The term "CII" stands for Cost Inflation Index. It is a value notified by the government that reflects the annual increase in the price of goods and services due to inflation. While the government notifies the CII values, individuals use these values to calculate the indexed cost of acquiring an asset, particularly for calculating long-term capital gains tax.
The reference provides the formula for calculating the indexation cost (or indexed cost) using the Cost Inflation Index.
Calculating Indexed Cost Using CII
To calculate the indexed cost of acquisition for a capital asset, you use the following formula as mentioned in the reference:
Indexed Cost = (Index for the year of sale / Index for the year of acquisition) x Cost
Let's break down the components of this formula:
- Index for the year of sale: This is the Cost Inflation Index value for the financial year in which you sell the asset.
- Index for the year of acquisition: This is the Cost Inflation Index value for the financial year in which you acquired the asset. If the asset was acquired before the base year for CII (currently FY 2001-02), the index for FY 2001-02 is used.
- Cost: This refers to the actual cost of acquiring the asset (or the Fair Market Value as on 1st April 2001 if acquired before that date, whichever is higher, when using the 2001-02 base year).
This calculation adjusts the original cost of the asset for inflation over the holding period, providing a more realistic cost basis when calculating capital gains.
Why is Indexation Important?
Indexation helps in reducing the tax liability on long-term capital gains. By adjusting the cost basis for inflation, the taxable gain is reduced, as the gain is calculated as Sale Price minus Indexed Cost (or Original Cost if no indexation is applied or applicable).
Where to Find CII Values?
The Cost Inflation Index values are notified annually by the Income Tax Department of the government. You can typically find the official CII charts on the Income Tax Department's website or through reputable financial news sources and tax portals.
Example Calculation
Let's assume:
- An asset was acquired in FY 2005-06 for ₹5,00,000.
- It was sold in FY 2022-23.
- The CII for FY 2005-06 was 117.
- The CII for FY 2022-23 was 331.
Using the formula from the reference:
Indexed Cost = (Index for the year of sale / Index for the year of acquisition) x Cost
Indexed Cost = (CII for FY 2022-23 / CII for FY 2005-06) x ₹5,00,000
Indexed Cost = (331 / 117) x ₹5,00,000
Indexed Cost ≈ 2.82906 x ₹5,00,000
Indexed Cost ≈ ₹14,14,530
| Item | Value |
|---|---|
| Cost of Acquisition (FY 2005-06) | ₹5,00,000 |
| CII for FY 2005-06 | 117 |
| CII for FY 2022-23 | 331 |
| Indexed Cost of Acquisition | ₹14,14,530 |
In this example, the original cost of ₹5,00,000 is indexed to approximately ₹14,14,530 to account for inflation over the holding period. This indexed cost is then used to calculate the long-term capital gain.
