-Rachana Anup / 08-Apr-2019
The prices of goods are getting higher but the value for money is going down. Ever
wondered why? It’s because of the fall in the purchasing power which
again brings down the value of money. Goods that were sold at Rs. 50 before 10 years are
sold at Rs. 100 today.
These results are often calculated based of the cost inflation index set by central government as notified by Central Board of Direct Taxes (CBDT). Inflation also brings down the purchasing power of nation’s currency.
To be specific, Inflation means the sustained increase in the price of goods and services over a period of time.
What is Cost Inflation Index (CII):
CII is an index used to calculate the effect of inflation by calculating the estimated increase in the capital assets or goods year after year.
Why is the Cost Inflation Index calculated?
As the Inflation rate increases, the price increases. CII is used to measure this price of inflation and calculate the long term capital gains to determine the actual value or sale of capital asset.
|Sl. No.||Financial Year||Cost Inflation Index|
|Financial Year||Cost Inflation Index||Financial Year||Cost Inflation Index|
Why the revision from 1981 to 2001?
Problems arose when tax players started facing difficulties in getting their properties valued that were purchased prior to April, 1981. Changing the base year also helped tax authorities to value the property faster and better. Also, as per the change, tax payers can take higher CII value as of April 2001 even if the property was brought before the base year 2001 helping the benefits of indexation.
Practical examples of how Indexed Cost of Acquisition and capital gain are calculated using CII?
Indexed Cost of Acquisition = Original price * (CII for year in which the asset was sold
/ CII of the year in which asset was originally bought or acquired)
In this case, Indexed Cost of Acquisition =5,00,000*254/113
= 5,00,000 * 2.24
Hence, Indexed Cost of Acquisition = Rs. 11,23,893.80
And, Capital Gain = 20,00,000-11,23,893
Capital Gain = Rs. 8,76,106
Capital gain here is the profit made by selling an asset. Simply put, it’s the gain that arises from the capital asset or the property when it is sold. Greater the Capital gain, higher the worth of the asset.