The Cost Inflation Index (CII) is a financial metric used in India to adjust the purchase price of an asset for inflation over time. It is used for calculating the indexed cost of acquisition or improvement of assets when determining capital gains for tax purposes. Its primary purpose is to account for the impact of inflation on the value of an asset. 


When an individual sells an asset such as real estate, stocks, or certain other capital assets, they may incur capital gains tax on the profit earned. To calculate the capital gains, the cost of acquisition or improvement needs to be adjusted for inflation, and the Cost Inflation Index can be helpful in such instances.

Cost Inflation Index Table

The cost inflation index chart also known as the cost inflation index table, uses 2001-2002 as its base year wherein the CII value is fixed at 100. A glance at the indexation chart or indexation table will give you an idea of how the prices of services and goods have gradually increased over time. 

 

Given below is the cost indexation table from the financial year 2001-2002 to the financial year 2023-2024: 

Financial Year

Cost Inflation Index (CII)

2001-2002

100

2002-2003

105

2003-2004

109

2004-2005

113

2005-2006

117

2006-2007

122

2007-2008

129

2008–2009

137

2009-2010

148

2010-2011

167

2011-2012

184

2012-2013

200

2013-2014

220

2014-2015

240

2015-2016

254

2016-2017

264

2017-2018

272

2018-2019

280

2019-2020

289

2020-2021

301

2021-2022

317

2022-2023

331

2023-2024

348

How Does the Cost Inflation Indexation Work

The indexed cost is found by multiplying the actual cost by the ratio of the CII of the transfer year to that of the acquisition or improvement year. The Central Board of Direct Taxes (CBDT) releases the Cost Inflation Index for each financial year. It is used for the purpose of computing the indexed cost of acquisition or improvement.

How To Calculate Cost Inflation Index

The formula for calculating the indexed cost is as follows:

1. Indexed cost of asset acquisition

(CII for transfer or sale year x asset acquisition cost)/ CII for first year in the holding period of asset or the year of 2001-02 

2. Indexed cost of asset improvement

(CII for year of sale or transfer x Cost of asset improvement)/ CII for the asset improvement year  

 

Say, you sold a property in the financial year 2023-24 (year of transfer) that you acquired in the financial year 2010-11 (year of acquisition). The CII for these years are as follows:

 

CII for 2010-11 = 167

CII for 2023-24 = 348

 

If the actual cost of acquisition is ₹10,00,000, the indexed cost would be calculated as follows:

Indexed Cost = (348/167) X 10,00,000

 

The Indexed Cost would be ₹20,83,832.34.

Importance of Cost Inflation Index

The primary reasons for calculating the Cost Inflation Index are:

  • Adjustment for Inflation

  • Calculation of Indexed Cost

  • Prevention of Tax on Inflationary Gains

  • Encouragement of Investments

  • Fair Taxation

Limitations of the Cost Inflation Index

While the CII is a valuable tool for adjusting the cost of acquisition or improvement of assets for inflation, it has some limitations and considerations:

  • Annual Publication

The CII is published annually by the Central Board of Direct Taxes (CBDT) based on the prevailing economic conditions. However, this once-a-year update may not fully capture the fluctuations in inflation rates throughout the year.

  • Uniform Index for All Assets

The same CII is applied to all types of assets, irrespective of their nature or class. Different assets may experience different rates of appreciation or depreciation, and a uniform index may not precisely reflect the inflationary impact on each asset.

  • Short-term Gains

While the CII is relevant for calculating long-term capital gains, it may not be as significant for short-term gains, where assets are held for a relatively shorter duration. In such cases, the impact of inflation might be less pronounced.

  • Currency Devaluation

The CII assumes a linear relationship between inflation and the erosion of the currency's purchasing power. In reality, factors such as currency devaluation, economic conditions, and global market trends can influence the impact of inflation on asset values.

  • Fixed Base Year

The CII uses a fixed base year for calculation, and changes in consumption patterns, technology, or market dynamics may not be fully reflected. This fixed base year may not accurately represent the current economic conditions.

  • Not Applicable for Certain Gains

The CII is mainly used for computing capital gains tax on the sale of capital assets. It may not be directly applicable to other forms of income or gains.

FAQs on Cost Inflation Index

What is a base year in CII?

The base year refers to the first year of the index, i.e. 2001-02, whose value is fixed at 100. The years that follow the foundation year are indexed based on the foundation year to calculate the inflation rate.

How is indexation calculated for long-term capital assets?

The indexed asset acquisition cost is calculated using the following formula:

 

CII for the financial year of sale or transfer X Acquisition cost / CII for the first year where the capital asset was held by the asset owner or the year 2001-2002, whichever comes later. 

 

Furthermore, the indexed improvement cost is calculated through the given formula:

 

CII for the financial year of transfer or sale X Improvement cost / CII for the financial year during which the asset improvement took place.

Why did the base year of the cost inflation index change from 1981 to 2001?

When 1981-82 was set as the base year, taxpayers found it difficult to get the properties purchased before 1st April 1981. Even the tax authorities found the valuation reports unreliable. Therefore, to make valuations faster and more accurate, the government shifted the foundation year from 1981 to 2001.

How can the cost inflation index be used in income tax?

Despite increasing inflation, long term capital assets are filed by their cost price and cannot be appraised. As a result, when sold, these assets bring in a high profit due to a higher selling price. 

 

This leads to an increase in the income tax as well. When the benefit of CII is applied to these long-term capital assets, the purchase cost rises, causing lower profits and, therefore, lower taxes.

What is the value of the CII for the financial year 2024-25?

The value of the CII for the financial year 2024-25 is 348.

In which year was the cost inflation index introduced in India?

In India, the CII was introduced in 1981.

Can CII be used to reduce tax?

Cost inflation index helps you save up on income tax that is imposed on the capital earnings earned through the selling of a long term capital asset. 

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