Cost Inflation Index

Cost Inflation Index ( CII ) is a measure of inflation that is used for computing long-term capital gains on sale of capital assets.

 It is set by the central government every year and useful in calculating the indexed value of the capital assets which in turn helps an individual/tax payer to understand the actual long term gain or loss on selling of capital assets and at last allows the individual/tax payer to factor the impact of inflation on the cost of their asset.

What are Capital Assets?

Capital Assets are the assets  which can be held by a person for examples Mutual Funds(Equity, Debt), Real Estate , Shares ,Gold, Fixed Maturity Plan(FMP) , Fixed returns Instruments such as Fixed Deposit.

How to calculate Capital Gain ?

Capital Gain = Sale Consideration – Indexed Cost of Acquisition

Indexed Cost of Acquisition Actual Price * ( Index in the year of Sale / Index in the year of purchase )

To calculate the indexed cost of acquisition we need divide the Cost Inflation Index or CII for year in which asset is sold by the Cost Inflation Index or CII for a year in which asset is bought, then multiplied with the purchase price of the asset to arrive at the indexed cost of acquisition which is the actual or true cost used at the time of tax computation or calculation.

Cost Inflation Index 1981-82 to 2015-16

 

Example, if a property purchased in 1991-92 for Rs 20 Lakh were to be sold  in F.Y. 2008 -09 for Rs 80 Lakh.

Indexed cost = (582/199) x 20 = Rs 58.49 Lakh

Long Term Capital Gain = (Rs 80 Lakh minus Rs 58.49 Lakh ) =  Rs 21.51 Lakh instead of Rs. 60 Lakh

Long Term Capital Gain Tax = 20 % of Long Term Capital Gain

                                                                               = 20 %  of 21.51 Lakh

                                                                               = Rs. 4.30 Lakh

You can use indexation benefits for investments such as : Mutual Funds(Equity, Debt), Real Estate , Shares ,Gold, Fixed Maturity Plan(FMP).

You cannot use indexation benefit for Fixed returns Instruments such as Fixed Deposit, Recurring Deposit, Post Office MIS, NSC, Interest on Saving Bank Account .

What are Long Term and Short Term Capital Assets ?

Assets are classified as Long Term or Short Term with reference to the period of holding of the assets till it is transferred. The classification is made on the following basis.

After  July 10, 2014

Nature of Asset

Short Term Capital Asset

 Long Term Capital Asset

 (i) Shares in a company or any other security listed in a recognised stock exchange in India or equity oriented mutual fund

Held for not more than 12 months.

 Held for more than 12 months.

 (ii) Assets other than assets mentioned in (i) above.

 Held for not more than 36 months.

Held for more than 36 months.

Long Term Capital Gain Tax Rate :

Long Term Capital Gains (for other than equity oriented) will be taxed at a flat rate of 20% with indexation.

You can calculate Long Tem Capital Gain Tax through below Calculator :

 

Short Term Capital Gain Tax Rate :

Other than Stocks and Equity Oriented Funds, any Short Term Capital Gain for rest of all Capital Assets Class is taxed as ordinary income i.e. It means any income you receive must be included in your taxable income for that year.

Short term capital gain tax on Stocks and Equity Oriented Funds is flat 15% irrespective of income slab of the tax payer.