COST INFLATION INDEX (CII)
COST INFLATION INDEX (CII)- Cost Inflation Index (CII) is used to measure the inflation when computing long-term capital gain on sale of Fixed Income and Fixed Assets. It is used only in fixed income, property and Gold Funds. But, it not used in equity-based products because in equity long term gains are tax-free. Capital gains are either short term or long term. Short term Capital Gains are earned if fixed assets are sold before 3 years. Long Term Capital gain is earned if it is sold after 3 years. Thus, in the case of short-term gain all gains will be added to your taxable income and taxed as per your current income tax slab. But, for those who earn long-term capital gain can enjoy the indexation benefit where your purchase value will be increased according to the cost inflation index. So, in simple terms, the assets purchased before three years will not cost same as compared to present time. Thus, the government gives you the benefit of inflation while computing Long term Capital Gain. The benefit of inflation is provided by the following method: The cost of the asset purchased three years ago will be less if you will consider the inflation rate over the past three years. Thus, when the government calculates Long term Capital gain they will not consider the purchase price of the asset on which you bought the asset. But, will instead inflate the purchase value using the cost inflation index (CII) and that value will be considered as the purchase price for computing Long term Capital Gain. To simplify your inflation calculation CBDT release cost inflation index every year on the budget announcement. This index helps you to calculate the long-term gains and here is the formula to calculate it: Indexed cost of acquisition = Actual cost of acquisition * CII of Year of Sale / CII of year of purchase
IF YOU HAVE ACQUIRED FROM SOMEONE ELSE THEN THIS THE FORMULA WOULD BE:
Indexed cost of acquisition = Actual cost of Acquisition * CII of Year of Sale / CII of year of purchase The cost of Inflation Index is available from 1981 and asset purchased before that period will be considered to be 1981 value. Cost Inflation Index (CII) Chart is as follows: Tag: Cost Inflation Index 2016-17, Cost Inflation Index 2015-16, CII,Cost Inflation Index In the case of debt funds there are two ways for long term Capital gains: (a) If you don’t want to choose indexation then you can simply pay 10% of gain as tax (b) Otherwise, you can choose indexation which is recommended and beneficial also To get clarity on computation please refer below example:Investment | In Debt fund |
Invested amount in FY 2011-12 | 1 Lakh |
Term | 5 year |
Rate of Return | @ 9% p.a. |
Maturity Amount before tax | INR 153862.40 |
Indexation on Invested Amount | INR 137703.68 (Invested amount X Cost of Inflation Index of 2015-16 / Cost of Inflation Index of 2011-12) |
Gain Earned before tax | INR 16155.4 (Indexed gain) |
Applicable Tax rate | 20% irrespective of slab on indexed gain |
Tax Charged | INR 3231.08 |
Total Maturity after Tax | INR 150631.32 |