The cost inflation index is a way to measure the inflation level for the current financial year furnished by the income tax department in each yearβs budget. This helps us to calculate the changes in the value of assets or items that we purchased last year but sold in the current year. Generally, the prices of goods rise over time which decreases the purchasing power.
What is the Cost Inflation Index?
(Cost inflation index) CII is simply put to calculate the assetβs value after adjusting the cost price along with inflation. However, you canβt put it to calculate the gains/losses on equities, mutual funds, and equity shares (amount above Rs.1 Lakh) taxed at a 10% rate without any advantage of indexation.
For instance - If you have bought 5 units of goods today for Rs.1000, tomorrow only 2 units might be available for Rs. 1000. There comes a cost inflation index to measure this increment in the price of goods year-by-year. Tax Department has announced the Cost Inflation Index to ease the calculations of long-term gains. The cost inflation index is issued by them every financial year in the yearly Budget. The base year is Currently 2001.
Why is it important to calculate Cost Inflation Index?
The cost Inflation Index is essentially computed to match the prices to the increased inflation rate. In easy words, an increment in the inflation rates over time will lead to a rise in prices.
The Old Cost Inflation Index
Cost Inflation Index (CII)
Financial Year
551
2007-08
582
2008-09
632
2009-10
711
2010-11
785
2011-12
852
2012-13
939
2013-14
1024
2014-15
1081
2015-16
1125
2016-17
The New Current Cost Inflation Index
CII (Cost Inflation Index)
Financial Year
2001-02
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
2008-11
167
2007-12
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
How It is Calculated?
The prescribed formula to calculate the inflation cost price is - (CII of the year of sale/CII for the year of purchase)*Actual cost price.
Letβs assume that Mr. Rohan purchased a house for RS. 30,00,000 in the year 2000 and sold it for Rs. 45,00,000. The accumulated profit made over the years by Mr. Rohan is Rs. 15,00,000.
The cost inflation index in the year 2000 was 389 and 582 in the year 2009.
Therefore, the CII = 582/389 = 1.49
The government had stated in the budget 2017 that the base year (earlier 1981) will be replaced with 2001 due to the challenges in receiving the relevant details by taxpayers.
What is the role of the base year in the Cost Inflation Index?
The base year in the cost inflation index is the foremost year which has an index value of 100. To calculate the increased percentage in inflation, other indexes of other years are compared with the base year. For any if in case of a capital asset that is purchased before the base year of CII, taxpayers can rise the purchasing price than the βactual cost or Fair Market Value on the 1st day of the base year. Indexation benefit is applied to the purchase price which is too calculated.