Cost Inflation Index

Prices of goods increase over time, resulting in a fall in the purchasing power (quantity of goods that one unit of money can buy) of money.

If two units of goods could be bought for Rs 100 today, tomorrow only one unit might be available for Rs 100 due to inflation.

Cost Inflation Index (CII) is used to estimate the increase in the prices of goods and assets year-by-year due to inflation.

Why is Cost Inflation Index calculated?

Cost Inflation Index is calculated to match the prices to the inflation rate. In simple words, an increase in the inflation rate over time will lead to a rise in the prices.

Who notifies the cost inflation index?

The Central Government specifies the cost inflation index by notifying in the official gazette.

Cost Inflation Index = 75% of the average rise in the Consumer Price Index* (urban) for the immediately preceding year.

*Consumer Price Index compares the current price of a basket of goods and services (which represent the economy) with the cost of the same basket of goods and services in the previous year to calculate the increase in prices.

What is the current Cost Inflation Index?

Financial Year

Cost Inflation Index (CII)

2001-02 (Base year) 100

2002-03 105

2003-04 109

2004-05 113

2005-06 117

2006-07 122

2007-08 129

2008-09 137

2009-10 148

2010-11 167

2011-12 184

2012-13 200

2013-14 220

2014-15 240

2015-16 254

2016-17 264

2017-18 272

2018-19 280

2019-20 289

2020-21 301

How is Cost Inflation Index used in Income Tax? Long-Term Capital Assets are recorded at cost price in books. Despite increasing inflation, they exist at the cost price and cannot be revalued.

When these assets are sold, the profit amount remains high due to the higher sale price as compared to purchase price. This also leads to a higher income tax.

The cost inflation index is applied to the long-term capital assets, due to which purchase cost increases, resulting in lesser profits and lesser taxes to benefit taxpayers.

To benefit the taxpayers, cost inflation index benefit is applied to the long-term capital assets, due to which purchase cost increases, resulting in lesser profits and lesser taxes.

What is the concept of base year in Cost Inflation Index?

The base year is the first year of the cost inflation index and has index value as 100. Index of all other years is compared to the base year to see the increase in inflation percentage.

For any capital asset purchased before the base year of cost inflation index, taxpayers can take the purchase price as higher of the “actual cost or Fair Market Value (FMV) as on 1st day of the base year. Indexation benefit is applied to the purchase price so calculated.

FMV is based on the valuation report of a registered valuer.

Why is the base year of Cost Inflation Index changed to 2001 from 1981?

Initially, 1981-82 was considered as the base year. But, taxpayers were facing hardships in getting the properties valued 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.

So, for a capital asset purchased before 1st April 2001, taxpayers can take higher of actual cost or FMV as on 1st April 2001 as the purchase price and avail benefit of indexation.

How is indexation benefit applied to long-term capital assets?

When the indexation benefit is applied to “Cost of Acquisition” (purchase price) of the capital asset, it becomes “Indexed Cost of Acquisition”.