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A Brief Note on Cost Inflation Index (CII) for FY 2021-22 (AY 2022-23)

A Brief Note on Cost Inflation Index CII for FY 2021 22 AY 2022 23 Blog Post 1

The price of a product increases overtime, and this brings down the purchasing power of money. The phenomenon of a reduction in the value of money, which leads to an increase in an individual’s cost of living, is known as inflation. The Cost Inflation Index is basically a tool which measures the effect of inflation on the value of money over a period of time.Cost Inflation Index (CII) is used to estimate the increase in the prices of goods and assets year-by-year due to inflation.The Central Government fixes this index and publishes it in its official gazette for measuring inflation. Section 48 of the Income Tax Act, 1961, defines the index as notified by the Government every year.

Under Income Tax the CII is used to adjust the cost of the capital asset over a period of time due to inflation. The value of capital asset derived by using CII is known as the inflation adjusted purchase price of assets. The capital gain is computed by taking into consideration the adjusted price of the capital asset.

The Central Board of Direct Taxes every year notifies the Cost Inflation Index rate. This year the Cost Inflation Index (CII) has been notified by the Ministry of Finance. The Finance Minister stated that CII for FY 2021-22 has been set as 317. For the previous financial year, i.e. 2020-21 CII was 301.

Purpose of Cost Inflation Index:

  • A Cost Inflation Index table is used to calculate the long term capital gains from a transfer or sale of capital assets. Capital gain refers to the profit acquired from the sale/transfer of any capital assets, including land, property, stocks, shares, trademarks, patents, etc.
  • In the books of accounts of the assessees long term capital assets are recorded at historical cost.
  • At the time of sale of these assets, the profit or gain acquired from them remains high due to their high sale price in comparison to their purchase price. As a result, assessees also have to pay a higher income tax on the gains from these assets.
  • With the application of Cost Inflation Index for capital gain, in the long run, the purchase price of assets is adjusted according to their sale price, leading to lower profits and lower tax amount on them. Hence, the implementation of CII is beneficial for the assessees.

Concept of Base Year:

  • The ‘Base Year’ is the year from which the CII table starts.
  • In other words it is the very first year of the Cost Inflation Index.
  • The value of base year is always assumed to be 100. The index of all other years is expressed as a percentage of the base year.

Shift in Base Year from 1981 to 2001:

  • Earlier, 1981-82 was regarded as the base year. However, addressing the technical difficulties faced by valuers and tax authorities, the Government decided to shift the base year to 2001-02, so that valuations can be done faster and accurately.
  • The Central Board of Direct Taxes in February 2018 notified new Cost Inflation Index numbers applicable from 2017-18 onwards.
  • In this revision, there was a shift from the old base year of 1981 to 2001, with 100 taken as its CII. The indices for subsequent years were also revised accordingly.
  • In case of capital assets bought before April 1, 2001, taxpayers can take higher of actual cost or fair market value as on April 1, 2001, as the purchase price and enjoy the benefit of indexation.Changing the base year helps capture the property's inflated cost in a better manner, bringing down the capital gains and the tax burden.

Old Cost Inflation Index (Applicable from FY 1981-82 to FY 2016-17):

 

Financial Year

Assessment Year

Cost Inflation Index

1981-1982

1982-1983

100

1982-1983

1983-1984

109

1983-1984

1984-1985

116

1984-1985

1985-1986

125

1985-1986

1986-1987

133

1986-1987

1987-1988

140

1987-1988

1988-1989

150

1988-1989

1989-1990

161

1989-1990

1990-1991

172

1990-1991

1991-1992

182

1991-1992

1992-1993

199

1992-1993

1993-1994

223

1993-1994

1994-1995

244

1994-1995

1995-1996

259

1995-1996

1996-1997

281

1996-1997

1997-1998

305

1997-1998

1998-1999

331

1998-1999

1999-2000

351

1999-2000

2000-2001

389

2000-2001

2001-2002

406

2001-2002

2002-2003

426

2002-2003

2003-2004

447

2003-2004

2004-2005

463

2004-2005

2005-2006

480

2005-2006

2006-2007

497

2006-2007

2007-2008

519

2007-2008

2008-2009

551

2008-2009

2009-2010

582

2009-2010

2010-2011

632

2010-2011

2011-2012

711

2011-2012

2012-2013

785

2012-2013

2013-2014

852

2013-2014

2014-2015

939

2014-2015

2015-2016

1024

2015-2016

2016-2017

1081

2016-2017

2017-2018

1125

 

New Cost Inflation Index applicable from 1st April 2017 onwards:

  • In order to revise the base year for computation of capital gains, section 55 of the Income Tax Act, 1961 was amended vide Finance Act, 2017 so as to provide that the cost of acquisition of an asset acquired before 1st April 2001 shall be allowed to be taken as fair market value as on 1st April, 2001 and the cost of improvement shall include only those capital expenses which are incurred after 01.04.2001.
  • Cost inflation index for Long Term Capital Assets sold after 1st April 2017 as notified by CBDT Notification No. 44/2017 dated 05.06.2017 shall be as under:

 

Financial Year

Assessment Year

Cost Inflation Index

2001-02

2002-03

100

2002-03

2003-04

105

2003-04

2004-05

109

2004-05

2005-06

113

2005-06

2006-07

117

2006-07

2007-08

122

2007-08

2008-09

129

2008-09

2009-10

137

2009-10

2010-11

148

2010-11

2011-12

167

2011-12

2012-13

184

2012-13

2013-14

200

2013-14

2014-15

220

2014-15

2015-16

240

2015-16

2016-17

254

2016-17

2017-18

264

2017-18

2018-19

272

2018-19

2019-20

280

2019-20

2020-21

289

2020-21

2021-22

301

2021-22

2022-21

317

Indexed Cost of Acquisition:

  • Long-Term Capital Assets are recorded at historical cost in books of accounts. Despite increasing inflation, they exist at the cost price and cannot be revalued. When these assets are sold, the profit amount remains high due to the higher sale price as compared to purchase price. This also leads to a higher income tax.
  • The cost inflation index is applied to the long-term capital assets, due to which purchase cost increases, resulting in lesser profits and lesser taxes to benefit taxpayers. This increased purchase cost of asset is known as Indexed Cost of Acquisition.
  • For the computation of the indexed cost of Acquisition of a property, the seller needs to multiply the property's cost of acquisition with the Cost Inflation Index, as notified by the tax authorities for the year of transfer.
  • This figure then has to be divided by the cost inflation index of the year of purchase.

Formula:

 

Indexed Cost of Acquisition=Acquisition Cost of Asset X CII for the year of Sale / CII for the year of Purchase

Note: But, should the property be purchased prior to the base year of cost inflation index, one needs to know the property's fair market value for the base year.

Indexed Cost of Improvement:

Indexed Cost of Improvement =

 

Actual Cost of Improvement of Asset X CII for the year of Sale / CII for the year of Improvement

Example:

 

Year of Purchase of Asset

2004

Purchase Price of the Asset

Rs. 30 Lakhs

Year of Sale of Asset

2018

Sales Price of the Asset

Rs. 85 Lakh

Indexed Cost of Acquisition=Rs. 30,00,000X 280 / 113=Rs. 74,33,628

 

Capital Gain = 85,00,000 – 74,33,628 = 10,66,372

 

Other Important Notes:

  • If an asset is received by will, CII is considered for the year in which it is received. In this case, the asset’s actual purchase year is to be ignored.
  • Any improvement cost incurred before April 1st 2001 is not viable for indexation.
  • Benefits of indexation are not applicable for debentures or bonds, apart from RBI issued sovereign gold bonds or capital indexation bonds.

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