Cost Inflation Index : CII Income Tax

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.

Financial Year CII
2022-23 331
2021-22 317
2020-21 301
2019-20 289
2018-19 280
2017-18 272
2016-17 264
2015-16 254
2014-15 240
2013-14 220
2012-13 200
2011-12 184
2010-11 167
2009-10 148
2008-09 137
2007-08 129
2006-07 122
2005-06 117
2004-05 113
2003-04 109
2002-03 105
2001-02 100

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.

  Particulars
  Full Value of Consideration
Less Transfer Expenses
  Net 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)

Note:

  • 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

FAQs

What is the CII i.e. Cost Inflation Index for FY 2022-23?

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.

What is the CII i.e. Cost Inflation Index for FY 2021-22?

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.

How to calculate the Indexed Cost of Acquisition using CII?

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.

How to calculate Indexed Cost of Acquisition if the asset was purchased before 1st April 2001 i.e. FY 2001-02?

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.

Capital Gain Tax on Sale of Property/Land

Immovable Property or Land is considered to be a Capital Asset as per the Income Tax Act. A taxpayer who sells an immovable property or land should report such income or loss as Capital Gains it in the Income Tax Return and pay tax on it at the applicable rate. Capital Gain Tax on sale of property or land is determined on the basis of the nature of the capital gain. long term or short term. While the STCG on sale of immovable property is taxable at slab rates, the LTCG on sale of immovable property is taxable at 20% with indexation benefit under Section 112 of Income Tax Act.

Capital Gain Tax on Sale of Property / Land

Capital Gain can be of two types depending on the period of holding of the capital asset.

  1. Long Term Capital Gain (LTCG): If the taxpayer sells an immovable property or land held for more than 24 months, gain or loss on such sales is a Long Term Capital Gain (LTCG) or Long Term Capital Loss (LTCL).
  2. Short Term Capital Gain (STCG): If the taxpayer sells an immovable property or land held for up to 24 months, gain or loss on such sale is a Short Term Capital Gain (STCG) or Short Term Capital Loss (STCL).
The holding period for immovable property i.e. land, building and house property was 36 months up to FY 2016-17. However, the period of holding is reduced to 24 months FY 2017-18 onwards.
Tip
The holding period for immovable property i.e. land, building and house property was 36 months up to FY 2016-17. However, the period of holding is reduced to 24 months FY 2017-18 onwards.

Income Tax on Sale of Immovable Property

Income Tax on the sale of immovable property i.e. land, building, or house property is similar to the tax treatment of other capital assets.

Calculation of Long Term Capital Gain tax on sale of property in India

As per Section 112 of the Income Tax Act, LTCG on the sale of immovable property in India is taxable at 20% with an indexation benefit. To take the indexation benefit, the taxpayer can calculate the indexed cost of the acquisition using Cost Inflation Index i.e. CII to compute the long term capital gain. The cost of Improvement is the expense incurred by the taxpayer for making addition or improvements to the capital asset. The taxpayer can also calculate the Indexed Cost of Improvement using the CII.

  Particulars Amount
  Sale Consideration XXXX
Less Transfer Expenses (XXXX)
Less Indexed Cost of Acquisition (XXXX)
Less Indexed Cost of Improvement (XXXX)
Less Exemption u/s 54 to 54GB (XXXX)
  Long Term Capital Gain XXXX
  • Sale Consideration = In the case of immovable property, as per Section 50C of Income Tax Act, sale consideration should be the sale value of capital asset or value adopted by stamp duty valuation authority whichever is higher.
  • Transfer Expenses = expenses incurred exclusively for the sale of the capital asset.
  • Indexed Cost of Acquisition = Cost of Acquisition * (CII of year of Sale / CII of year of Purchase)
  • Indexed Cost of Improvement = Cost of Improvement * (CII of year of Sale / CII of year of Improvement)
  • Capital Gain Exemption – Taxpayer can claim capital gain exemption under Section 54 to 54GB on fulfilling the specified conditions.

Calculation of Short Term Capital Gain tax on sale of property in India

The Short Term Capital Gain on the sale of immovable property is taxable as per the slab rates. There is no indexation benefit in the case of a Short Term Capital Gain. Further, the capital gain exemption under Section 54 to 54GB is also not available. Thus, the Capital Gain is calculated on the basis of the cost of acquisition, cost of improvement, and transfer expenses.

  Particulars Amount
  Sale Consideration XXXX
Less Transfer Expenses (XXXX)
Less Cost of Acquisition (XXXX)
Less Cost of Improvement (XXXX)
  Short Term Capital Gain XXXX

Capital Gains on Sale of Property before Possession

Many times the taxpayer will sell the immovable property before receiving the possession of the same. Let’s understand the treatment of capital gains in that situation.

You have booked a property that is still under construction. So essentially you have acquired the rights for the under-construction property and not the property itself. Now before the construction completes, you want to sell the rights. Now the first question that comes to your mind is how do I calculate the capital gains for the same and what would be my tax liability?

Example

Darshil paid INR 20 Lakh on 01/01/2012 to book a house in a housing scheme. The scheme will give possession of the property on 01/01/2016. Darshil finds a better scheme and wants to sell the rights in this scheme. The taxability of the capital gains will depend on the time gap between the date of booking of the property and the date of agreement to transfer the rights in the under-construction property.

Various Situations

  1. If Darshil transfers the rights before 01/01/2015
    • Then it will result in short term capital gains since the holding period is less than 36 months.
    • Indexation benefit is not applicable
    • The capital gains will be taxable at the normal slab rate applicable to the individuals.
    • Since it will be short term capital gains, no capital gain exemption is available to save the capital gains tax on property.
  2. If Darshil transfers the rights after 01/01/2015
    • Then it will result in long term capital gains since the holding period is more than 36 months
    • Indexation benefit is applicable to the amount payable to the builder, stamp duty, and also registration fees.
    • The capital gains will be taxable at 20%
    • Since it will be long term capital gains, the exemption under Section 54F and Section 54EC will be available.
    • You can not claim the exemption under Section 54 because the exemption is for the purchase of new residential property against the sale of existing residential property. Here what you are selling is a right to acquire a residential house and not the residential house itself. Many people treat the sale of an under-construction property at par with a residential house for the purpose of claiming long term capital gain exemption which is incorrect and the taxpayer may receive a scrutiny notice.

Set Off & Carry Forward Loss on Sale of Immovable Property

  • The loss on sale of an immovable property held for more than 24 months is a Long Term Capital Loss. As per the income tax rules for set off and carry forward of losses, the taxpayer can set off Long Term Capital Loss (LTCL) against Long Term Capital Gain (LTCG) only. They can carry forward the remaining loss for 8 years and set off against LTCG only.
  • The loss on sale of an immovable property held for up to 24 months is a Short Term Capital Loss. The taxpayer can set off Short Term Capital Loss (STCL) against both Short Term Capital Gain (STCG) and Long Term Capital Gain (LTCG). They can carry forward the remaining loss for 8 years and set off against STCG and LTCG only.

ITR Form & Due Date for Income from Sale of Immovable Property

  • ITR Form: The taxpayer should file ITR-2 (ITR for Capital Gains Income) on Income Tax Website since income on the sale of immovable property such as land, building, or house property is Capital Gains.
  • Due Date – 31st July of the Assessment Year
    • Up to FY 2019-20 – 31st July
      31st July – for taxpayers to whom Tax Audit is not applicable
      30th September – for taxpayers to whom Tax Audit is applicable
    • FY 2020-21 Onwards
      31st July – for taxpayers to whom Tax Audit is not applicable
      31st October – for taxpayers to whom Tax Audit is applicable
  • Tax Audit: Since the income on the sale of unlisted stock is a Capital Gains Income, the applicability of tax audit under Section 44AB need not be determined.

How to save capital gains tax on sale of immovable property?

To save STCG on sale of immovable property, the taxpayer can set off Short Term Capital Loss from any other capital asset against it. Further, since STCG on sale of immovable property is taxable at slab rates, the taxpayer can claim Chapter-VIA deductions too.

To save LTCG on the sale of immovable property, the taxpayer can set off Short Term Capital Loss or Long Term Capital Loss from any other capital asset against such LTCG. Further, since LTCG on sale of immovable property is taxable at a special rate of 20%, the taxpayer cannot claim Chapter-VIA deductions against it. Taxpayer can claim following capital gain exemptions to save capital gain tax on sale of residential property:

  • Section 54F – Exemption on sale of residential house property on investment in another residential house property.
  • Section 54GB – Exemption on sale of residential house property on investment in equity shares of an eligible company.

Further, taxpayer can claim following capital gain exemptions to save capital gain tax on sale of immovable property:

  • Section 54EC – Exemption on sale of land or building on investment in NHAI/REC bonds.
  • Section 54EE – Exemption on sale of any long-term capital asset on investment in units of a specified fund.

A taxpayer can claim the exemption by reinvesting the sale proceeds into a specified capital asset to lower the capital gains and save taxes. The taxpayer must hold the new asset for the specified period as per relevant section. However, if he/she sells the asset before specified time period, they must report it as income in the relevant financial year and pay tax at applicable rate. The taxpayer has an option to open an account under Capital Gains Account Scheme and park sale proceeds in it until they invest in specified asset to claim the exemption.

Capital Gain Tax on Sale of Inherited Property

When a taxpayer receives a property as inheritance, it is not taxable for the receiver. However, when the taxpayer sells such property, it is taxable as Capital Gains. Below are the steps to calculate Capital Gains tax on sale of inherited property:

  • STCG = Sale Consideration – Transfer Expenses – Cost of Acquisition – Cost of Improvement
  • LTCG = Sale Consideration – Transfer Expenses – Indexed Cost of Acquisition – Indexed Cost of Improvement

The taxpayer must note the following for calculating Capital Gains:

  • Period of Holding to determine STCG or LTCG would be from the date of purchase by the previous owner
  • Cost of Acquisition would be the cost of the previous owner
  • Indexed Cost of Acquisition would be computed based on the year of acquisition of the previous owner

FAQs

How do you calculate long term capital gains on the sale of immovable property?

Income from sale of immovable property after 24 months of purchase is a Long Term Capital Gain taxable at 20% with benefit of indexation. In case of LTCG, the taxpayer should calculate Indexed Cost of Acquisition using Cost Inflation Index (CII) issued by income tax department to compute the LTCG.
LTCG = Sale Consideration – Expenses – Indexed Cost of Acquisition – Indexed Cost of Improvement

How can I save capital gains tax on the sale of immovable property?

You can claim capital gain exemption on investment in a specified asset and on fulfilling the specified sections. To save tax on Long Term Capital Gains from the sale of immovable property, the taxpayer can claim an exemption under Section 54, Section 54EC, Section 54EE, or Section 54GB of the Income Tax Act. These exemptions are not available for Short Term Capital Gains.

How to calculate tax on sale of inherited property?

The property received as inheritance is not taxable in the hands of the receiver at the time of inheritance. However, when the taxpayer sells the inherited property, it is taxable as capital gains. To calculate the capital gain, cost of acquisition is taken as cost to previous owner. The period of holding is calculated from the date of purchase of the previous owner.