What is Cost Inflation Index? - Know 3 Things About CII

As inflation increases, the prices of goods increase too. Due to this, the purchasing power of money falls. For instance, if you can purchase ten units of some products in Rs. 1,000 today, you might only be able to buy eight units after two years due to the rise in inflation.But how is this increase in the price of goods due to inflation measured? With the help of the Cost Inflation Index (CII).With regards to taxation, CII could help investors reduce their capital gains from the sale of long-term capital assets. As the capital gains fall, so does the applicable income tax on the gains.Let us have a detailed look at three things every investor should know about CII-

As mentioned above, CII calculates the increase in the price of goods due to inflation year-by-year. For instance, let us assume that you purchase 10gms of gold today at Rs. 42,000. You sell the same after two years at Rs. 50,000. So, the capital gains here would be Rs. 8,000. You will then be required to pay applicable taxes on this amount.But assets like gold, real estate, debentures, and even debt funds get more expensive with time as the inflation rises. So, with regards to the same example, CII would allow you to increase the purchase price of gold (previously Rs. 42,000) to make up for the price rise due to inflation.This will help in reducing your capital gains when you sell it at Rs. 50,000. As the capital gains would fall, so will the income tax you will have to pay on the gains.

If left to the investor, every investor would have a different opinion on inflation. So, rather than letting investors calculate CII on their own, the Central Board of Direct Taxes (CBDT) is responsible for notifying the CII every year in the official gazette.The CBDT calculates the CII and comes up with a unique three-digit number, which is then considered for calculating the indexed cost of assets.

CII has a base year concept. For instance, if the base year is considered as 1981, it will be treated as the first year of CII and will have an index value of 100. This index value of 100 will then be used for calculating the CII for the following years.1981 was the base year for CII calculation in the past. The base year has now been shifted to 2001. Here is the CII for the last five years, considering 2001 as the base year with CII of 100-

Let us assume that you purchased a property in 2015 for Rs. 10 lakhs. You are selling the same in 2019 at Rs. 30 lakhs. So, the capital gains without the Cost Inflation Index (CII) is Rs. 20 lakhs. You will now have to pay taxes on Rs. 20 lakhs. But with CII, you can get capital gains reduced. Take a look-Indexed Acquisition Cost= 10,000,00 x 289/254Here,

• 10,000,000 is the purchase price
• 289 is the CII of year in which you sell the property; 2019 in this case, and
• 254 is the CII of year in which you purchased the property; 2015 in this case
  So, the Indexed Cost of Acquisition will be Rs. 11,377,95. For taxation, the cost of property purchase will be treated as Rs. 11,377,95.
  Due to this, your capital gains will fall to Rs. 18,622,05 from Rs. 20,000,00. Tax will now be paid on this lower amount of Rs. 18,622,05.

If you are planning to sell assets such as gold, real estate, or debt mutual funds , do take advantage of this indexation to increase the cost of purchase and reduce your tax liabilities.If this is the first time that you have been introduced to CII, you should consider professional help so that your tax liabilities could be legally reduced correctly.Ready to make the most of your money? Start your tax planning journey now!

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.