Cost-inflation-index

-Rachana Anup / 08-Apr-2019

The prices of goods are getting higher but the value for money is going down. Ever wondered why? It’s because of the fall in the purchasing power which again brings down the value of money. Goods that were sold at Rs. 50 before 10 years are sold at Rs. 100 today.

These results are often calculated based of the cost inflation index set by central government as notified by Central Board of Direct Taxes (CBDT). Inflation also brings down the purchasing power of nation’s currency.

To be specific, Inflation means the sustained increase in the price of goods and services over a period of time.

What is Cost Inflation Index (CII):

CII is an index used to calculate the effect of inflation by calculating the estimated increase in the capital assets or goods year after year.

Why is the Cost Inflation Index calculated?

As the Inflation rate increases, the price increases. CII is used to measure this price of inflation and calculate the long term capital gains to determine the actual value or sale of capital asset.

Cost Inflation Index from Financial Year 2001-02 to 2018-19:

Sl. No.	Financial Year	Cost Inflation Index
1	2001-02	100
2	2002-03	105
3	2003-04	109
4	2004-05	113
5	2005-06	117
6	2006-07	122
7	2007-08	129
8	2008-09	137
9	2009-10	148
10	2010-11	167
11	2011-12	184
12	2012-13	200
13	2013-14	220
14	2014-15	240
15	2015-16	254
16	2016-17	264
17	2017-18	272
18	2018-19	280

Source: incometaxindia

Cost Inflation Index from Financial Year 2001-02 to 2018-19:

Financial Year	Cost Inflation Index	Financial Year	Cost Inflation Index
1981-1982	100	1999-2000	389
1982-1983	109	2000-2001	406
1983-1984	116	2001-2002	426
1984-1985	125	2002-2003	447
1985-1986	133	2003-2004	463
1986-1987	140	2004-2005	480
1987-1988	150	2005-2006	497
1988-1989	161	2006-2007	519
1989-1990	172	2007-2008	551
1990-1991	182	2008-2009	582
1991-1992	199	2009-2010	632
1992-1993	223	2010-2011	711
1993-1994	244	2011-2012	785
1994-1995	259	2012-2013	852
1995-1996	281	2013-2014	939
1996-1997	305	2014-2015	1024
1997-1998	331	2015-2016	1081
1998-1999	351	2016-2017	1125

Source: incometaxindia

The above Index Table is important and it can be used to calculate long term capital gains of any asset.

Why the revision from 1981 to 2001?

Problems arose when tax players started facing difficulties in getting their properties valued that were purchased prior to April, 1981. Changing the base year also helped tax authorities to value the property faster and better. Also, as per the change, tax payers can take higher CII value as of April 2001 even if the property was brought before the base year 2001 helping the benefits of indexation.

Practical examples of how Indexed Cost of Acquisition and capital gain are calculated using CII?

Indexed Cost of Acquisition = Original price * (CII for year in which the asset was sold / CII of the year in which asset was originally bought or acquired)

Say, if the property was purchased in 2004 for Rs. 5,00,000 and sold for Rs. 20,00,000 in 2016 Indexed Cost of Acquisition is calculated as follows.

In this case, Indexed Cost of Acquisition =5,00,000*254/113

= 5,00,000 * 2.24

Hence, Indexed Cost of Acquisition = Rs. 11,23,893.80

And, Capital Gain = 20,00,000-11,23,893

Capital Gain = Rs. 8,76,106

Capital gain here is the profit made by selling an asset. Simply put, it’s the gain that arises from the capital asset or the property when it is sold. Greater the Capital gain, higher the worth of the asset.