What is Cost Inflation Index (CII)

Learn all about cost Inflation Index or CII which is used to compute the potential increase in the price of an asset due to inflation each year.
What is Cost Inflation Index
3 min
29 March 2024

The laws and regulations in India have various provisions enshrined in them to help account for the natural inflation in the economy. The Cost Inflation Index (CII) is one such provision. It is particularly relevant for calculating the indexed cost of purchase, investment or improvement in income tax computations.

In this article, we look into the meaning of the Cost Inflation Index, its purpose, yearly values and the role of the Cost Inflation Index in calculating the indexed purchase cost.

What is the Cost Inflation Index

The Cost Inflation Index is a numerical value that is calculated and assigned for each financial year by the Income Tax Department in India. It represents the inflation in the economy, due to which the costs of goods and services rise with time. A unique Cost Inflation Index is assigned to each financial year.

The significance of the Cost Inflation Index

The primary purpose of the Cost Inflation Index is to ensure that certain costs can easily be adjusted to account for inflation. Some examples of such costs include the amount used to purchase a house property or a lump sum investment made in a mutual fund scheme.

The adjusted investment value or purchase cost is known as the indexed cost of acquisition or purchase. If the cost of improving a house property is adjusted using the Cost Inflation Index, you get the indexed cost of improvement. These values are all crucial to calculate the capital gains from the sale of certain assets.

Decoding the base year in CII

The base year is central to the concept and calculation of the Cost Inflation Index. It is the first year from which CII values are assigned. The CII value for the base year is fixed at 100 and increases from the next year onward.

In India, the base year for CII was originally the financial year 1981-82. For any property or asset purchased before the base year, the higher of the Fair Market Value (FMV) on the first day of the base year or the actual cost is considered.

However, investors found it difficult to find the FMV of such properties as of April 1, 1981. So, the base year for the Cost Inflation Index was later changed to the financial year 2001-02 because the records for property valuation as of April 1, 2001, were more easily available.

Cost Inflation Index Values from FY02 to FY24

The Income Tax Department assigns a new and unique CII value for each financial year based on the rate of inflation in the economy. Check out the Cost Inflation Index values for the years from FY02 to FY24 in the table below.

Financial Year

Cost Inflation Index (CII)

2001-02 (Base year)

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

 

Calculating the indexed cost using CII

In income tax calculations, Cost Inflation Index values play a crucial role. The CII is used to find the indexed cost of acquisition (or improvement) of eligible assets. Let us discuss an example of calculating the indexed purchase cost using the Cost Inflation Index. Consider the following details about the purchase and sale of a house property.

  • Purchase value: Rs. 5,00,000
  • Purchase date: April 5, 2007
  • Financial year of purchase: FY 2007-08
  • Sale value: Rs. 30,00,000
  • Sale date: May 14, 2017
  • Financial year of sale: FY 2017-18

To calculate the indexed cost of acquisition of the above house property, you can use the following formula.

Indexed acquisition cost = Purchase price x (CII for the year of sale ÷ CII for the year of purchase)

Using the formula above, we get the following indexed cost of acquisition:

= Rs. 5,00,000 x (272 ÷ 129)

= Rs. 10,54,264

This means the capital gains from the sale of the property will be Rs. 19,45,736 (i.e. Rs. 30,00,000 minus Rs. 10,54,264).

Conclusion

If you sell a house property or redeem your equity or mutual fund investments, you can use the Cost Inflation Index to account for inflation in the cost of acquisition. That said, keep in mind that only some types of mutual funds are eligible for indexation benefits on capital gains. More specifically, funds that invest more than 35% but less than 65% in equity (or debt) carry indexation benefits.

If you want to choose the funds that can optimise your overall tax liabilities, check out the 1,000+ mutual funds available for investors on the Bajaj Finserv Mutual Funds Platform. You can compare mutual funds and make an informed choice.

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Frequently asked questions

What is the meaning of the Cost Inflation Index?

The CII is a numerical value published and assigned to each financial year by the Income Tax Department. It is a measure of the rate at which the costs of products and services have increased from one year to the next.

How can I calculate the indexed cost of purchase using the CII?

To calculate the indexed cost of purchase using the Cost Inflation Index, you need to divide the CII for the year of sale by the CII for the year of purchase. The resulting figure is multiplied by the purchase cost to find the indexed purchase price.

What does the base year mean in the Cost Inflation Index?

The base year is the first year in the Cost Inflation Index table. It is assigned a CII value of 100. In India, the base year was originally 1981. Thereafter, it was later revised and shifted to 2001.

What is CII in the context of income tax?

In income tax computation, the CII refers to the Cost Inflation Index, which is a numerical that represents the increase in the cost of goods and services over time.

When was the Cost Inflation Index introduced in India?

The concept of CII was introduced in India in 1981.

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