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

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

New Cost Inflation Index

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Old Cost Inflation Index

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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:

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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-

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–

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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 –

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:

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

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.