Cost Inflation Index – Detailed Explanation
Prices of goods keep on increasing timely, thus resulting in the fall in the purchasing power of money. Let’s take an example: If 2 units of goods are bought today at a price of INR 100; tomorrow only 1 unit will be available for INR 100 due to increasing inflation. Talking about this, the Cost Inflation Index or CII is used for the calculation of the estimated increase in the prices of goods & assets yearly due to inflation.
What is the Need for the Calculation?
CII is calculated to match up the prices to the inflation rate. To simplify, an increase in the inflation rate over a certain time-period will lead to an increase in the prices.
Who Notifies the CII?
The Central Government specifies the CII by notifying in the official gazette.
The Current CII?
|Financial Year||CII Number|
How is CII used in Income Tax?
Long-term Capital Assets are calculated at cost price. Despite increased inflation, they exist at the cost price & cannot be re-valued. When these are sold out, the profit amount remains high due to the high price as compared to purchase price, thus, leading to a higher income-tax. Turning beneficial to tax-payers, CII benefit is applied to long-term capital assets; due to which purchase cost increases, thus, resulting in lesser profits & lesser taxes.
The Concept of Base Year in CII?
The base years are referred to as the first year of CII & have index value as INR 100. Index of other years is compared to base year just to see the increase in the percentage of inflation.
For any capital asset purchased before the base year of CII, tax-payers can take the purchase price as higher of the – Fair Market Value or actual cost as on 1st day of the base year. Also, the indexation benefit is applied to the purchase price so calculated.
Points to Think About
- Index benefit is not allowed in case of debentures or bonds except sovereign gold bonds or indexation bonds issued by RBI.
- Ignore the improvement cost incurred before – 1st April 2001.
- If the property has received in the will, CII must be taken for the year wherein the property is received. NOTE: The actual purchase year of the property must be ignored.
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