CII or Cost Inflation Index is a unique numerical value assigned by the Income Tax Department to each financial year to monitor the inflation and the impact on prices on assets across India. Majorly, CII is used to adjust the purchase price of various assets for inflation when calculating long-term capital gains tax.
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What is the cost inflation index?
Each financial year is assigned a unique numerical value by the Tax Department of India which represents the inflation in the economy, due to which the prices of assets have subsequently changed. CII for the financial year 2023-24 is 348. Any profit earned through the sale or transfer of a capital asset of land, shares, trademark etc is known as capital gain.
Cost Inflation Index table: FY 2001-02 to FY 2023-24 Table
| Financial Year | Cost Inflation Index (CII) |
|---|---|
| Base Year 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 |
Note: The table shows how prices change over the years using something called the Cost Inflation Index (CII). It’s like a score that tells us how much prices have gone up compared to the past.
- Each year has a different CII number. Higher numbers mean prices have gone up more.
- For example, in the year 2023-24, the CII is 348. In 2018-19, the CII was 280.
How is the cost inflation index different from the inflation rate?
The CII helps individuals accurately calculate their capital gains for tax purposes, ensuring they are taxed fairly by considering the impact of inflation on their investments. The inflation rate helps understand how the cost of living changes over time and guides economic policies and personal financial decisions.
- Inflation rate example: If the inflation rate is 5% this year, it means things cost 5% more than they did last year. If you had INR 100 worth of goods last year, you’d need INR 105 to buy the same goods this year.
- CII example: If you bought a house in 2018-19 when the CII was 280 and sold it in 2023-24 when the CII is 348, you use the CII to adjust the purchase price of the house to account for inflation. This helps you calculate the real profit when you sell the house.
How to calculate cost inflation index
While calculating the Income tax, CII is used to find the indexed cost of acquisitions of the eligible assets. When the CII is applied to the “Cost of Acquisition” (purchase price) of a capital asset, it becomes the “Indexed Cost of Acquisition”.
Let us understand how you can calculate the cost Inflation Index.
Formula for Index Acquisition Cost= Purchase price X ( CII of the year of sale ÷ CII of the year of purchase)
Asset purchased: FY 2007-08 for Rs.10 lakh
Asset sold: FY 2017-18 for Rs. 50 lakhs the indexed cost of acquisition would be:
Indexed acquisition Cost = Rs.10 lakhs multiplied by (CII of 2017-18 / CII of 2007-08)
= Rs. 10 lakhs * (272 / 129)
= Rs. 21.08 lakhs
As a result, the tax liability is decreased since the taxable capital gains are now just Rs. 28.92 lakhs instead of Rs. 40 lakhs.
Every year, the Central Government publishes a notice in the official gazette on the CII. To facilitate evaluations, the base year for CII was originally 1981–82 but later changed to 2001–02.
What is the base year for the cost inflation index and why is it important?
The current base year is FY 2001-02 which is chosen to simplify the evaluation process. FY 2001–02 serves as the foundation year for the Cost Inflation Index (CII). To guarantee that the CII appropriately reflects the inflationary fluctuations in asset prices over time, and to make the process of valuing long-term capital assets simpler, this base year was selected.
Since it acts as a benchmark for measuring inflationary changes in the cost of assets, base year is important in the calculation of CII. It guarantees that the CII values are computed in relation to a standardized baseline, enabling precise changes to the asset acquisition price for inflation.
The CII computation and the indexed cost of acquisition and improvement are impacted by the base year selection which makes it an essential choice. This also affects how long-term capital gains tax liabilities are calculated. It is crucial for taxpayers to understand how the base year affects their tax liability.
Purpose of cost inflation index
Following are some major purposes of the cost inflation index
- Adjusts purchase price: To precisely determine the gain or loss, the CII adjusts the purchase price of an eligible asset for inflation to calculate the capital gains tax.
- Reduces taxable capital gains: If you index the purchase price using CII, the taxable capital gain reduces which leads to lower tax liability on the taxpayer.
- Simplifies the tax calculation: By CII, you can adjust the purchase price which simplifies the calculation of long-term capital gains tax.
To adjust the asset acquisition price of inflation, the Income Tax Department of India uses cost inflation tax as a critical tool. It subsequently lowers down the taxable capital gains and guarantees fair taxation.
