Inflation results in rising in prices which reduces the purchasing power of money. It is important to calculate the rise in the cost of goods or services each year due to the effect of inflation. Thus, the taxpayer can take the benefit of indexation to compute the cost of acquisition to calculate Capital Gains Tax. The Indexed Cost is the cost after adding the effect of inflation of each financial year. Thus, Cost Inflation Index i.e. CII helps to estimate the increase in prices each year due to the effect of inflation. The Income Tax Department notifies CII for each financial year.
What is CII (Cost Inflation Index)? Who notifies CII?
Cost Inflation Index i.e. CII is the index used for calculating the cost of acquisition or improvement after applying the effect of inflation over the financial years.
CII = 75% of the average rise in Consumer Price Index (CPI) for the immediately preceding year
Consumer Price Index computes the rise in prices by comparing the current price of a basket of goods and services with the cost of such a basket in the previous year.
The Central Government publishes CII in the official gazette. The Cost Inflation Index for FY 2022-23 (AY 2023-24) is 331 as per the notification dated 14th June 2022 – CBDT Notification.
Cost Inflation Index Chart
Below is the list of CII i.e. Cost Inflation Index as notified by the Income Tax Department on its website.
Base Year in Cost Inflation Index
Base Year is the first year of the Cost Inflation Index with an index value of 100. The CII of all the other financial years is compared to the base year to calculate the increase in the percentage of inflation. If a taxpayer has purchased a capital asset before the base year, he/she can take the cost of acquisition as higher of the actual purchase price or FMV i.e. fair market value on the first day of the base year. The taxpayer can calculate the indexation on this cost of acquisition by using the CII of the base year. FMV is based on the valuation report of a registered valuer.
Change in Base Year of CII changed from 1981 to 2001
Prior to the Finance Act 2017, the base year was 1981-82 as per the Cost Inflation Index Chart for the purpose of calculating indexation. However, the taxpayers were facing issues to get the valuation of the property purchased before 1st April 1981. Further, the tax authorities were not easily relying on the valuation reports. As a result, under the Finance Act 2017, the government shifted the base year from 1981 to 2001 for an easier and more accurate valuation. The Income Tax Department introduced the new Cost Inflation Index Chart with a revision in CII for all financial years. The new base year was now 2001-02 applicable from FY 2017-18.
How to calculate Long Term Capital Gains with Indexation benefit?
Below is the calculation of Long Term Capital Gains with the benefit of indexation.
|Full Value of Consideration|
|Less||Indexed Cost of Acquisition|
|Less||Indexed Cost of Improvement|
|Long Term Capital Gains|
How to calculate Indexed Cost of Acquisition and Indexed Cost of Improvement?
The Indexed Cost of Acquisition is the calculation of the cost of acquisition by applying the indexation benefit to compute Long Term Capital Gains.
Indexed Cost of Acquisition = Cost of Acquisition * (CII for year of sale / CII for year of purchase)
The Indexed Cost of Improvement is the calculation of the cost of improvement by applying the indexation benefit to compute Long Term Capital Gains.
Indexed Cost of Improvement = Cost of Improvement * (CII for year of sale / CII for year of improvement)
- If the asset is purchased before the base year, take CII of base year i.e. 2001-02 to calculate Indexed Cost of Acquisition
- If the taxpayer has received the property through a will, take CII for the year in which the property is received and not the actual purchase year
- If the taxpayer incurs any cost of improvement before 1st April 2001, it should be ignored
Example to calculate Indexed Cost of Acquisition
Mr. A purchased a flat in FY 2018-19 for INR 50,00,000. He sells the flat in FY 2021-22 for INR 80,00,000. Calculate the Capital Gain.
Since the flat is sold after 24 months from purchase, it is a long term capital asset. Thus, the benefit of indexation is available for the calculation of Long Term Capital Gains as per Section 112 of Income Tax Act.
CII for 2018-19 = 280
CII for 2021-22 = 317
Indexed Cost of Acquisition = 50,00,000 * (317/280) = INR 56,60,714
LTCG = 80,00,000 – 56,60,714 = INR 23,39,286
Example to calculate Indexed Cost of Acquisition using Base Year
Mr. B purchased a property in FY 1994-95 for INR 30,00,000. He sells the same in FY 2014-15 for INR 1,30,00,000. The FMV of the property on 1st April 2001 was INR 50,00,000. Calculate the Capital Gain.
Since the immovable property is sold after 24 months from purchase, it is a long term capital asset. Thus, the benefit of indexation is available for the calculation of Long Term Capital Gains as per Section 112 of Income Tax Act.
CII for 2014-15 = 240
CII for 2001-02 = 100
Cost of Acquisition = higher of actual purchase value or FMV as on 1.4.2001 = INR 50,00,000
Indexed Cost of Acquisition = 50,00,000 * (240/100) = INR 1,20,00,000
LTCG = 1,30,00,000 – 1,20,00,000 = INR 10,00,000
CII i.e. Cost Inflation Index is issued by the income tax department for each financial year. The CBDT notified Cost Inflation Index i.e. CII for FY 2022-23 as 331 via a notification dated 14th June 2022. Cost Inflation Index Chart for all financial years is available on the website of the income tax department. Taxpayer can use CII to compute indexed cost of acquisition and indexed cost of improvement for the calculation of LTCG.
CII i.e. Cost Inflation Index is issued by the income tax department for each financial year. The CBDT notified Cost Inflation Index i.e. CII for FY 2021-22 as 317 via a notification dated 15th June 2021. Cost Inflation Index Chart for all financial years is available on the website of the income tax department. Taxpayer can use CII to compute indexed cost of acquisition and indexed cost of improvement for the calculation of LTCG.
Indexed Cost of Acquisition = Cost of Acquisition * (CII of sale year / CII of purchase year). If the asset is purchased before base year, take CII of the base year i.e. 2001-02 to calculate the Indexed Cost of Acquisition.
If the taxpayer has purchased the capital asset before 1.4.2001, he/she must use the CII of the base year to compute the indexation. Further, the cost of acquisition would be higher of the actual purchase value and FMV of the capital asset as of 1st April 2001. FMV can be derived from the valuation report prepared by a registered valuer.
On business income of 2 lakhs INR: 5%
On STCG of 2 lakhs INR: 15%
You can also refer to our Income Tax Calculator
I have income Short Term and Long term Capital gains and “Income from other sources” (Bank interest and Dividend). Also, I have investments in 80C, 80D, 80CCD.
Are the investments in 80C, 80D, 80CCD considered for tax deduction?
For example if income from other source is 1 lac and 80C investment is 1lac, will this 1 lac be exempt?
STCG is 3.5lac, so 15% will be applicable on 1 lac. as 2.5 lacs is exempt.
so i pay tax only 15% of 1 lac which is Rs.15000.
Your are absolutely correct.
Deductions, if any, will be reduced from your Income taxable at slab rates.
The un-exhausted part of the basic exemption limit of 2.5 lakhs will be reduced from you Capital Gains.
So, in the above case you’ll have to pay 15% tax on 1 lakh.
However, if your taxable income after deductions is upto 5 lakhs, you’re eligible for rebate (12.5k) under section 87A.
Hope this helps.
Just to reconfirm,
income from other source (FD Interest and dividend) is 1 lac and 80C investment is 1lac, will this 1 lac be exempt and will not be calculated under taxable income?
Yes, this 1 lac will not be taxable after deductions.
Deductions under Chapter VI-A can be claimed against taxable incomes. Based on your data, here is a calculation:
Gross Total Income = 1 lac (IFOS) + 3.5 lac (STCG) = 4.5 lac
Deduction 80C = 1 lac
Total Income = 3.5 lac
Special Rate Income = 3.5 lac
Adjusted against basic exemption limit = 2.5 lac
Taxable Special Rate Income (STCG) = 1 lac
Tax on STCG = 15% of 1 lac = 15,000
Rebate u/s 87A = 12,500
Net Tax Liability = 2,500
Cess = 4% of 2,500 = 100
Total Tax Liability = 2,600
Here’s how you’ll be taxed under the Old Regime:
Total Income = 11 lacs
Income Taxable at Slab rates = 10 lacs
Income Taxable at Specified rates = 1 lakh
Tax on Slab Rate Income = 1,12,500
Tax on STCG = 15,000
Total Income Tax = 1,27,500
HEC = 5100
Total Tax Liability = 1,32,600
Hope this helps
I bought shares worth INR 70,000 in 2017 which are now worth around INR 1,80,000. It is long term capital gains, how much tax do I have to pay?
To differentiate capital gains into long term and short term the period is 36 months and 12 months - which one to consider?
In Budget 2018, the grandfathering rule was announced u/s 112A which implies that - long term capital gains above INR 1 Lakh will be taxed at 10% after 1st Feb 2018.
Therefore to calculate LTCG:
Any tax on LTCG will be 10% above INR 1 Lakh
Hope this helps!
Refer to our learn article on LTCG on sale of Equity Shares and Equity Mutual funds
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