In this article I will write about the Cost Inflation Index(CII) and how it is measured by the government every year. Many of us not aware of the term CII. It is the main logic behind increase in the value of land and house prices. The value is set by the government each year. This articles explores more details on the CII. Please post your comments after reading the article. If you like the article please subscribe it here.
What is Cost Inflation Index(CII)?
It is a measure of inflation that finds application in tax law, when computing long-term capital gains on sale of assets. Section 48 of the Income-Tax Act defines the index as what is notified by the Central Government every year, having regard to 75 per cent of average rise in the consumer price index (CPI) for urban non-manual employees for the immediately preceding previous year.
How does CII help in capital gains computation? Capital gain, as you know, arises when the net sale consideration of a capital asset is more than the cost. Since “cost of acquisition” is historical, the concept of indexed cost allows the taxpayer to factor in the impact of inflation on cost. Consequently, a lower amount of capital gains gets to be taxed than if historical cost had been considered in the computations.
Formula for computing indexed cost is (Index for the year of sale/ Index in the year of acquisition) x cost.
For example, if a property purchased in 1991-92 for Rs 10 lakh were to be sold now for Rs 40 lakh, indexed cost = (519/199) x 10 = Rs 26.08 lakh. And the long-term capital gains would be Rs 13.92, that is Rs 40 lakh minus Rs 26.08 lakh.
Summary
In this article I have explained about the Cost Inflation Index(CII) and how it can be calculated. Hope this article helped you to find the meaning of CII. Thank you for reading this article.
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May 30, 2009 at 10:19 pm
You have explained the use of CII in calcuation of capital gain rather than how CII is calculated, this is not reflected in either introduction or summary.
September 9, 2009 at 10:48 pm
Hi Krishna,
How to save tax on long term Capital gain by selling the residencial house?
How to avoid tax for long term gain by selling Commercial property(godown).
September 10, 2009 at 6:58 am
Hello Rahul,
If you are investing in buying the new property within specified time, you will not required to pay any tax. or constructing the new property.
Thanks,
Krishna
September 13, 2009 at 3:19 am
Is it that the total amount or the profit amount from the sale of the property should be invested in new property ?is the rule applies to commercial property too?
sell amount —20 lac
profit amount —5 lacs..
do i have to buy a new property of 20 lac or 5 lac….
September 13, 2009 at 3:29 am
Hello Rahul,
What you got as capital gains should be invested in the property. In your case it is Rs.5 lacs.
Thanks,
Krishna
September 13, 2009 at 3:41 am
Does capital gain tax depends on Number of years of possesion of property . I mean to say , if possesion of property taken 20 years back then the tax will be less as compared to property bought 5 years back.
Will cost inflation favour seller if the property is held for more years.
September 13, 2009 at 3:43 am
Hello Rahul,
No, it not depends on the number of years. At present value of the asseset capital gain will be calculated.
Thanks,
Krishna
October 21, 2009 at 12:56 am
what is the technical definition for the cost of the property i.e suppose a consideratio amount is given in 2001-02 but the possesion is given in 2002-03,which year’s CII be taken for cost purpose?
October 21, 2009 at 7:38 pm
Hello Vikas,
The date when the property is registered on your name.
Thanks,
Krishna
April 12, 2010 at 9:30 pm
How toi find index for require year and last year. there is table avialable any where. or there is some furmula to calculate index
January 3, 2011 at 3:16 am
Purchase value of Machinery (Testing Transformer) as on 27.10.2007 was 5.22 Crore. Replacement value quotation as on 11.12.2009 is not available as the subject machinery is proprietary type of item (Tailer made) hence application of CII is permitted ? or is limited to Fixed Assets like Land & Building. We await your special comment & guidance in the matter.
October 28, 2011 at 8:30 pm
Hi,
I have purchased a plot 1.6 Lakh in 1988 and constructed the house for 20 lakh in 1995-96. Now, I have sold the house for 72 lakh couple of weeks back and purchased another house for 35 Lakh. Do I need to pay any long term tax?
Regards,
-Simran
March 13, 2012 at 12:19 am
indexed cost = (519/199) x 10 = Rs 26.08 lakh. in this formula from where you get 519 and 199 figure.
June 22, 2012 at 2:24 am
dear sir
how its calculate please describe to me