The Income Tax Department issues the Cost Inflation Index (CII) each year. It helps adjust the purchase cost of long-term capital assets (like property, stocks, etc.) for inflation. This adjustment is crucial because it ensures that when you sell an asset, the taxable gain reflects true economic profit and not just inflationary increases.
CII is used to calculate the taxable capital gain. To compute it, you have to first find the original purchase price of the asset and then adjust this price for inflation using the CII for the year you bought it and the year you sold it. After this, you have to subtract the adjusted purchase price from the sale price to get the taxable capital gain.
Furthermore, it must be noted that each year, the government announces the CII for the new financial year. For FY 2024-25, the CII is 363. You must be aware of these new values as they significantly influence your capital gain computations.
In this article, you will learn about the Cost Inflation Index in detail and see how it is computed and applied while making income tax calculations. Also, you will study the latest tax updates and check out a comprehensive list of CII numbers from 2001-02 to the current year.
Budget 2024 update
The government has eliminated indexation benefits for long-term capital gains effective July 23, 2024. This implies that investors can no longer offset inflation by adjusting the purchase price of their assets when determining taxable gains. As a result, long-term capital gains will be calculated based on the original cost, potentially increasing the tax burden. For land or building acquired prior to July 23, 2024, taxpayers may elect between a 12.5% tax without indexation or a 20% tax with indexation. Conversely, for land or building purchased on or after July 23, 2024, a 12.5% tax rate without indexation applies to qualifying long-term assets.
What is the Cost Inflation Index?
Inflation is an economic phenomenon characterized by a decline in the purchasing power of currency, resulting in increased costs of goods and services. The Cost Inflation Index (CII) is a government-mandated index used to estimate the annual impact of inflation on asset values. The Central Government, under Section 48 of the Income Tax Act, 1961, determines and publishes the CII in the official gazette.
Cost Inflation Index table from FY 2001-2002 to FY 2024-2025
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 from FY 2001-2002 to FY 2024-2025 in the table below.
Financial year |
Cost Inflation Index (CII) |
2024-25 |
363 |
2023-24 |
348 |
2022-23 |
331 |
2021-22 |
317 |
2020-21 |
301 |
2019-20 |
289 |
2018-19 |
280 |
2017-18 |
272 |
2016-17 |
264 |
2015-16 |
254 |
2014-15 |
240 |
2013-14 |
220 |
2012-13 |
200 |
2011-12 |
184 |
2010-11 |
167 |
2009-10 |
148 |
2008-09 |
137 |
2007-08 |
129 |
2006-07 |
122 |
2005-06 |
117 |
2004-05 |
113 |
2003-04 |
109 |
2002-03 |
105 |
2001-02 (Base year) |
100 |
Also read: Income Tax Slabs for FY 2024-25
What is the purpose of Cost Inflation Index (CII)?
A company typically records long-term capital assets, like machinery, on its balance sheet at their original cost. However, over time, the value of these assets can increase due to factors such as inflation. Traditional accounting practices often do not allow for the revaluation of these assets to reflect their current market value.
When a business or individual sells a capital asset, the difference between the sale price and the original purchase price is considered a long-term capital gain. This gain is subject to long-term capital gains tax.
The Cost Inflation Index (CII) is a factor used to adjust the original purchase price of a capital asset to account for inflation. By applying the CII, taxpayers can reduce the calculated long-term capital gain, ultimately leading to a lower tax liability.
How is cost inflation index used in income tax?
The Indian government relies on the Cost Inflation Index (CII) as a pivotal measure to gauge annual inflation rates. This index plays a critical role in adjusting the purchase price of assets to account for inflation, ensuring equitable taxation practices in the domain of capital gains.
In practical terms, the CII is integrated into income tax calculations to adjust the asset's purchase price, accurately reflecting inflation's impact when computing capital gains tax. By incorporating the CII, taxpayers can offset the effects of inflation on their taxable gains, fostering a fairer taxation framework.
This adjustment, facilitated by the CII, has tangible implications for taxpayers' tax liabilities, particularly in the context of long-term capital gains. As the inflated purchase price reduces the taxable amount of capital gains, taxpayers experience a diminished tax burden on their long-term capital gains.
Cost Inflation Index formula
By using the CII index, you can calculate the inflation-adjusted purchase price using the following formula:
Inflation-adjusted price = (CII of the year of sale/ CII of the year of purchase)*Actual price of the asset
How to calculate cost inflation index?
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).
Practical examples of Cost Inflation Index calculation
Case 1: Amit purchased a flat in FY 2003-04 for Rs. 15,00,000. He sells the flat in FY 2019-20. What will be the indexed cost of acquisition?
In the instant case, the CII for 2003-04 is 109, and for 2019-20 is 289.
Now, the indexed cost of acquisition = 15,00,000 x 289/109 = Rs. 39,81,651
Case 2: Priya purchased a capital asset in FY 1997-98 for Rs. 3,00,000. The Fair Market Value (FMV) of the asset on 1st April 2001 was Rs. 5,00,000. She sells the asset in FY 2018-19.
In this example, it must be noted that the capital asset was acquired before the base year of 2001-02. Hence, the cost of acquisition would be the higher of actual cost or FMV on 1st April 2001, i.e., Rs. 5,00,000.
In this case, CII for 2001-02 is 100 and for CII for 2018-19 is 280.
Hence, indexed cost of acquisition = 5,00,000 x 280/100 = 14,00,000
Case 3: Rohan purchased equity shares for Rs. 1,50,000 on 1st March 2016 and sold the shares on 1st April 2021.
In this case, the CII for FY 2015-16 is 254, and for FY 2021-22, it is 317.
Hence, indexed cost of acquisition = 1,50,000 x 317/254 = Rs, 1,87,008
Case 4: Nisha purchased Sovereign Gold Bonds in November 2017 for Rs. 2,50,000. The bonds were prematurely withdrawn in January 2023 at the existing market price of Rs. 3,20,000.
In this case, the CII for FY 2017-18 is 272, and for FY 2022-23, it is 331.
Hence, indexed cost of acquisition = 2,50,000 x 331/272 = Rs. 3,04,044
Case 5: Suresh purchased a house in December 2013 for Rs. 25,00,000. The house was sold in August 2024.
In this case, the CII for FY 2013-14 is 220, and for FY 2024-25, it is 348.
Hence, indexed cost of acquisition = 25,00,000 x 348/220 = Rs. 39,54,545.
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.
Which assets can avail indexation benefit?
To avail indexation benefits, the long-term capital assets must be land, building, unlisted shares, or other specified assets like jewellery, paintings, sculptures, and archaeological collections. Additionally, debt mutual funds, bonds, and debentures acquired before April 1, 2023, qualify for indexation. However, long-term gains from equity shares and equity-oriented mutual funds are not eligible for this benefit.
How is indexation benefit applied to long-term capital assets?
The application of the Cost Inflation Index (CII) serves to adjust the purchase price of capital assets in relation to their sale value. By applying the CII indexation to the acquisition cost, the resulting figure is referred to as the "Indexed Cost of Acquisition." Below are the formulas for determining the Indexed Cost of Acquisition and the Indexed Cost of Improvement:
- Indexed Cost of Acquisition:
Cost Inflation Index (CII) for the year of asset transfer (sale) / CII for the first year of the asset purchase or year 2001-02, whichever is later X cost of acquisition - Indexed Cost of Improvement:
Cost Inflation Index (CII) for the year of asset transfer (sale) / CII for the year of asset improvement X cost of improvement.
What is the base year in the cost inflation index?
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.
Why is the base year important in the cost inflation index?
The selection of the base year in the Cost Inflation Index (CII) holds significance as it acts as the benchmark for calculating the CII in subsequent years. This standardized practice of choosing the base year ensures an accurate portrayal of how inflation impacts the indexed acquisition cost.
Changes to the base year can wield significant influence over the computation of the Cost Inflation Index. For instance, in India, transitioning the base year from 1981 to 2001 led to resetting the CII for 2001-02 at 100. This adjustment carries implications for computing the indexed acquisition cost, especially for assets acquired before 2001, potentially resulting in alterations to capital gains tax obligations.
Why is the base year of the Cost Inflation Index changed to 2001 from 1981?
The initial base year for calculating the Cost Inflation Index was set to 1981-82 by the central government. However, due to the challenges faced by taxpayers in accurately valuing long-term capital assets acquired prior to April 1, 1981, and the limitations of valuation methodologies available at that time, the government deemed it necessary to adjust the base year.
To address these concerns, the base year was shifted to 2001-02. This change allows taxpayers who acquired assets before April 1, 2001, to utilise a more practical valuation method. They have the option to choose the lower value between the original cost price and the Fair Market Value as of April 1, 2001.
Who notifies the cost inflation index?
The Central Government officially establishes the Cost Inflation Index (CII) by publishing a notification in the Gazette of India. The CII is calculated as 75% of the average annual increase in the Consumer Price Index (CPI) for urban areas in the preceding year.
Note: The CPI measures the percentage change in the prices of a representative basket of goods and services consumed by households in urban areas.
Indexation benefits for property received in will
- CII: Cost Inflation Index applies to the year of property purchase by the previous owner.
- Improvement costs: Those incurred before April 1, 2001, are ignored.
Restrictions on indexation benefits
- Bonds and debentures: Indexation is generally not allowed, except for capital indexation bonds and sovereign gold bonds.
- Debt funds: From April 1, 2023, indexation is not available.
- All assets: Starting July 23, 2024, indexation is not allowed for any asset.
Tax options for land and building transfers
- Pre-July 23, 2024: Option for 12.5% tax without indexation or 20% with indexation.
- On or after July 23, 2024: 12.5% tax without indexation for long-term assets.
Things to note about Cost Inflation Index
When calculating the indexed cost of asset acquisition, taxpayers should be mindful of the following:
- Date of asset acquisition: For assets received voluntarily, the indexation year is the year of receipt, regardless of the original purchase date.
- Improvement costs: Improvement costs incurred before April 1, 2001, are not eligible for indexation.
- Exclusions from indexation: Indexation benefits do not apply to debentures or bonds, except for RBI-issued sovereign gold bonds and capital indexation bonds.
Conclusion
The Cost Inflation Index (CII) helps adjust the purchase price of long-term capital assets for inflation and calculate long-term capital gains from assets like property, stocks, and bonds. This adjustment ensures that capital gains tax reflects true economic profit.
The CII table, which starts from the base year 2001-02 with a value of 100, adjusts the purchase price of these assets to account for inflation. The indexed cost of acquisition is calculated by multiplying the original purchase price by the ratio of the CII for the sale year to the CII for the purchase year. This reduces taxable gains and lowers the tax burden.
It is worth mentioning that earlier, the base year was 1981, which was later changed to 2001 to simplify valuations. Furthermore, the CII is notified by the central government and is based on 75% of the average rise in the Consumer Price Index for the preceding year. The CII for FY 2024-25 is 363.
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