Cost Inflation Index: CII Income Tax

The Cost Inflation Index (CII) is an important tool used in the calculation of long-term capital gains. It accounts for inflation by adjusting the original purchase price of an asset to reflect the increased cost of living over time. By using CII, taxpayers can increase the cost of acquisition, thereby reducing the taxable capital gains. This adjustment helps ensure that taxpayers do not pay excessive taxes on gains that are largely attributable to inflation rather than real appreciation in the asset’s value.

Budget 2024 Update

As of July 23, 2024, the government has removed the indexation benefit on long-term capital gains. Investors can no longer adjust the purchase price of assets for inflation when calculating capital gains tax. Now, capital gains will be based on the actual purchase price.

For land or buildings bought before July 23, 2024, taxpayers can choose to pay either a 12.5% tax rate without indexation or a 20% rate with indexation. However, for land or buildings purchased on or after July 23, 2024, the tax rate will be 12.5% without any indexation benefit, applicable to assets classified as long-term.

Cost Inflation Index: Meaning

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 the 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 2024-25 (AY 2025-26) is 363.

Cost Inflation Index Chart

The Income Tax Department has notified the list of the Cost Inflation Index (CII) 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 to calculate 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 benefits?

Below is the calculation of Long Term Capital Gains with the benefit of indexation.

How to calculate the 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 the year of sale / CII for the 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 the year of sale / CII for the year of improvement)

Note:

• If the asset is purchased before the base year, take the CII of the base year i.e. 2001-02 to calculate the 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 the 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

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