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What Is the Cost Inflation Index? Purpose, CII Value, & Calculation Process Explained

Cost Inflation Index evaluates the increase in the value of assets, including lands, buildings, etc., due to inflation. During computation of CII, a in the Consumer Price Index for urban non-manual employees for the previous year is considered. Keep reading to know more vital aspects associated with it!

What Is the Purpose of the Cost Inflation Index?

The primary purpose of the Cost Inflation Index is to adjust the value of an asset with the inflation rate. To understand this, let's take an example-

Suppose Mr Singh purchased a house worth ₹ 20,00,000 in FY 2016-2017 and sold it for ₹ 30,00,000 in FY 2021-2022. The capital gains arising from selling the house amount to ₹ 10,00,000. Now, Mr Singh may find the house's selling price inappropriate given the inflationary impact on its market value over the years. However, the selling value of this house will differ with each buyer.

Thus, to avoid this confusion, the Central Board of Direct Taxes issues this Cost Inflation Index every fiscal year and is presented in the Budget. CII assists individuals in receiving appropriate capital gains given the appreciation in the value of an asset because of inflation.

What Is the New and Old Cost Inflation Index?

Take a look at the following table of cost inflation index, divided into new and old CII:

New Cost Inflation Index

Fiscal Years Cost Inflation Index
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 100

[Source]

Old Cost Inflation Index

Fiscal Years Cost Inflation Index
2016–2017 1125
2015-2016 1081
2014-2015 1024
2013-2014 939
2012-2013 852
2011-2012 758
2010-2011 711
2009-2010 632
2008-2009 582
2007-2008 551
2006-2007 519
2005-2006 497
2004-2005 480
2003-2004 463
2002-2003 447
2001-2002 426
2000-2001 406
1999-2000 389
1998-1999 351
1997-1998 331
1996-1997 305
1995-1996 281
1994-1995 259
1993-1994 244
1992-1993 223
1991-1992 199
1990-1991 182
1989-1990 172
1988-1989 161
1987-1988 150
1986-1987 140
1985-1986 133
1984-1985 125
1983-1984 116
1982-1983 109
1981-1982 100

[Source]

How to Calculate Cost Inflation Index?

Calculation of Cost Inflation Index is simple using the following formula-

Cost Inflation Index = Cost Inflation Index of the financial year in which the asset was sold/Cost Inflation Index of a financial year in which the asset was purchased.

Let's understand the concept of CII with the help of an example-

Mr Alok purchased a house worth ₹ 30,00,000 in FY 2017-2018. He sold it in FY 2021-2022 for ₹ 45,00,000. The long-term capital gain amounts to ₹ 15,00,000.

Then, the calculation is as follows:

Particulars CII Value
CII of Purchasing year 272
CII of Selling Year 317
Cost Inflation Index (317/272) 1.16

[Source]

How Is the Indexation Benefit Applied to Long-Term Capital Assets?

When the cost inflation index is used to calculate income tax, indexation is applied to an asset's acquisition or purchasing cost to get the indexed acquisition cost. This is an inflation-adjusted value of an asset.

The formula to get indexed acquisition cost is-

Indexed acquisition cost = Purchasing cost of an asset x cost Inflation Index.

Thus the calculation is illustrated in the table mentioned below following the similar example stated above-

Particulars Amount
Purchasing cost ₹ 30,00,000
CII 1.16
Indexed acquisition cost (₹ 30,00,000 x 1.16) ₹ 34,80,000

As can be seen, the indexation method can help one inflate an asset's acquisition cost. Now, to arrive at a long-term capital gain after indexation, individuals need to use the following formula –

Long term capital gains = Selling price of an asset – indexed cost of acquisition- indexed cost of improvement if any

Thus, the calculation is illustrated in the table mentioned below following the similar example stated above–

Particulars Amount
Selling price ₹ 45,00,000
Indexed acquisition cost ₹ 34,80,000
LTCG (₹ 45,00,000 - ₹ 34,80,000) ₹ 10,20,000

[Source]

How to Reduce Tax Liabilities on Long Capital Gains Using CII?

Considering the similar example mentioned above, if Mr Alok uses the indexation method, he needs to pay a tax rate of 20% on long term capital gains. Then, the tax payable towards LTCG is –

Particulars Amount
Long term capital gains ₹ 10,20,000
Tax rate charged 20%
Tax payable towards LTCG (₹ 10,20,000 x 20%) ₹ 2,04,000

If Mr Alok does not calculate LTCG using the indexation method, he needs to pay 10% plus applicable surcharge on ₹ 15,00,000 (LTCG without indexation). Then, the tax payable towards LTCG is:

Particulars Amount
Long term capital gains (selling price – acquisition cost) ₹ 15,00,000
Tax rate charged 10%
Tax payable towards LTCG (₹ 15,00,000 x 10%) ₹ 1,50,000

The assessee can use indexation whenever it is beneficial for him or her. [Source]

Knowing about the cost inflation index and other vital information associated with it will streamline the process for taxpayers to calculate long term capital gains. Moreover, it will help them reduce their tax liabilities, and they can reinvest the savings in tax payments in other financial instruments.

Frequently Asked Questions

Can the Cost Inflation Index be used to calculate short-term capital gains?

No, Cost Inflation Index is not used to calculate short-term capital gains or losses. [Source]

an an NRI use CII while computing long-term capital gains?

Yes, NRIs can use CII while computing long term capital gains. [Source]

Is indexation benefit available on equity-oriented mutual funds and equity shares?

No, indexation benefit is not available on equity-oriented mutual funds and equity shares whose capital gains are above ₹ 1,00,000 and are taxable at a flat rate of 10%.

[Source]