What is Cost Inflation Index(CII)?
Cost Inflation Index is the Index fixes by the central Government to match the prices to the inflation rate. In other words, an increase in the inflation rate over time will lead to a rise in the prices.
Cost Inflation Index or CII is a method used for the calculation of an estimated yearly increase in an asset’s price as a result of inflation.
The Central Government fixes this index and notifies it in its official gazette for measuring inflation. This index, notified each year by the Government is defined under Section 48 of the Income Tax Act, 1961.
The government with Notification No. 32/2020-Income Tax dated 12th June, 2020 has notified the cost inflation index for Financial Year 2020-21 or Assessment Year 2021-22 which is as follows:-
| Financial Year | Cost Inflation Index |
| 2020-21 | 301 |
Notified Cost Inflation Index Under Section 48:-
| S.No. | Financial Year | Cost Inflation Index |
| 1 | 2001-02 | 100 |
| 2 | 2002-03 | 105 |
| 3 | 2003-04 | 109 |
| 4 | 2004-05 | 113 |
| 5 | 2005-06 | 117 |
| 6 | 2006-07 | 122 |
| 7 | 2007-08 | 129 |
| 8 | 2008-09 | 137 |
| 9 | 2009-10 | 148 |
| 10 | 2010-11 | 167 |
| 11 | 2011-12 | 184 |
| 12 | 2012-13 | 200 |
| 13 | 2013-14 | 220 |
| 14 | 2014-15 | 240 |
| 15 | 2015-16 | 254 |
| 16 | 2016-17 | 264 |
| 17 | 2017-18 | 272 |
| 18 | 2018-19 | 280 |
| 19 | 2019-20 | 289 |
How Cost Inflation Index is used ?
A Cost Inflation Index is used to calculate the long term capital gains from a transfer or sale of capital assets. Capital gain means to the profit or gain from the sale or transfer of any capital assets, including land, property, stocks, shares, trademarks, patents, etc.
In general accounting, long term capital assets are recorded at their cost price in books. these capital assets cannot be revalued due to an increase in prices.
Thus, at the time of sale of such assets, the profit or gain acquired from them remains very high due to their high sale price in comparison to their purchase price.
As a result, Tax payers also have to pay a higher income tax on the gains from these assets.
With the use of the Cost Inflation Index table, in the long term, the purchase price of assets is adjusted according to their sale price, which results in lower profits and lower tax amounts on them.
Illustration:-
For Example, you purchased a Capital Asset (House) in the financial year 2004-05 for Rs. 10 lakh and sold in FY 2019-20 for Rs 30 lakh. The inflation-adjusted cost and capital gain on it will be calculated as follows:
In this case, cost inflation index (CII) for F.Y. 2004-05 is 113 and for F.Y. 2019-20 is 289
So,
Inflation adjusted cost: (289/113) * 10 lakh = Rs. 25.58 lakh (Approx)
Long term capital gain: Rs 30 lakh – Rs. 25.58 lakh = Rs. 4.42 lakh (Approx)
Note:- In Budget 2017, then Finance Minister Arun Jaitley announced the shifting of base year from 1981 to 2001. The revision was done to resolve the problems faced by taxpayers while calculating Long term capital gain tax payable on assets acquired on or before 1981. from onwards base year is now taken 2001 for calculating capital gain.
