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.
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.
Subscribe to our future articles here.