Cost Inflation Index (CII) in Capital Gain

Cost Inflation Index (CII) in Capital Gain

1. What is Cost Inflation Index (CII) in capital gain?
2. What is the benefit of Indexation in Capital Gain?
3. Which costs are eligible for Indexation in Capital Gain?
4. How to calculate Indexed Cost of Acquisition in Capital Gain?
5. Which is the Base Year for calculation of Cost inflation Index in Capital Gain?
6. What are the year wise values of Cost Inflation Index till FY 2019-20?
7. Which type of capital asset is not eligible for indexation?
8. In case of Gifted or Inherited property, what period has to be considered for indexation?

1. What is Cost Inflation Index (CII) in capital gain?

Cost inflation index is a factor derived so as to adjust the historical purchase value to the effect of current decreased rupee value because of inflation, so the Indexation is a process by which the original or historical sot or cost of improvements are hiked by multiplying the index factor of current year so as to keep same rupee value as earlier.

2. What is the benefit of Indexation in Capital Gain?

The concept of this inflation index has been introduced to get a fair value of gain or loss because sale value in current year and purchase value in past years should come at par in terms of inflationary rise. By way of Indexation, we will have lesser taxable capital gain and the effect of inflation gets nullified.

3. Which costs are eligible for Indexation in Capital Gain?

Following components of cost are eligible for Indexation: -

1. Original cost of purchase in case of purchased asset
2. Original cost of Construction, in case of constructed property
3. Original cost of improvements or further construction on asset
4. Original cost of purchase / construction in hands of previous owner in case of inherited or gifted asset.

Note :-In the definition of improvements , the expenditure which are incurred on the asset to increase its life are covered, regular or general repair to keep its running are not improvements.

4. How to calculate Indexed Cost of Acquisition in Capital Gain?

The benefit of indexation is available only to the assets which fall as long-term capital assets. For computation of indexed cost of acquisition following are the key factors:

• • Year of Original purchase (Even if in case of Gift/ Will or inheritance, the year of original purchase by donor is required)
  • Year of improvement, if any
  • Year of transfer
  • Cost inflation index of the year of  original purchase/ onstruction
  • Cost inflation index of the year of  improvements, if any
  • Cost inflation index of the year of transfer

Following is the formula to calculate indexed cost of purchase or improvements

Cost of acquisition / improvements ×  (Cost inflation index of the year of transfer of capital asset / Cost inflation index of the year of acquisition / improvements )

5. Which is the Base Year for calculation of Cost inflation Index in Capital Gain?

Base Year for Cost inflation Index in Capital Gain :-

Govt has chosen 1st April 2001 as the base year for any asset acquired before 1st Apr. 2001. The assessee has the option to choose original purchase + improvement cost before 1^st Apr. 2001 or the fair market value of the property as on 1^st Apr. 2001 to take the acquisition value of asset before indexation.

Earlier this base year was 1st Apr. 1981.

6. What are the year wise values of Cost Inflation Index till FY 2019-20?

Following is the table of Cost inflation index as notified by the Central Government: -

7. Which type of capital asset is not eligible for indexation?

Following are the assets which are covered u/s 111A and not eligible for benefit of indexation:

• Equity shares which are recognised on a stock exchange in India and which are subject to STT
• Units of equity oriented mutual funds
• Units of business trust

In case of above assets with holding period of more than 12 months are considered as long-term capital asset, and any long term capital gain on above are chargeable to capital gain @10% in excess of Rs. 1 lac in a financial year and capital gain upto 1 lac is exempt from tax. But at the same time for calculation of capital gain, indexation does not apply on the cost of above assets.

8. In case of Gifted or Inherited property, what period has to be considered for indexation?

In case of will, gift or inheritance the indexation applies from the date on which original owner or previous owner acquired / purchases /constructed the asset. For improvements also prior to gift/ will/ inheritance, will be indexed from the date it was incurred by previous owner.

However, any improvements made by current owner would be indexed from the date it was incurrent by current owner.