The value of rupee does not remain same on every day. There may be slight increase or decrease in the value. This increase and the decrease of the value price is known as Inflation which means simply a general increase in prices and fall in the purchasing value of money is nothing but “Inflation”. This rise and fall of the value is explained in terms of Cost Inflation Index (CII). Here, you can clearly know how the cost of Inflation Index is explained and the Cost Inflation Index chart for various years.
Every year the Central Government, Ministry of Finance, Department of Revenue by the CBDT (Central Board of Direct Taxes) notifies Cost of Inflation Index in the Official Gazette. This Cost Inflation Index rate changes for every Financial Year. Now you have to know what is a Capital Gains and how Capital Gains Tax effects the Cost of Inflation Index. The profit which you make by selling an asset or property or investment is known as Capital Gains. The asset can be mutual funds, jewellery, stock or real estate. There are 2 types of Capital Gains through which you can make the profit. If an asset that you have purchased is sold after 1 year from the date of its purchase, then the profit which you makes from that asset is said to be “Short Term Capital Gains”. If an asset that you have purchased is sold after 36 months from the date of purchase, then the profit which you makes from that asset is said to be “Long Term Capital Gains”. The CII is mainly used for computing “Long Term Capital Gains“.
Cost Inflation Index Meaning – CII
While computing the Long Term Capital Gains on the Sale of Capital Assets we use Cost Inflation Index as a measure. The Index which is notified by the Central Government every year is defined under Section 48 of Income Tax Act. The Index shows 75% of the average rise in CPI (Consumer Price Index) for the immediately preceding previous year for Urban Non- Manual Employees. This agenda which is introduced by the Central Government is useful for an individual or taxpayer in calculating the Indexed value of the Capital Assets.
How to Calculate Cost of Inflation Index
As Cost Inflation Index is mainly used for calculating Long Term Capital Gains here you can see the procedure for calculating and steps for calculating.
CII (Cost Inflation Index) = Cost of Inflation Index for the year in which the asset was sold or transferred/ Cost Inflation Index for the year the asset was bought or acquired.
Example for CII
If you bought an apartment in January 2005 for Rs. 25 lakhs and sold it in January 2010 for Rs. 45 Lakhs. Here you have gained a profit of Rs. 20 lakhs.
For calculating the CII, you have to select the Cost of Inflation for the Financial Year from the given table.
The CII for the year in which your apartment was purchased is 480. The Cost of Inflation for the year the apartment was sold in is 632.
Then the computed Cost of Inflation Index as per the above formula is 632/480 = 1.316
For the computing tax, the CII should be multiplied with the purchase price in order to attain the indexed cost of acquisition.
So the indexed cost of aquisition = Rs. 25,00,000 x 1.31 = Rs. 32,75000/-.
The Long Term Capital Gain= Sale value of the asset – Indexed Cost of Acquisition
That means Rs. 45,00,00 – Rs. 32,75000/- = Rs. 12,25000/-.
So here for the purpose of tax calculation Rs. 12,25000/- is taken into consideration.
The long term capital gain tax calculation is different for various types of assets. If the indexation method is used then the tax liability is charged at the rate of 20% i.e., 20% x Rs. 12, 25000 = Rs. 245000/-.
The capital in this case is Sale Price of the Apartment – Cost of Acquisition = Rs. 45,00,000/ – Rs. 25,00,000/- = Rs. 20,00000/-. If the indexation method is not used then the tax liablity is charged at rate of 10% i.e., 10% x Rs. 20,00000/- = Rs. 20,0000/-.
Cost Inflation Index Rate Chart
The Cost of Inflation Index Rate chart as notified by the Central Government. The figures in the Inflation Rate Chart changes for every Financial Year. Check the rate of Inflation for the relevant year and the assessee can also check the Current Inflation Rate.
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