What Is the Cost Inflation Index? Purpose, CII Value, & Calculation Process Explained

Cost Inflation Index evaluates the increase in the value of assets, including lands, buildings, etc., due to inflation. During computation of CII, a 75% average increment in the Consumer Price Index for urban non-manual employees for the previous year is considered. Keep reading to know more vital aspects associated with it!

What Is the Purpose of the Cost Inflation Index?

inlation-index — (source: taxindiaupdates)

The primary purpose of the Cost Inflation Index is to adjust the value of an asset with the inflation rate. To understand this, let's take an example-

Suppose Mr Singh purchased a house worth ₹ 20,00,000 in FY 2016-2017 and sold it for ₹ 30,00,000 in FY 2021-2022. The capital gains arising from selling the house amount to ₹ 10,00,000. Now, Mr Singh may find the house's selling price inappropriate given the inflationary impact on its market value over the years. However, the selling value of this house will differ with each buyer.

Thus, to avoid this confusion, the Central Board of Direct Taxes issues this Cost Inflation Index every fiscal year and is presented in the Budget. CII assists individuals in receiving appropriate capital gains given the appreciation in the value of an asset because of inflation.

What Is the New and Old Cost Inflation Index?

Take a look at the following table of cost inflation index, divided into new and old CII:

New Cost Inflation Index

Fiscal Years	Cost Inflation Index
2021-2022	317
2020-2021	301
2019-2020	289
2018-2019	280
2017-2018	272
2016-2017	264
2015-2016	254
2014-2015	240
2013-2014	220
2012-2013	200
2011-2012	184
2010-2011	167
2009-2010	148
2008-2009	137
2007-2008	129
2006-2007	122
2005-2006	117
2004-2005	113
2003-2004	109
2002-2003	105
2001-2002	100

Old Cost Inflation Index

Fiscal Years	Cost Inflation Index
2016–2017	1125
2015-2016	1081
2014-2015	1024
2013-2014	939
2012-2013	852
2011-2012	758
2010-2011	711
2009-2010	632
2008-2009	582
2007-2008	551
2006-2007	519
2005-2006	497
2004-2005	480
2003-2004	463
2002-2003	447
2001-2002	426
2000-2001	406
1999-2000	389
1998-1999	351
1997-1998	331
1996-1997	305
1995-1996	281
1994-1995	259
1993-1994	244
1992-1993	223
1991-1992	199
1990-1991	182
1989-1990	172
1988-1989	161
1987-1988	150
1986-1987	140
1985-1986	133
1984-1985	125
1983-1984	116
1982-1983	109
1981-1982	100

How to Calculate Cost Inflation Index?

Calculation of Cost Inflation Index is simple using the following formula-

Cost Inflation Index = Cost Inflation Index of the financial year in which the asset was sold/Cost Inflation Index of a financial year in which the asset was purchased.

Let's understand the concept of CII with the help of an example-

Mr Alok purchased a house worth ₹ 30,00,000 in FY 2017-2018. He sold it in FY 2021-2022 for ₹ 45,00,000. The long-term capital gain amounts to ₹ 15,00,000.

Then, the calculation is as follows:

Particulars	CII Value
CII of Purchasing year	272
CII of Selling Year	317
Cost Inflation Index (317/272)	1.16

How Is the Indexation Benefit Applied to Long-Term Capital Assets?

When the cost inflation index is used to calculate income tax, indexation is applied to an asset's acquisition or purchasing cost to get the indexed acquisition cost. This is an inflation-adjusted value of an asset.

The formula to get indexed acquisition cost is-

Indexed acquisition cost = Purchasing cost of an asset x cost Inflation Index.

Thus the calculation is illustrated in the table mentioned below following the similar example stated above-

Particulars	Amount
Purchasing cost	₹ 30,00,000
CII	1.16
Indexed acquisition cost (₹ 30,00,000 x 1.16)	₹ 34,80,000

As can be seen, the indexation method can help one inflate an asset's acquisition cost. Now, to arrive at a long-term capital gain after indexation, individuals need to use the following formula –

Long term capital gains = Selling price of an asset – indexed cost of acquisition.

Thus, the calculation is illustrated in the table mentioned below following the similar example stated above–

Particulars	Amount
Selling price	₹ 45,00,000
Indexed acquisition cost	₹ 34,80,000
LTCG (₹ 45,00,000 - ₹ 34,80,000)	₹ 10,20,000

How to Reduce Tax Liabilities on Long Capital Gains Using CII?

Considering the similar example mentioned above, if Mr Alok uses the indexation method, he needs to pay a tax rate of 20% on long term capital gains. Then, the tax payable towards LTCG is –

Particulars	Amount
Long term capital gains	₹ 10,20,000
Tax rate charged	20%
Tax payable towards LTCG (₹ 10,20,000 x 20%)	₹ 2,04,000

If Mr Alok does not calculate LTCG using the indexation method, he needs to pay 20% on ₹ 15,00,000 (LTCG without indexation). Then, the tax payable towards LTCG is:

Particulars	Amount
Long term capital gains (selling price – acquisition cost)	₹ 15,00,000
Tax rate charged	20%
Tax payable towards LTCG (₹ 15,00,000 x 10%)	₹ 3,00,000

Thus, as it can be seen from the example stated above, Cost Inflation Index lowers the taxable capital gains (from ₹ 15,00,000 to ₹ 10,20,000), which subsequently reduces the tax liability of an assessee (₹ 3,00,000 to ₹ 2,04,000).

Knowing about the cost inflation index and other vital information associated with it will streamline the process for taxpayers to calculate long term capital gains. Moreover, it will help them reduce their tax liabilities, and they can reinvest the savings in tax payments in other financial instruments.

Frequently Asked Questions

All

Can the Cost Inflation Index be used to calculate short-term capital gains?

No, Cost Inflation Index is not used to calculate short-term capital gains or losses.

an an NRI use CII while computing long-term capital gains?

No, only Indian residents are eligible to use the Cost Inflation Index while evaluating long-term capital gains.

Is indexation benefit available on equity-oriented mutual funds and equity shares?

No, indexation benefit is not available on equity-oriented mutual funds and equity shares whose capital gains are above ₹ 1,00,000 and are taxable at a flat rate of 10%.