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:-

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

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.

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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

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