Prices of goods/products rise over time, which leads to a fall in buying power of money. This means if 2 units of goods can be purchased for Rs 200 today, tomorrow just 1 unit may be available for Rs 200 owing to inflation. CII or Cost Inflation Index is considered here to calculate the rise in prices of goods yearly owing to inflation.
What is CII?
CII or Cost Inflation Index is used to calculate the estimated yearly rise in the asset price due to inflation. The inflation adjusted price is then used for arriving at the long-term capital gains (LTCG) or long-term capital losses. Note that CII number is used for calculating the inflation adjusted price of the assets like building, land, house, debt mutual funds, gold jewelry etc. However, it cannot be used for the equity mutual funds or equity shares as their gains are taxable at 10% rate with zero indexation benefit.
By using the Cost Inflation Index calculator, a kind of income tax calculator, you can know your long-term capital gains on which you are required to pay taxes. Tax on LTCG can be paid either by way of advance tax in 4 instalments or before filing the ITR by way of self-assessment tax. The need to pay the advance tax or self-assessment tax arises if the asset buyers do not deduct their full tax payable.
Purpose of CII
Cost inflation index tables are used for calculating the LTCG from sale or transfer of capital assets. Capital gain is the profit gained from transfer/sale of capital assets like property, land, trademarks, shares, patents etc. In accounting, generally LTCG is recorded at cost price in the books. Thus, despite the increasing asset prices, such capital assets cannot be revalued. It means, at the sale time of such assets, the gain or profit obtained from them stays high owing to their high sale price as compared to their buying price. As an outcome, assessees are required to pay higher income tax on gain from such assets. With CII application for capital gain, in the long run, buying prices of the assets are adjusted as per their sale price, which results in reduced profits and lower tax amount.
The Central Government of India fixes the index and releases it in their official gazette for measurement of the inflation. The index notified every year as per the Government is defined under the Section 48 of the IT Act, 1961.
How is CII calculated?
Formula to calculate the inflation adjusted cost price = (CII of the sale year/ CII for purchase year) X Actual cost price. This can also be calculated using a CII calculator available online. It is a type of income tax calculator used to derive LTCG on which you need to pay taxes.
Here is a table showing CII number since 2001 – 2002 (base year)
|Financial Year||CII Number|
|2001 – 2002||100|
|2002 – 2003||105|
|2003 – 2004||109|
|2004 – 2005||113|
|2005 – 2006||117|
|2006 – 2007||122|
|2007 – 2008||129|
|2008 – 2009||137|
|2009 – 2010||148|
|2010 – 2011||167|
|2011 – 2012||184|
|2012 – 2013||200|
|2013 – 2014||220|
|2014 – 2015||240|
|2015 – 2016||254|
|2016 – 2017||264|
|2017 – 2018||272|
|2018 – 2019||280|
|2019 – 2020||289|
|2020 – 2021||301|
|2021 – 2022||317|
Note that in the budget 2017, the Indian government announced shifting of the base year to 2001 from 1981 owing to the trouble faced by taxpayers in finding out the relevant info. In the case of assets bought before 1st April 2001, the cost at which the asset is acquired is taken as a fair market value as on 1st April 2001.
How are the indexation benefits applied to long-term capital assets?
When indexation benefits are applied to the cost of acquisition of capital assets, it is called ‘indexed cost of acquisition’.
Indexed cost of acquisition = CII of sale/transfer year X acquisition cost/CII for 1st year when asset was held by the holding asset period or the year 2001-02 (whichever is later)
Indexed cost of improvement = CII of sale/transfer year X asset improvement cost / CII for the year when the asset improvement happened
Practical examples of indexation application on long term capital assets
Mr. X purchased a capital asset in FY 1994-95 for Rs 1 lakh. FMV (Fair Market Value) for the capital asset as on 1st April 2001 was Rs 2.20 lakh. Mr. X proceeded to sell off the asset in FY 2015-16.
Solution: As the asset is bought before the base year, the acquisition cost = Higher of FMV or actual cost on 1st April 2001 i.e., Rs 2.20 lakh. The CII for 2001-02 and 2015-16 is 100 and 254, respectively.
Thus, the indexed cost of acquisition = 2.20 lakh X 254/100 = Rs 5.58 lakh approx.
At the time of IT returns filing, this CII number is useful to ascertain LTCG on which you require paying taxes. Note that, while there are changes in the ITR forms linked with new tax regime, reporting of ESOPs, dividend taxation etc., in consideration to the types of ITR forms the number is still 7.