Budget 2025 Updates
As per Budget 2025, the income tax rebate u/s 87A has been increased to Rs.60,000, making an income upto Rs.12 lakhs as tax-free under the new tax regime. However, this increased rebate is not applicable on special grade incomes such as ‘Capital Gains’.
What is Cost Inflation Index?
Cost Inflation Index (CII) is a tool used in India to adjust the purchase price of an asset for inflation, as inflation can impact the cost of an asset over time. CII is used to adjust the purchase price of an asset for inflation so that the actual inflationary gain or loss can be accurately determined when the asset is sold.
The CII is used to compute long-term capital gains tax in India. Long-term capital gains arise when an asset is sold after being held for more than a specified period. The CBDT announces the CII for a particular financial year before the start of the financial year.
Cost Inflation Index Table from FY 2001-2002 to FY 2024-25
Find the updated CII Table from the Financial Year 2001-02 (Base Year) to FY 2023-24 below:-
| Financial Year |
Cost Inflation Index |
| 2024-25 |
363 |
| 2023-24 |
348 |
| 2022-23 |
331 |
| 2021-22 |
317 |
| 2020-21 |
301 |
| 2019-20 |
289 |
| 2018-19 |
280 |
| 2017-18 |
272 |
| 2016-17 |
264 |
| 2015-16 |
254 |
| 2015-16 |
240 |
| 2013-14 |
220 |
| 2012-13 |
200 |
| 2011-12 |
184 |
| 2010-11 |
167 |
| 2009-10 |
148 |
| 2008-09 |
137 |
| 2007-08 |
129 |
| 2006-07 |
122 |
| 2005-06 |
117 |
| 2004-05 |
113 |
| 2003-04 |
109 |
| 2002-03 |
105 |
| 2001-02 & Base Year |
100 |
How is Cost Inflation Index used in Income Tax?
The Cost Inflation Index (CII) serves as a crucial metric utilized by the Indian government to estimate inflation on an annual basis. It plays a pivotal role in adjusting the purchase price of an asset for inflation, thereby ensuring fair taxation in the realm of capital gains.
In practical terms, the CII is employed in income tax calculations to modify the purchase price of an asset, effectively reflecting the impact of inflation when computing capital gains tax. By utilizing the CII, taxpayers can mitigate the impact of inflation on their taxable gains, resulting in a more equitable taxation system.
This adjustment facilitated by the CII has a tangible effect on the tax liability of taxpayers, particularly concerning long-term capital gains. As the inflated purchase price lowers the capital gains amount subject to taxation, taxpayers find themselves facing a reduced tax burden on their long-term capital gains.
How to Calculate Cost Inflation Index
If you acquired a property in 2005 for ₹20,00,000 and subsequently sold it in the financial year 2023-24, consider the Cost Inflation Index (CII) values as follows:
CII for FY 2005-06 = 117
CII for FY 2023-24 = 348
The indexed cost of acquisition for the property can be calculated as:
Indexed Cost of Acquisition = (CII for FY 2023-24 / CII for FY 2005-06) * Cost of Acquisition
Substituting the given values:
Indexed Cost of Acquisition = (348 / 117) * 20,00,000
= 5,948,717.94
Therefore, the indexed cost of acquisition of the property would be approximately 5,948,717.
Note: After budget 2024, taxpayers now have the option to choose between a 20% tax rate with indexation and a 12.5% tax rate without indexation. The taxpayers can choose the one that is more beneficial to them.
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What is the Purpose of Cost Inflation Index?
In the realm of accounting, companies typically record long-term capital assets, such as machinery, at their original cost price in their balance sheets. However, over time, the value of these assets may increase due to inflation, rendering it impractical to adjust their valuation in the accounting books.
When such capital assets are eventually sold, the sale price often exceeds the original cost price, leading to substantial long-term capital gains. Consequently, the taxpayer becomes liable to pay a higher long-term capital gains tax on the profit derived from the sale.
To address this issue and ensure fair taxation, the concept of the Cost Inflation Index (CII) is instrumental. The CII methodology extends to capital gains, enabling taxpayers to adjust the purchase price of capital assets in accordance with the sale price. This adjustment mechanism effectively mitigates the impact of inflation on the taxable gains, allowing taxpayers to demonstrate lower long-term capital gains and thereby reducing their tax liability.
By incorporating the CII into capital gains calculations, taxpayers can accurately reflect the erosion of purchasing power over time. This approach ensures that the taxation system remains equitable, as it taxes individuals or businesses based on their real gains rather than nominal ones. Ultimately, the utilization of the CII in capital gains taxation aligns with principles of fairness and economic efficiency, promoting a more balanced and transparent tax regime.
What is Base Year in Cost Inflation Index?
India uses a Cost Inflation Index (CII) to account for inflation when calculating capital gains for tax purposes. This index is based on a specific "base year," which was most recently changed from 1981 to 2001. This means that the CII for the financial year 2001-2002 is considered 100, and the CII for all other years is calculated relative to this starting point.
Why is the Base Year of Cost Inflation Index Changed to 2001 from 1981?
Taxpayer faced hardships in getting the property values which were purchased before 1st April 1981. Tax authorities were also finding it difficult to rely on the valuation reports. Hence, the government decided to shift the base year to 2001 so that valuations can be done quickly and accurately.
Why Base Year is Important in Cost Inflation Index?
The choice of the base year in the Cost Inflation Index (CII) is important as it serves as the reference point for determining the CII in subsequent years. This standardized approach in selecting the base year ensures an accurate reflection of the impact of inflation on the indexed acquisition cost.
Alterations to the base year can exert a substantial influence on the computation of the Cost Inflation Index. In the case of India, the shift in the base year from 1981 to 2001 resulted in resetting the CII for 2001-02 to 100. This adjustment has implications for the calculation of the indexed acquisition cost, particularly for assets procured before 2001, potentially leading to variations in capital gains tax liabilities.
How Can Indexation Lower Assesses’ Tax Liabilities on LTCG
The utilization of the Cost Inflation Index (CII) in capital gains taxation aims to adjust the purchase price of capital assets against their sale value, thus providing a more accurate reflection of the real gains accrued over time. This adjustment process yields two essential figures: the Indexed Cost of Acquisition and the Indexed Cost of Improvement.
The formulas for calculating these indexed costs are as follows:
Indexed Cost of Acquisition: Cost Inflation Index (CII) for the year of asset transfer (sale) / CII for the first year of the asset purchase or year 2001-02, whichever is later X cost of acquisition
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