What is Cost Inflation Index?
The global economy is active and constantly changing. This shift can be seen in a decline in the purchasing power of money due to a continuous rise in the cost of goods and services. Inflation is the occurrence of a decrease in the value of money, that results in a spike in an individual's cost of living. The Cost Inflation Index (CII) is a measure used to calculate the projected yearly rise in the price of an asset due to inflation. This index is set by the Central Government and published in the official gazette to measure inflation. Section 48 of the Income Tax Act of 1961 defines this index, which is notified by the government each year
What is the Goal of CII?
A Cost Inflation Index table is employed to calculate the long-term capital gains from a capital asset transfer or sale. Capital gain refers to the profit earned from the sale/transfer of any capital assets, including land, property, stocks, shares, trademarks, patents, etc. Long-term capital assets are typically documented in books at their cost price. As a result, these capital assets cannot be re-evaluated despite growing asset prices. As a result, when these assets are sold, the profit or gain obtained from them stays higher owing to their elevated market price in relation to their acquisition price. As a result, assesses must pay a greater income tax on these assets' gains. In the long run, applying the Cost Inflation Index for capital gain adjusts the purchase price of assets based on their sale price, resulting in smaller earnings and lower tax amounts.
In February 2018, the Central Board of Direct Taxes announced revised Cost Inflation Index figures for 2017-18. This change shifted the original base year of 1981 to 2001, with 100 serving as the CII. The indexes for succeeding years were likewise updated. This change in the base year was made in response to taxpayers' difficulty in calculating the tax payable on gains from capital assets bought prior to 1981.
How is CII calculated?
Inflation-adjusted cost price is calculated as follows: (CII of the year of sale/CII of the year of purchase) * Actual cost price.
Due to difficulties in acquiring relevant information by taxpayers, the government indicated in Budget 2017 that the base year will be moved from 1981 to 2001. In the case of an asset purchased before April 1, 2001, the cost is considered to be the fair market value on that day.
Current Cost Inflation Index
The Central Board of Direct Taxes (CBDT) announced the cost inflation index (CII) for the fiscal year 2022-23 on June 14, 2022. The Cost Inflation Index for FY 2022-23, which is applicable to AY 2023-24, is 331.
The CII was notified as 348 issued by CBDT Notification No. 21/2023/F.No. 370142/5/2023-TPL dated 10-04-2023.