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COST INFLATION INDEX (CII)



COST INFLATION INDEX (CII)-

Cost Inflation Index (CII) is used to measure the inflation when computing long-term capital gain on sale of Fixed Income and Fixed Assets. It is used only in fixed income, property and Gold Funds. But, it not used in equity-based products because in equity long term gains are tax-free.

Capital gains are either short term or long term. Short term Capital Gains are earned if fixed assets are sold before 3 years. Long Term Capital gain is earned if it is sold after 3 years. Thus, in the case of short-term gain all gains will be added to your taxable income and taxed as per your current income tax slab.

 

But, for those who earn long-term capital gain can enjoy the indexation benefit where your purchase value will be increased according to the cost inflation index. So, in simple terms, the assets purchased before three years will not cost same as compared to present time. Thus, the government gives you the benefit of inflation while computing Long term Capital Gain. The benefit of inflation is provided by the following method:

 

The cost of the asset purchased three years ago will be less if you will consider the inflation rate over the past three years. Thus, when the government calculates Long term Capital gain they will not consider the purchase price of the asset on which you bought the asset. But, will instead inflate the purchase value using the cost inflation index (CII) and that value will be considered as the purchase price for computing Long term Capital Gain.

 

To simplify your inflation calculation CBDT release cost inflation index every year on the budget announcement. This index helps you to calculate the long-term gains and here is the formula to calculate it:




 

Indexed cost of acquisition = Actual cost of acquisition * CII of Year of Sale / CII of year of purchase

IF YOU HAVE ACQUIRED FROM SOMEONE ELSE THEN THIS THE FORMULA WOULD BE:

Indexed cost of acquisition = Actual cost of Acquisition * CII of Year of Sale / CII of year of purchase

 

The cost of Inflation Index is available from 1981 and asset purchased before that period will be considered to be 1981 value. Cost Inflation Index (CII) Chart is as follows:

 

Financial Year

Cost of Inflation Index (CII)

2016 – 17

                                                1125

2015 – 16

                                                1081

2014 – 15

1024

2013 – 14

939

2013 – 14

939

2012 – 13

852

2011 – 12

785

2010 – 11

711

2009 – 10

632

2008 – 09

582

2007 – 08

551

2006 – 07

519

2005 – 06

497

2004 – 05

480

2003 – 04

463

2002 – 03

447

2001 – 02

426

2000 – 01

                                                 406

1999 – 00

389

1998 – 99

351

1997 – 98

331

1996 – 97

305

1995 – 96

281

1994 – 95

259

1993 – 94

244

1992 – 93

223

1991 – 92

199

1990 – 91

182

1989 – 90

172

1988 – 89

161

1987 – 88

150

1986 – 87

140

1985 – 86

133

1984 – 85

125

1983 – 84

116

1982 – 83

109

1981 – 82

100

Tag: Cost Inflation Index 2016-17, Cost Inflation Index 2015-16, CII,Cost Inflation Index

In the case of debt funds there are two ways for long term Capital gains:

(a) If you don’t want to choose indexation then you can simply pay 10% of gain as tax

(b) Otherwise, you can choose indexation which is recommended and beneficial also

 

To get clarity on computation please refer below example:

 

Investment In Debt fund
Invested amount in FY 2011-12 1 Lakh
Term 5 year
Rate of Return @ 9% p.a.
Maturity Amount  before tax INR 153862.40
Indexation on Invested Amount INR 137703.68

(Invested amount X Cost of Inflation Index of 2015-16 / Cost of Inflation Index of 2011-12)

Gain Earned before tax INR 16155.4 (Indexed gain)
Applicable Tax rate 20% irrespective of slab on indexed gain
Tax Charged INR 3231.08
Total Maturity after Tax INR 150631.32

 

Although being a client of Investmentlocker  you don’t have to worry about calculating this. As we provide this on our portfolio portal for any year which automated. But those who are not associated with Investmentlocker, then you can calculate it though the help of formula.

If you have different purchase rates then you have to calculate every purchase entry differently. In that case, you have to follow FIFO method where the indexed year will be used as per the purchased year.

 

 

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