Cost Inflation Index |Income Tax Department

  • The Central Board of Direct Taxes of the Government of India, Department of Revenue of Ministry of Finance, issued in the Government gazette Exceptional Notice No. 73/2021-Income Tax Dated 15th June 2021 the CII for the Budget Year 2021-22, that is 317.

 

  • Annually, the Central Government publishes a notice in the Official Gazette announcing the price of the inflation index. As a result, the purchasing price will be indexed using the appropriate rates for the corresponding year. Long-term capital gain is mostly calculated using the Cost of Inflation Index.

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The Definition of Cost Inflation Index

 

This is an index that is used to estimate the inflation-adjusted rise in the value of assets. When it comes to the cost inflation rate, there really are two main factors to consider.

 

Primarily, this value will indeed be utilized to determine inflation-adjusted prices just for those commodities wherein inflation-adjusted (indexation benefit) is permitted. As a result, the Cost Inflation Index worth cannot be utilized to calculate Long Term Capital Gains Tax/Long-Term Capital Losses on equity mutual funds since any sum beyond Rs 1 lakh each fiscal year is taxed at a higher rate.

 

Furthermore, this Cost Inflation Index amount will be needed to compute Long Term Capital Gains Tax for FY 2020-21 for commodities wherein indexation is permitted prior to the imposition of the LTCG levy. You must pay the taxes on such profits when you file your income tax returns (ITR) for FY 2020-21. 

 

How to evaluate Cost Inflation Index

 

Cost Inflation Index of the year of selling/Cost Inflation Index of the year of buying) * Real cost pricing is the formula for calculating inflation-adjusted cost price.


Below is a table that tells you about the Cost Inflation Index chart Numbers over the years.

 

Financial Year

Cost Inflation Index (CII)
2021-2022 317
2020-2021 301
2019-2020 289
2018-2019 280
2017-2018 272
2016-2017 264
2015-2016 254
2014-2015 240
2013-2014 220
2012-2013 200
2011-2012 184
2010-2011 167
2009-2010 148
2008-2009 137
2007-2008 129
2006-2007 122
2005-2006 117
2004-2005 113
2003-2004 109
2002-2003 105
2001-2002 (Base year) 100

 

Because of the problems experienced by people who pay taxes in obtaining essential data, the government declared in the Interim budget for the year 2017 that the foundation year will be shifted from 1981 to 2001. When an item is purchased prior to April 1st, 2001, the asset's price is calculated using the fair market valuation on April 1st, 2001.

 

How Can Cost Inflation Index Help You Save Money on Taxes?

 

Cost of Inflation Index allows you to save a significant portion of income taxes on the long-term capital growth resulting from the sale of your commodity. However, short-term capital gains and losses are not eligible for the indexation. Non-Resident Indians are likewise not eligible for this advantage.

Just if you satisfy the required requirements, may you get indexation for long-term capital gains:

 

  1. The commodity's purchase price must be multiplied by that of the rate of inflation in the year it was moved.
  2. This amount is then multiplied by the cost inflation index during the year the commodity was purchased.
  3. If the commodity was bought before 1981, the 1981 cost inflation rate must be factored into the equation.
  4. If you have made some significant improvements to the commodity, double the cost inflation rate by the Cost Inflation Index(CII) of the year in which the modifications were done.

 

What is the Cost Index Inflation's Intent?

 

The long-term capital gains from a transaction or purchase of a capital commodity are calculated using a Cost Inflation Index table. The profits made through the sale or transfer of any financial assets, such as lands, properties, stock, shares, copyrights, and patents, are referred to as capital benefits. Long-term capital commodities are frequently documented in records at their market rates in accountancy. As a result, capital commodities cannot be reevaluated despite growing asset values.



As a result, whenever these assets are sold, then the gain or benefit realized stays high due to its higher selling cost than its acquisition cost. Consequently, people who assess must pay a higher rate of income tax on these commodities' profits.

When the Cost Inflation Rate is used for capital gains, the acquisition cost of commodities is changed according to their selling price over time, resulting in smaller earnings and lower-income tax amounts.

 

In Feb 2018, the Central Board of Direct Taxes announced fresh Cost Inflation Rating statistics for the 2017-18 fiscal year. The original baseline year of 1981 was replaced with 2001 in this edition, with 100 as the Cost Inflation Index. Following years' indexes were likewise adjusted correspondingly.

This change in the base year was made in response to people who pay taxes difficulty in calculating the tax due on profits on capital assets bought on or before 1981.

 

What Does a Cost Inflation Index Baseline Year Imply?

 

The baseline year is the index's initial year, with a value of 100. The following indexation of decades after the baseline year is conducted according to the baseline year to ensure that the inflation rate does not grow.

People who assess can use the greater of their Fair Market Valuation and the actual price of the property on the first day of the baseline year to calculate their sales price for commodities bought before the Cost Inflation Index baseline year. The indexation advantage is then added to the computed asset acquisition cost. On the other side, Fair Market Value is derived using a licensed valuer's financial analysis for the commodity.

 

India's GDP and inflation rate

 

Inflation is characterized by an increase in the cost of the commodity over a duration of time, as compared to deflation, which is described as a drop in the value of similar items. Inflation is a key measure of a country's economic health. Inflation is a measure or rate at which costs, products, and services in an economy grow on average and how this impacts the cost of living of individuals who live in that country.

 

It has an impact on interest rates spent on deposits and mortgages, as well as the amount of government pay and benefits earned. For instance, a 5% increase in interest rates in 2011 might indicate that a person would have to pay 5% more on items than he would have been in 2010.

 

Over the previous ten years, India's inflation rate has risen. Until 2010, nevertheless, it has been declining mildly. On the other hand, India's economy has been performing admirably for years, with its Gross Domestic Product constantly expanding and its national debt falling. With a government shortfall of much more than 10% of the Economy, the financial account in proportion with the Gross domestic product does not appear to be in good shape.

 

FAQs Related to the Cost Inflation Index

 

What is the purpose of the Cost Inflation Index?

 

The Cost Inflation Index is used to correlate pricing to the rate of inflation. To put it another way, if the inflation rate rises with time, prices would rise as well.

 

Who is the Cost Inflation Index notified by?

 

The cost inflation index is set by the central government and published in the gazette notification.

The Cost Inflation Index is equal to 75% of the median increase in the Consumer Price Index* (urban) for the previous year.

*To estimate the rise in cost, the Consumer Price Index compares the current price of a basket of goods and services (which represents the economy) to the expense of the same set of goods and services the prior years.

 

Why was the Cost Inflation Index's base year changed from 1981 to 2001?

 

The baseline year was originally set at 1981-82. However, taxpayers were having difficulty obtaining valuations for homes acquired before April 1, 1981. The value reports were also becoming difficult to trust for tax officials. As a result, the government decided to change the base year to 2001 in order to make appraisals more efficient and precise. To take advantage of indexation, taxpayers can use the higher actual cost or FMV as of April 1, 2001, as the sales price for a capital item bought before April 1, 2001.

 

Is it possible to employ CII for depreciable assets such as plants and machinery?

 

Any financial gain or loss coming from the transfer of a depreciable asset, such as Plant and Machinery, that is composed of a block of assets, will be considered as a short-term capital gain or loss, with no indexation advantage possible.

 

What are the four different kinds of inflation?

 

Creeping, strolling, galloping, and hyperinflation are the four forms of inflation.

 

How to calculate the CII of a property?

 

The indexed cost is calculated using the following formula:

[(Total cost) x (index of the selling year)] % (index year of acquisition) 

(Cost multiplied by (Index for the year of sale/Index for the year of acquisition)).

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