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Cost Inflation Index
The cost inflation index is a tool used by taxpayers to help them pay capital gain arising out of a sale of an asset after adjusting for inflation.
What is the Cost Inflation Index?
Inflation is a measure of the rate at which the prices of a group of goods and services increase over a year. Typically, inflation, expressed in percentage, is determined by government agencies, taking into consideration the prices of a wide variety of goods and services in a particular year.
A cost inflation index is a derivative of inflation that can be used by all concerned while calculating their capital gains tax under the income tax rules formulated from time to time. Thus, the cost inflation index is a table created from a base year and updated every year using the government-declared inflation rate for that year.
Purpose of Cost Inflation Index
The purpose of CII is to help people calculate the real capital gains on their assets as opposed to a simple arithmetic calculation of capital gains.
For instance, with different asset classes like land and buildings, shares, stocks, patents and trademarks, there is a concept of capital gains in income tax, which is the difference between the cost of acquisition of an asset and the sale price.
For instance, a building could have been bought in the year 2001 and sold in the year 2024. While the cost of acquiring the building in 2001 could have been Rs 100 lakh, the same could have been sold for Rs 700 lakh in 2024. The difference is Rs 600 lakh, which is the capital gain and on this, income tax would have to be paid at the rates prevailing as per income tax rules. For instance, if the income tax rate is 20% for long-term capital gains tax, then people pay Rs 120 lakh as capital gains tax.
It is generally believed in India that the value of property increases year on year, and if people were to buy a similar building in 2024, the cost would be far higher than the Rs 100 lakh prevailing in 2001. Thus, in order to arrive at a reasonable valuation, the cost of acquisition is inflated by the inflation rate or a derivative of that inflation rate.
The CII for 2023-24 is 348. Using this in the example above, the cost of acquisition of Rs 100 lakh becomes Rs 348 lakh. Thus, the CII-applied capital gains would now be Rs 352 lakh (700 – 348 = 352). Thus, the CII-adjusted capital gains tax would be 20% of Rs 352 lakh, which is Rs 70.4 lakh.
This CII-adjusted cost of acquisition of Rs 352 lakh appears to be more realistic than the Rs 100 lakh paid in 2001. Therefore, the lower capital gains tax is a more rational one than the simple arithmetic one. Thus, the main purpose of using CII is to provide a more reasonable assessment of capital gains adjusted for inflation.
New Cost Inflation Index Table for the Financial Years
In a major change to the concept of CII, the Income Tax Act, 1961 was amended by the Finance Act, 2017 to revise the base year for the computation of capital gains. The base year was shifted from 1981-82 prevailing in the old cost inflation index chart or cost inflation index table, to 2001-02 under the new CII table. Under the amendment, an asset acquired before 01.04.2001 shall be allowed to be taken as fair market value as of 1st April 2001 and the cost of improvement shall include only those capital expenses which are incurred after 01.04.2001.
Thus, the new CII table was created in 2017, with the base year 2001-02 having an index of 100. The new CII table is as follows:
| Year | Index |
|---|---|
| 2001-02 | 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 |
| 2024-25 | 363 |
Old Cost Inflation Index Table
The CII concept was introduced in India in 1981, and a CII table was prepared based on the inflation declared by the union government.
The old cost inflation index chart was in operation from 1981-82 until 2016-17, with 1981-82 as the base year, with an index of 100.
The cost inflation index under the old table is as follows:
| Year | Index |
|---|---|
| 1981-82 | 100 |
| 1982-83 | 109 |
| 1983-84 | 116 |
| 1984-85 | 125 |
| 1985-86 | 133 |
| 1986-87 | 140 |
| 1987-88 | 150 |
| 1988-89 | 161 |
| 1989-90 | 172 |
| 1990-91 | 182 |
| 1991-92 | 199 |
| 1992-93 | 223 |
| 1993-94 | 244 |
| 1994-95 | 259 |
| 1995-96 | 281 |
| 1996-97 | 305 |
| 1997-98 | 331 |
| 1998-99 | 351 |
| 1999-2000 | 389 |
| 2000-01 | 406 |
| 2001-02 | 426 |
| 2002-03 | 447 |
| 2003-04 | 463 |
| 2004-05 | 480 |
| 2005-06 | 497 |
| 2006-07 | 519 |
| 2007-08 | 551 |
| 2008-09 | 582 |
| 2009-10 | 632 |
| 2010-11 | 711 |
| 2011-12 | 785 |
| 2012-13 | 852 |
| 2013-14 | 939 |
| 2014-15 | 1024 |
| 2015-16 | 1081 |
| 2016-17 | 1125 |
How is the Cost Inflation Index used in Income Tax?
Under current accounting practices, any long-term asset is accounted for at cost price without being revalued and stays the same despite inflation. This would create an unreasonably high profit when the asset is sold. Since capital gain is taxed at special rates, the taxes will be huge, causing a heavy burden on the taxpayer.
Therefore, a CII table is created using the inflation rate announced by the government. The Income tax authorities would then notify the updated table year after year for use by taxpayers.
What is the concept of the base year in the Cost Inflation Index?
The base year helps to keep the increase in inflation relative to the base year in perspective. To do this, the base year is always kept at 100. In the new CII table, the base year is 2001-02, with an index of 100.
The Income Tax Act also permits a concept of fair market value (FMV) for an asset purchased prior to 31 March 2001, as determined by a valuation report for the asset prepared by a registered valuer. The taxpayer is allowed to take the purchase price as the higher of the FMV or the actual cost as on the 1st day of the base year.
How to Calculate Cost Inflation Index?
The Central Board of Direct Taxes (CBDT), which is part of the Department of Revenue, a department of the Ministry of Finance in the Union government, calculates the CII and notifies the same in the Official Gazette.
It calculates the CII using 75% of the average Consumer Price Index (urban) (CPI) for the immediate previous year.
Why is the Cost Inflation Index calculated?
The CII is calculated to offer the taxpayer a more realistic cost of acquisition of the asset after adjusting for inflation.
How is indexation benefit applied to long-term capital assets?
The calculation of CII is performed using the CII table, the purchase price of the asset, year of purchase, FMV if the asset is purchased prior to 2001, the selling price of the asset and the year of sale.
Cost Inflation Index (CII) = CII for the year the asset was transferred or sold / CII for the year the asset was acquired or bought
FAQs
What does CII mean in the context of income tax?
In income tax, capital gain is a source of income which is derived from the sale of assets. The capital gain is arrived at by subtracting the cost of acquisition of the asset from the sale price of the asset.
However, since the asset could be acquired at any time in the past at a cost prevailing at the time of acquisition, accounting guidelines do not allow the revaluation of the cost of acquisition. Therefore, after a prolonged period of holding the asset, when the taxpayer sells the asset, it is bound to fetch a very high price, especially when it refers to an asset like real estate. In order to make things common for every taxpayer, the cost of acquiring the asset is indexed through the CII and this index is derived from the average inflation rate announced by the union government for the country.
The CII, therefore, helps the taxpayer to pay capital gain adjusted for inflation, which is common for all.
When was the Cost Inflation Index introduced in India?
The CII was introduced in India in 1981.
What is the formula for computing indexation cost?
The formula for computing the indexation cost is as follows:
Cost x Index for the year of sale / Index for the year of acquisition
How much is the cost inflation index for the year 2022-23?
The cost inflation index for the year 2022-23 is 331.
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