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]