Cost Inflation Index for Financial Year 2024-25

CII or Cost Inflation Index is a unique numerical value assigned by the Income Tax Department to each financial year to monitor inflation and the impact on prices of assets across India. CII is used to adjust the purchase price of various assets for inflation when calculating long-term capital gains tax.

In this comprehensive blog, we’ll understand the meaning of Cost Inflation Index for the financial year 2024-25, along with its important elements and ways to calculate it for adjusting the purchase price of an asset for inflation.

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. The cost Inflation Index, also called Capital Gain, Index for the financial year 2024-25 is 363. Any profit earned through the sale or transfer of a capital asset of land, shares, trademark, etc is known as a capital gain. 

The adjustment in an asset’s purchase price helps accurately determine the real profit or loss when the asset is sold, considering how inflation has affected its value over time.  It is used to calculate long-term capital gains tax. Long-term capital gains occur when you sell an asset after holding it for a certain period. CII is announced by the Central Board of Direct Taxes (CBDT) for each financial year before the year begins.

Cost Inflation Index Table: FY 2001-02 to FY 2024-25 CII Chart

The following table indicates the Cost Inflation Index chart, also known as the Capital Gain Index chart, for the financial year from 2001-02 to 2024-25. 

How is the Cost Inflation Index Different From the Inflation Rate?

How to Calculate Cost Inflation Index?

While calculating the Income tax, Cost Inflation Index, or Capital Gain Index, 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”.

Formula for Index Acquisition Cost= Purchase price * ( CII of the year of sale ÷ CII of the year of purchase) 

Consider the following example for better understanding:

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.

Who Notifies the Cost Inflation Index?

The Central Government notifies the Cost Inflation Index (CII) through an official gazette. The CII is calculated as 75% of the average increase in the Consumer Price Index (CPI) for urban areas over the past year.

What is the Base Year for the Cost Inflation Index?

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.

Why is Base Year Important?

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.

How the Cost Inflation Index (CII) Affects Income Tax?

When you own long-term capital assets like property or stocks, they’re recorded in books at their original purchase price. Even though inflation makes prices go up over time, the recorded value of these assets stays the same. As a result, when you sell these assets, the profit can appear much larger because the sale price is higher compared to the purchase price, which can lead to a higher income tax.

The Cost Inflation Index (CII) is applied to the long-term capital assets and helps adjust the purchase price of the assets for inflation. The cost of the asset is increased based on inflation rates, which reduces the profit that appears when you sell it. Consequently, you end up paying less tax because the adjusted (inflated) cost lowers the taxes.

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.

Recent Updates Regarding Cost Inflation Index (CII) for FY 2024-25

Recent Updates Regarding Cost Inflation Index (CII) for FY 2024-25

Rollback of Indexation Benefit:

• Previously, the government removed the option to adjust for inflation (indexation) when selling immovable property.
• The Finance Bill 2024 has now reversed this decision.

Options for Tax Calculation:

• For properties bought before July 23, 2024, you can choose between:

• 12.5% tax rate without indexation.
• 20% tax rate with indexation benefits.
• You can calculate your tax using both methods and pick the one that reduces your tax bill.

Exceptions:

• Indexation benefits apply only to immovable property like land and buildings.
• Only individuals and Hindu Undivided Families (HUFs) can use indexation benefits; firms and companies cannot.
• Indexation benefits are only for tax calculations, not for figuring out investment amounts or losses for exemptions.

Long-Term Capital Gains (LTCG):

• The exemption limit for LTCG has increased from ₹1 lakh to ₹1.25 lakhs per year.
• LTCG tax rate on financial and non-financial assets is now 12.5%.

Short-Term Capital Gains (STCG):

• STCG on certain financial assets will be taxed at 20%.
• STCG on other non-financial assets will be taxed based on applicable income tax slab rates.
• Unlisted bonds, debentures, debt mutual funds, and market-linked debentures will be taxed based on the current rates, regardless of how long they are held.

Securities Transaction Tax (STT):

• STT on Futures and Options has increased to 0.02% and 0.01%, respectively.
• Listed financial assets held for more than a year are considered long-term.
• Unlisted financial assets and non-financial assets need to be held for at least two years to be classified as long-term.

No Indexation for Property Sales:

• Indexation benefits for property sales have been removed.
• LTCG tax rate without indexation is now 12.5%.

For further details or personalized advice, reach out to our tax experts.