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Cost Inflation Index for FY 2024-25
An overview of the cost inflation rate for the FY 2024–25
In this post, we will discuss Cost Inflation Index for Long Term Capital Gains in FY 2024-25.
Let’s look at each section in detail:
- Meaning of Cost Inflation Index (CII)
- What is the Cost Inflation Index?
- Cost Inflation Index Table from FY 2001-02 to FY 2024-25
- What is the Purpose of Cost Inflation Index?
- How is the Cost Inflation Index used in Income Tax?
- Reason for Base Year to change from 1981 to 2001
- How is indexation benefit applied to long-term capital assets?
- How to Calculate Cost Inflation Index?
- How is CII Useful?
- Things to Consider about Cost Inflation Index
- Example
- FAQs
Meaning of Cost Inflation Index (CII)
The cost inflation index (CII) is a way of measuring inflation. It is used in the computation of long-term capital gains earned from the sale of assets. CII use Consumer Price Index (CPI) to calculate inflation, and it helps reduce the amount of tax payable on long-term capital gains.
Since the price of a capital asset usually increases in between the years of purchase and sale, selling the asset would net the owner a significant amount.
Thus, the government levies tax on such transactions, the owner would have to pay heavy tax on these transactions.
In order to reduce tax, the asset’s selling price is indexed to consider the asset’s current value, taking into consideration the inflation reducing its value. So, the profit from the sale is less and thus reducing the payable capital gains. The purchase price is referred to as the indexed cost of acquisition, and the cost inflation index (CII), is the indexed price that the asset is purchased.
You can calculate CII on the official Income Tax website- Cost Inflation Index
Note: The Indian government fixes CII for a particular year and released it before the end of the accounting year.
What is the Cost Inflation Index?
The Cost Inflation Index (CII) is used for calculating long-term capital gains from the sale or transfer of capital assets such as land, property, stocks, trademarks, or patents. Capital gains are the profits made from such sales or transfers.
Long-term capital assets are usually recorded at their original cost in financial records. This means they don’t reflect the market’s increasing value over time.
When these assets are sold, the difference between the selling and original purchase prices might be large, resulting in higher income tax liabilities.
The CII helps by modifying the purchase price of assets based on inflation, reducing overall profits and cutting taxable income.
Cost of Inflation Index till FY 2023-24 or AY 2024-25
You can see the list of Cost Inflation Index (CII) for Long Term Capital Gains for recent years.
|
Financial Year |
Cost Inflation Index |
|
2001-02 |
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 |
|
2021-22 |
317 |
|
2022-23 |
331 |
|
2023-24 |
348 |
|
2024-25 |
363 |
Note:
- The CBDT changed the base year from 1981 to 2001. So FY 2001-02 is taken as the base year for calculation.
Download the Cost Inflation Index PDF by clicking here
What is the Purpose of Cost Inflation Index?
When a capital asset is sold, the difference between the selling price and the initial purchase price is considered a long-term capital gain, which is taxable. However, the value of these assets may increase over time as a result of inflation or other circumstances. Traditional accounting systems may require revaluing these assets to reflect their current market value. To account for inflation, the original purchase price of an asset is adjusted using the Cost Inflation Index (CII). This adjustment reduces the taxable long-term capital gain, reducing the total tax payment.
How is the Cost Inflation Index used in Income Tax?
The Cost Inflation Index (CII) is an annual inflation index calculated by the Indian government. It helps to adjust an asset’s purchase price for inflation by multiplying it by the ratio of the CII in the year of selling to the CII in the year of purchasing.
In income tax, the CII is used to calculate long-term capital gains by adjusting the purchase price for inflation. This reduces the taxable capital gains, resulting in a lower long-term capital gains (LTCG) tax for the taxpayer.
Reason for Base Year to change from 1981 to 2001
The government initially selected 1981-82 as the foundation year for computing the Cost Inflation Index. However, taxpayers found it difficult to value long-term investments purchased prior to April 1, 1981. Even the government found it difficult to rely on value reports because of the limited technology available at the time. To address this, the base year was shifted to 2001-02.
For assets purchased before April 1, 2001, taxpayers may select the lowest value between the actual purchase price and the Fair Market Value as of April 1, 2001.
How is indexation benefit applied to long-term capital assets?
The Cost Inflation Index (CII) is used to calculate the adjusted purchase price of capital assets while taking inflation into account. The Indexed Cost of Acquisition is calculated by applying indexation to the purchase price or acquisition cost.
Here’s how the formulas work:
1.Indexed Cost of Acquisition
2.Indexed Cost of Improvement
How to Calculate Cost Inflation Index?
The Cost Inflation Index (CII) is required for estimating the indexed cost of buying or improving assets. Let us explain this with an example of a house sale:
- Purchase price: ₹5,00,000
- Purchase date: April 5, 2007 (FY 2007-08)
- Sale price: ₹30,00,000
Sale date: May 14, 2017 (FY 2017-18)
Formula for Indexed Cost of Acquisition
Indexed cost = Purchase price × (CII for the year of sale ÷ CII for the year of purchase)
Calculation:
Using the CII values:
- CII for FY 2017-18 = 272
- CII for FY 2007-08 = 129
Indexed cost = ₹5,00,000 × (272 ÷ 129) = ₹10,54,264
Capital Gains:
Capital gains = Sale price – Indexed cost
= ₹30,00,000 – ₹10,54,264 = ₹19,45,736
Thus, the indexed cost reduces the taxable capital gains to ₹19,45,736.
How is CII Useful?
The indexing helps you to save a large amount of Income Tax levied on the long-term capital gain. But, it is not available for short-term capital gain/losses or Non-Resident Indians.
Indexing is only available if you meet the following:
- The cost of acquisition of the asset has to be multiplied by the cost of inflation of the year it was transferred.
- That figure is to be divided by the CII for the year in which you acquired the asset.
- If the asset was purchased before 1981, the CII of the year 1981 is taken into consideration.
- If you have made improvements to the asset, then you need to adjust the cost inflation index by multiplying with the CII of the year the improvement was made.
Things to Consider about Cost Inflation Index
Here are some important considerations to note when determining the indexed cost of asset acquisition:
- For assets obtained through a will, the Cost Inflation Index (CII) of the year of inheritance is used, rather than the actual purchase year of the asset.
- Indexation benefits are not available for bonds or debentures, except for sovereign gold bonds or capital indexation bonds issued by the RBI.
- Improvement costs incurred before April 1, 2001 are not eligible for indexing.
Example
Example 1:
Ramesh bought a flat in FY 2001-02 for ₹10,00,000 and sold it in FY 2017-18.
The Cost Inflation Index (CII) for the financial year 2001-02 is 100, whereas for fiscal year 2017-18 it is 272.
Indexed Cost of Acquisition:
₹10,00,000 × (272 ÷ 100) = ₹27,20,000.
Example 2:
Priya bought a home in FY 1995-96 for ₹2,00,000. On April 1, 2001, the property’s fair market value (FMV) was ₹3,20,000. She sold it in the financial year 2016-17.
For assets purchased before April 1, 2001, the acquisition cost is the greater of the actual cost or the fair market value on April 1, 2001.
Acquisition Cost: ₹3,20,000 (higher of ₹2,00,000 or ₹3,20,000)
CII for FY 2001-02 is 100, and for FY 2016-17, it is 264.
Indexed Cost of Acquisition:
₹3,20,000 × (264 ÷ 100) = ₹8,44,800.
Example 3:
Amit bought equity shares for ₹1,00,000 on March 1, 2015 and sold them on April 1, 2020.
The CII for FY 2014-15 is 240, and for FY 2020-21, it is 301.
Indexed Cost of Acquisition:
₹1,00,000 × (301 ÷ 240) = ₹1,25,416.
Example 4:
Deepak purchased Sovereign Gold Bonds (SGB) in November 2015 for ₹2,00,000. He repaid the bonds early in January 2021 (after 5 years) at a market price of ₹2,55,000.
The CII for FY 2015-16 is 254, and for FY 2020-21, it is 301.
Cost of Acquisition:
₹2,00,000 × (301 ÷ 254) = ₹2,37,007.
With that, we have come to the end of this post. Share with us your views and queries regarding this post in the comment section below.
FAQs
1. What exactly does CII mean in terms of income tax?
Ans: In income tax, CII stands for the Cost Inflation Index, which is used to estimate the annual increase in the cost of goods and assets due to inflation.
2. What is the objective of using the Cost Inflation Index?
Ans: The Cost Inflation Index helps to modify capital asset purchase prices to account for inflation. This ensures that the gains from selling the asset are minimized, resulting in a lower tax burden.
3. What is the cost inflation index for 2024-25?
Ans: The Cost inflation index for FY 2024-25 is 363.
4. When was India's Cost Inflation Index implemented?
Ans: The Cost Inflation Index was first implemented in India in 1981.
