COST INFLATION INDEX

Inflation in simple terms means an ‘increase’ or ‘raise’. The Cost

Inflation Index acts as a tool that is used to calculate the rise in the
price of an asset over a period of time due to the constant inflation
changes. Under section 48, Income Tax Act, 1961, every year the
inflation index is fixed by the Central Government and published in
the official gazette.
Cost Inflation Index= 75% of the average rise in the consumer price
index (it is the calculation of an increase in prices from the previous
year as compared to the present year).
 WHY COST INFLATION INDEX?
Cost Inflation Index or CII is used to calculate long-term capital gains or LTCG. CII (Cost
Inflation Index) for the year in which the asset was purchased and the year in which the
asset was sold is considered when calculating capital gains. You get the benefit of cost
indexing only for long-term capital gain.

Cost after indexing = Cost before indexing Cll for sale year / Cll for purchase year.

Capital Gain = Sale Price - Cost after Indexing.

To compute long-term capital gains, you (property seller) have to calculate indexed cost of
purchasing the property. You have to multiply property's cost of acquisition with the cost
inflation index for the year of transfer. This is divided by the cost inflation index for the year
of purchase.
Who notifies the Cost

The Central Government specifies the cost inflation index by notifying in

the official gazette.
Inflation Index

Cost Inflation Index = 75% of the average rise in the Consumer Price
Index* (urban) for the immediately preceding year.
*Consumer Price Index compares the current price of a basket of goods
and services (which represent the economy) with the cost of the same
basket of goods and services in the previous year to calculate the
increase in prices.
The formula for calculating CII price
In order to calculate the long term capital gains/long term capital losses, and to

calculate the cost inflation index price, the formula is=

Actual cost price X (CII year of sale/CII year of purchase)

Example 1: A person purchased a property in the FY 2001-02, and the property is sold
by him in the year 2019-20 for ₹3,00,000. Calculate the indexed cost.

The Cost Inflation Index price= 3,00,000* (289/100)= ₹8,67,000

Example 2: An asset was purchased by an individual in the FY 1957-58, well before the
base year, for ₹1,00,000. And the fair market value for this asset was ₹2,80,000 in the
year 2017-18. Calculate the indexed cost.
Since the asset was purchased before 2001, i.e., the base year, the higher cost of
acquisition is taken into consideration.
The calculation for the indexed cost is as follows: 2,80,000*(272//100)= ₹7,61,600.

What is the current Cost

Inflation Index
What is the concept of base year in Cost Inflation Index

The long term capital assets always have a fixed value (cost price) irrespective of the
inflation, and the price of these assets cannot be revalued. When these assets are sold, a
high profit is generated further leading to high income-tax amounts. In order to help the
taxpayers and buyers from paying a high amount of taxes, the CII is applied, wherein the
price of the assets is increased, leading to a decrease in the profits and taxes.
To make the calculations for inflation percentage and Cost Inflation Index viable, a base
year is decided, in which the value of CII is 100. Earlier, the base year was 1981-82, but,
recently in 2017, the base year has been shifted to 2001 to make the valuation process
simpler and viable, as many taxpayers faced issues while making calculations on the value
of properties that were purchased before 1st April 1981. For all the purchases made
before 1st April 2001, the taxpayers will be able to avail of all the indexation benefits by
taking higher of the fair market value (FMV).
The change in the base year has helped in reducing the capital gains and pressure of high
taxes on the individuals.
How is indexation
benefit applied to long-
term capital assets
 How is Cost Inflation Index used in
Income Tax

Long-Term Capital Assets are recorded at cost price in books. 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. To benefit the
taxpayers, cost inflation index benefit is applied to the long-term capital assets, due
to which purchase cost increases, resulting in lesser profits and lesser taxes
 Construction cost index for buildings (CCI)
(input price index)

The index measures changes in cost for production factors in housing construction, that is,
materials of various types, equipment, salaries, transport, etc. The index does not take account
of the market situation, but is based on measurements of a number of goods and salaries. Index
figures are calculated for multi-dwelling buildings, collectively built one- or two-dwelling
buildings and agricultural buildings in total and by major type of cost.
 Conclusion:

As such, the CII plays a key role in keeping a check on the changes in the economy.
Additionally, it allows the central government to keep a track of how the inflation
rates have changed over the past years, the way in which they can benefit the
taxpayers and how other changes can be brought in to transform the economy.
T
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