Cost Inflation Index

We all have read in the school books, never took it seriously as a child, and now it has become the most important part of adulthood. Any guesses? Yes, it’s Inflation. Now, the question arises that what exactly is inflation? Let us pick a hot topic these days to understand inflation. Petrol prices in the year 2016 in India were around Rs. 62 to Rs. 67 per liter. However, in the year 2021, the price of petrol has touched the mark as high as Rs. 112 per liter. This means that the purchasing power of money has dropped over the years in the case of petrol.

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Due to the dynamic nature of the economy, the value for money keeps on reducing, leading to a linear increase in the cost of living. This phenomenon of decline in purchasing power every passing year is known as Inflation.

What is Cost Inflation Index?

CII or Cost Inflation Index is notified under the Income Tax Act, 1961’s Section 48. CII is a way to calculate inflation, that is, an estimated increase in the price of a good or service over the years. The Central Government takes care of and publishes the index in the official gazette. Usually, for the calculation of CII, gains on long term capital are taken into account. Capital gains are capital assets like property, plot, agricultural land, bonds, stocks, etc. sold at a profit.

Cost Inflation Index = 75% average increase in CPI (Consumer Price Index) for the immediate previous year

How does Cost Inflation Indexation Work?

We know that, due to inflation, the capital asset prices are likely to increase from the time of purchase to the time of sale. Thus, the selling of assets will most likely increase the net worth of the owner as the sale price is higher than the purchase price. As we know, the government levies tax on the sale or purchase of property, the assessee is forced to pay much more tax than required due to inflation.

Here, Cost Inflation Indexation comes into the picture as it adjusts purchase price according to the sale price which is increased due to inflation.

The Cost Inflation Index is fixed every year by the Indian Government before the financial year ends.

Cost Inflation Index Table

Here are the old and new CII tables for reference:

  1. Old Cost Inflation Index Table

    Financial Year (CII) Cost Inflation Index
    2007-2008 551
    2008-2009 582
    2009-2010 632
    2010-2011 711
    2011-2012 785
    2012-2013 852
    2013-2014 939
    2014-2015 1024
    2015-2016 1081
    2016-2017 1125
  2. New Cost Inflation Index Table

    Financial Year (CII) Cost Inflation Index
    2001-2002 100
    2002-2003 105
    2003-2004 109
    2004-2005 113
    2005-2006 117
    2006-2007 122
    2007-2008 129
    2008-2009 137
    2009-2010 148
    2010-2011 167
    2011-2012 184
    2012-2013 200
    2013-2014 220
    2014-2015 240
    2015-2016 254
    2016-2017 264
    2017-2018 272
    2018-2019 280
    2019-2020 289
    2020-2021 301
    2021-2022 317

Calculation of Cost Inflation Index (CII)

The assets price at the time of purchase is indexed by CII

To calculate CII,

Cost Inflation Index = CII at time asset was sold / CII at the time asset is acquired

Illustration:

Mr. Khanna bought a plot for Rs. 20,00,000 in the year 2000 and in the year 2009 he sold it at Rs. 35,00,000. The profit made over the years by Mr. Khanna is Rs. 15,00,000.

The CII in the year 2000 was 389 and in the year 2009 was 582.

Hence, the CII = 582 / 389 = 1.49

For Indexation of Long Term Capital Assets

To calculate the indexed cost of asset acquisition,

Indexed Cost of Asset Acquisition = (CII at the time asset was sold X Cost of Acquisition) / CII at the time asset is possessed

To calculate indexed cost of asset improvement,

Indexed Cost of Asset Improvement = CII at the time asset was sold X Cost of Asset Improvement) / CCI at the time improvement is made

Illustration:

Mr. Khan purchased a property for Rs. 1,00,000 in the financial year 1979-80. The Fair Market Value in the year 2000 reached Rs. 2,20,000 of his property. He eventually sold the property in the year 2015-16.

Note: The asset is purchased before the base year (that is, 2001), hence the CII will be considered of the year 2001, which is 100.

Also, the cost of asset acquisition is always higher of,

  • Fair Market Value, or

  • Actual cost

Hence, the cost of acquisition here = Rs. 2,20,000

Indexed cost of acquisition = (2,20,000 X 254) / 100 = Rs. 5,58,000

Points to Remember About CII India

At the time of the cost of inflation calculation, the following points should be kept in mind:

  • During the finding of property in the will of the assessee, CII at the time of receiving is considered

  • Indexation is not viable from before 1st of April, 2001

  • Index benefits are applicable on capital indexation bonds or sovereign gold bonds, but not on bonds or debentures.

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