Cost Inflation Index

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The prices of goods are getting higher but the value for money is going down. Ever wondered why? It's because of the fall in the purchasing power which again brings down the value of money. Goods that were sold at Rs. 50 before 10 years are sold at Rs. 100 today.

These results are often calculated based of the cost inflation index set by central government as notified by Central Board of Direct Taxes (CBDT). Inflation also brings down the purchasing power of nation's currency.

To be specific, Inflation means the sustained increase in the price of goods and services over a period of time.

What is Cost Inflation Index (CII)?

CII is an index used to calculate the effect of inflation by calculating the estimated increase in the capital assets or goods year after year.

Why is the Cost Inflation Index calculated?

As the Inflation rate increases, the price increases. CII is used to measure this price of inflation and calculate the long term capital gains to determine the actual value or sale of capital asset.

Cost Inflation Index from Financial Year 2001-02 to 2018-19:

Sl. No. Financial Year Cost Inflation Index
1 2001-02 100
2 2002-03 105
3 2003-04 109
4 2004-05 113
5 2005-06 117
6 2006-07 122
7 2007-08 129
8 2008-09 137
9 2009-10 148
10 2010-11 167
11 2011-12 184
12 2012-13 200
13 2013-14 220
14 2014-15 240
15 2015-16 254
16 2016-17 264
17 2017-18 272
18 2018-19 280

Source: incometaxindia

Cost Inflation Index from Financial Year 2001-02 to 2018-19:

Financial Year Cost Inflation Index Financial Year Cost Inflation Index
1981-1982 100 1999-2000 389
1982-1983 109 2000-2001 406
1983-1984 116 2001-2002 426
1984-1985 125 2002-2003 447
1985-1986 133 2003-2004 463
1986-1987 140 2004-2005 480
1987-1988 150 2005-2006 497
1988-1989 161 2006-2007 519
1989-1990 172 2007-2008 551
1990-1991 182 2008-2009 582
1991-1992 199 2009-2010 632
1992-1993 223 2010-2011 711
1993-1994 244 2011-2012 785
1994-1995 259 2012-2013 852
1995-1996 281 2013-2014 939
1996-1997 305 2014-2015 1024
1997-1998 331 2015-2016 1081
1998-1999 351 2016-2017 1125

Source: incometaxindia
The above Index Table is important and it can be used to calculate long term capital gains of any asset.

Why the revision from 1981 to 2001?

Problems arose when tax players started facing difficulties in getting their properties valued that were purchased prior to April, 1981. Changing the base year also helped tax authorities to value the property faster and better. Also, as per the change, tax payers can take higher CII value as of April 2001 even if the property was brought before the base year 2001 helping the benefits of indexation.

Practical examples of how Indexed Cost of Acquisition and capital gain are calculated using CII?

Indexed Cost of Acquisition = Original price * (CII for year in which the asset was sold / CII of the year in which asset was originally bought or acquired)

Say, if the property was purchased in 2004 for Rs. 5,00,000 and sold for Rs. 20,00,000 in 2016 Indexed Cost of Acquisition is calculated as follows.

In this case, Indexed Cost of Acquisition =5,00,000*254/113

= 5,00,000 * 2.24

Hence, Indexed Cost of Acquisition = Rs. 11,23,893.80

And, Capital Gain = 20,00,000-11,23,893

Capital Gain = Rs. 8,76,106

Capital gain here is the profit made by selling an asset. Simply put, it's the gain that arises from the capital asset or the property when it is sold. Greater the Capital gain, higher the worth of the asset.