cost inflation index

Prices of goods increase over time, resulting in a fall in the purchasing power (quantity of goods that one unit of money can buy) of money. If two units of goods could be bought for Rs 100 today, tomorrow only one unit might be available for Rs 100 due to inflation. The Cost Inflation Index (CII) is used to estimate the increase in the prices of goods and assets year-by-year due to inflation.

The Cost Inflation Index (CII) for the financial year 2024-25 is 363.

Budget 2024 Update

As of July 23, 2024, the government has discontinued the indexation benefit on long-term capital gains. This means that investors can no longer adjust the purchase price of their investments for inflation when calculating capital gains for tax purposes. Consequently, long-term capital gains will be computed based on the actual purchase price, potentially resulting in higher taxable gains and, therefore, a higher tax liability for investors. However, in case of transfer of land or building acquired before July 23, 2024, taxpayers have the option to pay tax at either a rate of 12.5% without indexation benefits or 20% with indexation benefits. However, on land or building purchased on or after 23rd July, 2024, the tax rate will be 12.5% without indexation benefit, applicable to assets qualified as long term.

What is Cost Inflation Index?

A Cost Inflation Index table is used to calculate the long-term capital gains from a capital asset transfer or sale. The profit earned through the sale or transfer of any capital asset, such as land, property, stocks, shares, trademarks, patents, and so on, is referred to as capital gain.

Long-term capital assets are typically documented in books at their cost price. As a result, despite growing asset prices, these capital assets cannot be revalued.

When these assets are sold, the profit or gain obtained from them remains high due to their high sale price in relation to their acquisition price. As a result, assessees must pay a greater income tax on these assets' gains.

In the long run, the application of the Cost Inflation Index for capital gain adjusts the purchase price of assets based on their sale price, resulting in smaller earnings and a lower tax amount.

Cost Inflation Index Table from FY 2001-02 to FY 2024-25

How is Cost Inflation Index used in Income Tax?

Long-Term Capital Assets are recorded at cost price in books. Despite increasing inflation, they exist at the cost price and cannot be revalued. When these assets are sold, the profit amount remains high due to the higher sale price as compared to the purchase price. This also leads to a higher income tax. 

The cost inflation index is applied to the long-term capital assets, due to which purchase cost increases, resulting in lesser profits and lesser taxes to benefit taxpayers. To benefit the taxpayers, the cost inflation index benefit is applied to the long-term capital assets, due to which purchase cost increases, resulting in lesser profits and lesser taxes.

What is the Concept of the Base Year in Cost Inflation Index?

The base year is the first year of the cost inflation index and has an index value of 100. The index of all other years is compared to the base year to see the increase in inflation percentage. For any capital asset purchased before the base year of the cost inflation index, taxpayers can take the purchase price higher of the “actual cost or Fair Market Value (FMV) as on the 1st day of the base year. Indexation benefit is applied to the purchase price so calculated. FMV is based on the valuation report of a registered valuer.

Why is the Base Year of Cost Inflation Index Changed to 2001 from 1981?

Initially, 1981-82 was considered as the base year. But, taxpayers were facing hardships in getting the properties valued which were purchased before 1st April 1981. Tax authorities were also finding it difficult to rely on the valuation reports. Hence, the government decided to shift the base year to 2001 so that valuations can be done quickly and accurately.  

So, for a capital asset purchased before 1st April 2001, taxpayers can take higher of actual cost or FMV as on 1st April 2001 as the purchase price and avail benefit of indexation. You can read the detailed benefits of the change in the base year here.

Why is Cost Inflation Index Calculated?

The Cost Inflation Index is calculated to match the prices to the inflation rate. In simple words, an increase in the inflation rate over time will lead to a rise in prices.

Who Notifies the Cost Inflation Index?

The Central Government specifies the cost inflation index by notifying in the official gazette.  
Cost Inflation Index = 75% of the average rise in the Consumer Price Index* (urban) for the immediately preceding year.  

*Consumer Price Index compares the current price of a basket of goods and services (which represent the economy) with the cost of the same basket of goods and services in the previous year to calculate the increase in prices.

How is Indexation Benefit Applied to Long-term Capital Assets?

When the indexation benefit is applied to “Cost of Acquisition” (purchase price) of the capital asset, it becomes “Indexed Cost of Acquisition”.

Points to Ponder

• In case of property received in the will, CII has to be taken for the year in which the property was purchased by the previous owner. 
• Ignore the improvement cost incurred before 1st April 2001.
• Index benefit is not allowed in the case of bonds or debentures except capital indexation bonds or sovereign gold bonds issued by RBI.
• Starting 1st April 2023, indexation benefit is not available for Debt Funds.
• Starting 23rd July 2024, indexation benefit is not available for any asset. However, in case of transfer of land or building acquired before July 23, 2024, taxpayers have the option to pay tax at either a rate of 12.5% without indexation benefits or 20% with indexation benefits. However, on land or building purchased on or after 23rd July, 2024, the tax rate will be 12.5% without indexation benefit, applicable to assets qualified as long term.

Practical Examples

Case 1: Rahul purchased a flat in FY 2001-02 for Rs. 10,00,000. He sells the flat in FY 2017-18. What will be the indexed cost of acquisition? 

In this case, CII for the year 2001-02 and 2017-18 is 100 and 272 respectively.  
Hence, the indexed cost of acquisition = 10,00,000 x 272/100 = Rs. 27,20,000  

Case 2: Shivani purchased a capital asset in FY 1995-1996 for Rs. 2,00,000. FMV of the capital asset on 1st April 2001 was Rs. 3,20,000. She sells the asset in FY 2016-17. What is the indexed cost of acquisition?  

Here, the asset is purchased before the base year.  
Hence the cost of acquisition = Higher of the actual cost or FMV on 1st April 2001. i.e. cost of acquisition = Rs. 3,20,000.  
CII for the year 2001-02 and 2016-17 is 100 and 264 respectively.  
Indexed cost of acquisition = 3,20,000 x 264/100 = Rs. 8,44,800  

Case 3: Gita has purchased equity shares of Rs.1,00,000 on 1st March 2015 and sells the shares on 1st April 2020. What will be the indexed cost of acquisition? 

CII for the year of purchase FY 2014-15 is 240 and  
for the year of sale 2020-21 is 301 
Hence, indexed cost of acquisition = Rs.1,00,000 x 301/240 = Rs.1,25,416 

Case 4: Harish has purchased Sovereign Gold Bonds (SGB) in November 2015 at Rs 2,00,000. The Bonds were prematurely withdrawn (after 5 years but before maturity) at the existing market price of Rs 2,55,000 in January 2021. What will be the indexed cost of acquisition? 

CII for the year of purchase FY 2015-16 is 254 and  
for the year of redemption FY 2020-21- is 301 
Hence, indexed cost of acquisition = Rs. 2,00,000 x 301/254 = Rs. 2,37,007 

Case 5: Suman has purchased a house in December 2012 at Rs 20,00,000. The house was sold in August 2023. What will be the indexed cost of acquisition?

CII for the year of purchase FY 2012-13 is 200 and 

for the year of sale is FY 2023-24 is 348

Hence, indexed cost of acquisition = Rs. 20,00,00 x 348/200 = Rs. 34,80,000

Case 6: Calculate tax on LTCG if the property is sold for Rs. 10,00,000 during FY 2024-25. The property was purchased at Rs. 2,00,000 on June 2001. 

Computation of LTCG with and without indexation benefit as per Budget 2024:

Related Articles: 
Capital Gains Tax In India
Capital Gains Exemption 
Long Term Capital Gains on Shares
Taxation of Income Earned from Selling Shares 
Section 80D  
Income Tax Deductions 
ITR Due Date  
File ITR 
UAN Number 
Home Loan Tax Benefit 
Section 115BAC