased a piece of land in May, 2004 for Rs. 84,000 and sold the same in  April, 2016 for Rs. 10,10,000 (brokerage Rs. 10,000). What will be the taxable capital gain in the hands of Mr. Raja?

Computation of capital gain will be as follows :

Particulars                                                                                                                     Rs. 
Full value of consideration (i.e., Sales consideration of asset)                     10,10,000
Less: Expenditure incurred wholly and exclusively in connection with
transfer of capital asset (brokerage)                                                                         10,000
Net sale consideration                                                                                           10,00,000
Less: Indexed cost of acquisition (*)                                                                    1,96,875
Less: Indexed cost of improvement, if any Nil
Long-Term Capital Gains                                                                                       8,03,125

(*) The cost inflation index notified for the year 2004-05 is 480 and for the year 2016-17
is 1125.Hence, the indexed cost of acquisition, i.e., the inflated cost of acquisition will be
computed as follows:
(Cost of acquisition × Cost inflation index of the year of transfer of capital asset )/
Cost inflation index of the year of acquisition

(Rs. 84,000 × 1125 )/ 480 = Rs. 1,96,875

How is CII helpful in Reducing Income 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.
  • 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 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.

Click here to visit Income Tax Department website of India

Judgments on Cost Inflation Index

Indexation benefit can’t be denied because Assessee not declared long term gain in ITR

Capital gains on gifted asset shall be computed by taking Cost inflation Index of year in which asset held by previous owner

Indexation benefit from period asset was first held by previous owner ITAT

Related Post on Cost Inflation Index

CII (Cost Inflation Index) for FY 2016-17 notified by CBDT

CII (COST INFLATION INDEX) INCOME TAX- 1981 to 2017

New CII Index Base Year 2001-02 Notified by CBDT for FY 2017-18 onwards – Download print Notification

Book and Ready Reckoner on Cost Inflation Index

Cost Inflation Index Direct Taxes Ready Reckoner (41st Edition A.Y. 2018-19 & 2019-20) Paperback – 2018 by Dr. Vinod K. Singhania

 

 

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