Prices of goods increase over time, resulting in a fall in the purchasing power (quantity of goods that one unit of money can buy) of money. If two units of goods could be bought for Rs 100 today, tomorrow only one unit might be available for Rs 100 due to inflation. The Cost Inflation Index (CII) is used to estimate the increase in the prices of goods and assets year-by-year due to inflation.
The Cost Inflation Index (CII) for the financial year 2023-24 is 348.
What is Cost Inflation Index?
A Cost Inflation Index table is used to calculate the long-term capital gains from a capital asset transfer or sale. The profit earned through the sale or transfer of any capital asset, such as land, property, stocks, shares, trademarks, patents, and so on, is referred to as capital gain.
Long-term capital assets are typically documented in books at their cost price. As a result, despite growing asset prices, these capital assets cannot be revalued.
As a result, when these assets are sold, the profit or gain obtained from them remains high due to their high sale price in relation to their acquisition price. As a result, assessees must pay a greater income tax on these assets' gains.
In the long run, the application of the Cost Inflation Index for capital gain adjusts the purchase price of assets based on their sale price, resulting in smaller earnings and a lower tax amount.
Cost Inflation Index Table from FY 2001-02 to FY 2023-24
| Financial Year | Cost Inflation Index (CII) |
| 2001-02 (Base year) | 100 |
| 2002-03 | 105 |
| 2003-04 | 109 |
| 2004-05 | 113 |
| 2005-06 | 117 |
| 2006-07 | 122 |
| 2007-08 | 129 |
| 2008-09 | 137 |
| 2009-10 | 148 |
| 2010-11 | 167 |
| 2011-12 | 184 |
| 2012-13 | 200 |
| 2013-14 | 220 |
| 2014-15 | 240 |
| 2015-16 | 254 |
| 2016-17 | 264 |
| 2017-18 | 272 |
| 2018-19 | 280 |
| 2019-20 | 289 |
| 2020-21 | 301 |
| 2021-22 | 317 |
| 2022-23 | 331 |
| 2023-24 | 348 |
How is Cost Inflation Index used in Income Tax?
Long-Term Capital Assets are recorded at cost price in books. Despite increasing inflation, they exist at the cost price and cannot be revalued. When these assets are sold, the profit amount remains high due to the higher sale price as compared to the purchase price. This also leads to a higher income tax.
The cost inflation index is applied to the long-term capital assets, due to which purchase cost increases, resulting in lesser profits and lesser taxes to benefit taxpayers. To benefit the taxpayers, the cost inflation index benefit is applied to the long-term capital assets, due to which purchase cost increases, resulting in lesser profits and lesser taxes.
What is the concept of the base year in Cost Inflation Index?
The base year is the first year of the cost inflation index and has an index value of 100. The index of all other years is compared to the base year to see the increase in inflation percentage. For any capital asset purchased before the base year of the cost inflation index, taxpayers can take the purchase price higher of the “actual cost or Fair Market Value (FMV) as on the 1st day of the base year. Indexation benefit is applied to the purchase price so calculated. FMV is based on the valuation report of a registered valuer.
Why is Cost Inflation Index calculated?
The Cost Inflation Index is calculated to match the prices to the inflation rate. In simple words, an increase in the inflation rate over time will lead to a rise in prices.
Who notifies the Cost Inflation Index?
The Central Government specifies the cost inflation index by notifying in the official gazette.
Cost Inflation Index = 75% of the average rise in the Consumer Price Index* (urban) for the immediately preceding year.
*Consumer Price Index compares the current price of a basket of goods and services (which represent the economy) with the cost of the same basket of goods and services in the previous year to calculate the increase in prices.
Why is the base year of Cost Inflation Index changed to 2001 from 1981?
Initially, 1981-82 was considered as the base year. But, taxpayers were facing hardships in getting the properties valued which were purchased before 1st April 1981. Tax authorities were also finding it difficult to rely on the valuation reports. Hence, the government decided to shift the base year to 2001 so that valuations can be done quickly and accurately.
So, for a capital asset purchased before 1st April 2001, taxpayers can take higher of actual cost or FMV as on 1st April 2001 as the purchase price and avail benefit of indexation. You can read the detailed benefits of the change in the base yearhere.
How is indexation benefit applied to long-term capital assets?
When the indexation benefit is applied to “Cost of Acquisition” (purchase price) of the capital asset, it becomes “Indexed Cost of Acquisition”.
Points to Ponder
- In case of property received in the will, CII has to be taken for the year in which the property is received. The actual purchase year of the property has to be ignored.
- Ignore the improvement cost incurred before 1stApril 2001.
- Index benefit is not allowed in the case of bonds or debentures exceptcapital indexation bonds or sovereign gold bonds issued by RBI.
- Starting 1st April 2023, indexation benefit is not available for Debt Funds.
Practical Examples
Case 1: Rahul purchased a flat in FY 2001-02 for Rs. 10,00,000. He sells the flat in FY 2017-18. What will be the indexed cost of acquisition?
In this case, CII for the year 2001-02 and 2017-18 is 100 and 272 respectively.
Hence, the indexed cost of acquisition = 10,00,000 x 272/100 = Rs. 27,20,000
Case 2: Shivani purchased a capital asset in FY 1995-1996 for Rs. 2,00,000. FMV of the capital asset on 1st April 2001 was Rs. 3,20,000. She sells the asset in FY 2016-17. What is the indexed cost of acquisition?
Here, the asset is purchased before the base year.
Hence the cost of acquisition = Higher of the actual cost or FMV on 1st April 2001. i.e. cost of acquisition = Rs. 3,20,000.
CII for the year 2001-02 and 2016-17 is 100 and 264 respectively.
Indexed cost of acquisition = 3,20,000 x 264/100 = Rs. 8,44,800
Case 3: Gita has purchased equity shares of Rs.1,00,000 on 1st March 2015 and sells the shares on 1st April 2020. What will be the indexed cost of acquisition?
CII for the year of purchase FY 2014-15 is 240 and
for the year of sale 2020-21 is 301
Hence, indexed cost of acquisition = Rs.1,00,000 x 301/240 = Rs.1,25,416
Case 4: Harish has purchased Sovereign Gold Bonds (SGB) in November 2015 at Rs 2,00,000. The Bonds were prematurely withdrawn (after 5 years but before maturity) at the existing market price of Rs 2,55,000 in January 2021. What will be the indexed cost of acquisition?
CII for the year of purchase FY 2015-16 is 254 and
for the year of redemption FY 2020-21- is 301
Hence, indexed cost of acquisition = Rs. 2,00,000 x 301/254 = Rs. 2,37,007
FAQs on Cost Inflation Index
What does CII mean in the context of income tax?
In income tax, CII stands for Cost Inflation Index, which is used to assess the annual growth in the cost of goods and assets owing to inflation.
What is the cost inflation index for the fiscal year 2022-23?
In 2022-23, the cost inflation index is 331.
What is the cost inflation index for the fiscal year 2023-24?
Cost inflation index for the financial year 2023-24 is 348. The CBDT notified this on 10 April 2023 vide Notification No. 21/2023.
When was India's Cost Inflation Index introduced?
The Cost Inflation Index was first introduced in India in 1981.
What is the formula for calculating the cost of indexation?
The indexation cost is calculated as (Index for the year of sale/Index for the year of purchase) x cost.
What will the cost of inflation be in 2022?
In 2022, the cost of inflation is 8.3%.
What is the Cost of Inflation Index for the fiscal year 2021-22?
The cost inflation index for the fiscal year 2021-22 is 301.
What does CII mean in the context of income tax?
In income tax, CII stands for the Cost Inflation Index, which is used to assess the annual growth in the cost of goods and assets owing to inflation.
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Understanding the Cost Inflation Index (CII) and its Applications
-
Cost Inflation Index (CII):
- CII is a tool used to estimate the increase in the prices of goods and assets over time due to inflation.
- The CII for the financial year 2023-24 is 348.
-
Application in Income Tax:
- CII is crucial in calculating long-term capital gains from the sale or transfer of capital assets.
- Long-term capital assets are documented at cost price, and CII is applied to adjust the purchase price based on the sale price, reducing profits and subsequently lowering taxes.
-
Base Year in CII:
- The base year, in this case, is 2001-02, with an index value of 100.
- For assets purchased before this base year, taxpayers can consider the higher of the actual cost or Fair Market Value (FMV) as on the 1st day of the base year.
-
Calculation of CII:
- CII is calculated by the Central Government and is 75% of the average rise in the Consumer Price Index (urban) for the immediately preceding year.
- Consumer Price Index compares the current price of a basket of goods and services with the cost of the same basket in the previous year.
-
Shift in Base Year:
- The base year was changed from 1981 to 2001 to facilitate quicker and more accurate property valuations for assets purchased before April 1, 1981.
-
Indexation Benefit:
- Indexation benefit is applied to the purchase price of long-term capital assets, resulting in the "Indexed Cost of Acquisition."
- This helps reduce taxable profits and, subsequently, the income tax liability for taxpayers.
-
Practical Examples:
- Illustrated examples demonstrate how CII is applied in different scenarios, such as property sales, capital asset purchases, and the sale of bonds.
-
FAQs:
- Frequently Asked Questions provide additional clarity on terms like CII, the formula for calculating indexation, and specific details for the fiscal years 2022-23 and 2023-24.
In conclusion, the Cost Inflation Index plays a pivotal role in the realm of taxation, offering a mechanism to adjust for inflation and ensuring a fair assessment of capital gains. Its application is nuanced, impacting the financial landscape for both taxpayers and the government.
