Cost Inflation Index under Income Tax Act
What is Cost Inflation Index ?
Cost Inflation Index (CII) is a measure of inflation that is used for computing long-term capital gains on sale of capital assets under Section 48 of the Income-Tax Act.
What are the COST INFLATION INDEX notified by the Government ?
|FINANCIALYEAR||COST INFLATION INDEX|
Any capital asset held by a person for a period of more than 36 months immediately preceding the date of its transfer will be treated as long-term capital asset.
However, in respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014), units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months.
Mr. Kumar is a salaried employee. On 8th April, 2009, he purchased a piece of land and sold the same on 29th June, 2015. In this case, land is a capital asset for Mr. Kumar. He purchased the land on 8th April, 2009 and sold it on 29th June, 2015, i.e., after holding for a period of more than 36 months. Hence, the land will be a long-term capital asset.
Mr. Raj is a salaried employee. On 8th April, 2014 he purchased shares of SBI Ltd. (listed in BSE) and sold the same on 29th June, 2015. In this case, shares are capital assets for Mr. Raj. He purchased shares on 8th April, 2014 and sold them on 29th June, 2015, i.e., after holding them for a period of more than 12 months. Hence, shares are long-term capital assets.
How Long term Capital Gains is calculated in the case of Long term Capital Assets using Cost Inflation Index ?
Long term capital gain arising on account of transfer of long-term capital asset will be computed as follows:
|Full value of consideration (i.e., Sales consideration of asset)||XXXXX|
|Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g., brokerage, commission, etc.)|| |
|Net sale consideration||XXXXX|
|Less: Indexed cost of acquisition (*)||(XXXXX)|
|Less: Indexed cost of improvement, if any (*)||(XXXXX)|
|Long-Term Capital Gain||XXXXX|
(*) Cost of acquisition is the purchase price of the capital asset and cost of improvement which includes all expenditure of a capital nature incurred on or after 01-04-1981) in making any additions or alterations to the capital asset by the assesse after it became his property. Indexation is a process by which the cost of acquisition/improvement is adjusted against inflationary rise in the value of asset. For this purpose, Central Government has notified cost inflation index for different years. The benefit of indexation is available only to long-term capital assets. For computation of indexed cost of acquisition/indexed cost of improvement, following factors are to be considered:
- Year of acquisition/improvement
- Year of transfer
- Cost inflation index of the year of acquisition/improvement
- Cost inflation index of the year of transfer
How Indexed cost of acquisition is computed ?
Indexed cost of acquisition is computed with the help of following formula :
Cost of acquisition × Cost inflation index of the year of transfer of capital asset
Cost inflation index of the year of acquisition
How Indexed cost of improvement is computed ?
Indexed cost of improvement is computed with the help of following formula :
Cost of improvement × Cost inflation index of the year of transfer of capital asset
Cost inflation index of the year of improvement
Give example to calcuate Long term Capital Gain using Cost of Inflation Index ?
Mr. Raja is a salaried employee. On 2nd May , 2000 he purchased a residential house consisting two floors for Rs. 8,40,000. In December, 2005 he constructed third floor at a cost of Rs. 1,00,000. The house is sold on 1st August, 2015. What will be the indexed cost of acquisition and indexed cost of improvement?
On the basis of formula discussed above, indexed cost of acquisition will be computed as follows :
Rs. 8,40,000 × 1081 (*) = Rs. 22,36,552
(*) Cost inflation index as notified by the Government for financial year 2015-16 is 1081 and for financial year 2000-01 is 406.
On the basis of formula discussed above, indexed cost of improvement will be computed as follows :
Rs. 1,00,000 × 1081 (*) = Rs. 2,17,505
(*) Cost inflation index as notified by the Government for financial year 2015-16 is 1081 and for financial year 2005-06 is 497.