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

What Is the Purpose of the Cost Inflation Index?

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- indexed cost of improvement if any

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 10% plus applicable surcharge 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

10%

Tax payable towards LTCG (₹ 15,00,000 x 10%)

₹ 1,50,000

The assessee can use indexation whenever it is beneficial for him or her.

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