If you want to measure the increment in the cost of goods, you will require some major tools out of which the Cost Inflation Index is the most important tool. The central government decides the CII in its official gazette to measure inflation.
The prices of goods will always increase if inflation increases the purchasing power of capital falls because of it. Suppose you decide to spend Rs. 2000/- for 20-units of some products or something near to it today, this doesn’t mean that you can buy the exact similar number of products after the passing of two or three years, you might be able to buy only fifteen products for the same price.
Now, here you will be having a question about the measurement of increment in the price of goods? Well, you can measure it with the help of CII, which is different for different FY (Financial Year).
The principal gains from the sale of long-term capital assets could be minimized by the help of the CII regarding taxation.
48th, Section of the Indian Income Tax Act, 1961, is followed for CII. On 12th June 2020, the Minister of Finance issued the notification regarding finical year (FY) 2020-21 for announcing the estimated value of CII, which is 301. It was 289 for the last FY 2019-20. The notification is dated 12 June 2020.
Before 1st, April 2001 if any development cost has been incurred, you shouldn’t worry as they don’t concern because FY 2001-02 is assumed as the base year for CII.
What Is Cost Inflation Index CII?
If you want to predict the approximation increase in the price of goods and assets year-by-year due to inflation, you will need support, and that support is the CII or Cost Inflation Index.
For example: if two units are bought for Rs.100/- today, there might be a possibility that tomorrow you could have only one unit for Rs.100/- this is due to inflation.
Before you use the tool CII for anything, you should know these points as they concern with CII-
i. CII number is utilized balanced cost uniquely for those where swelling balanced (indexation advantage) is permitted to ascertain expansion. In this manner, the CII esteem can’t be utilized to show up at LTCG/LTCL on value common assets. The sum that surpasses Rs.1lakh per budgetary is charged at a level pace of 10% without indexation advantage.
ii. To calculate LTCG for FY 2020-21, a CII number is required. While filing your income tax returns (ITR) for FY 2020-21 (AY 2021-22), you will have to pay the taxes on your gain.
MINISTRY OF FINANCE
(Department of Revenue)
(CENTRAL BOARD OF DIRECT TAXES)
New Delhi, the 12th, June 2020
S.O. 1879(E).—In concern of the powers presented by clause (v) of the Explanation to section 48 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby makes the subsequent further amendments in the notification of the Government of India, Ministry of Finance (Department of Revenue), Central Board of Direct Taxes, published in the Gazette of India, Extraordinary, vide number S.O. 1790(E), dated the 5th, June 2017 namely:—
- In the said announcement, in the Table, after serial number 19, the following serial number and entries relating to that shall be inserted, namely:—
- From 1st April 2021, an announcement regarding CII should come into motion, and it should be used for further evaluation year 2021-22 and subsequent years.
Formula To Calculate Cost Inflation Index (CII)
For calculating indexed cost, the seller needs to multiply the “cost of acquisition” purchase price to the CII notified by the tax authorities and then divide the multiple with the CII of the year of purchase.
Indexed cost of acquisition = (CII for a year of transfer . cost of acquisition) /CII for a year of assets
Indexed cost of improvement = (CII for a year of transfer . cost of improvement)/CII for a year of improvement.
Who Issues Cost Inflation Index (CII)?
The official gazette for measuring inflation is issued by the “central government” for fixing the value of the Cost Inflation Index. For the finical year 2020-2021, the finance minister has notified 301 as a CII (Cost Inflation Index).
A 75% average rise of the Consumer Price Index (CPI) for the immediately preceding year is the Cost Inflation Index.
Consumer Price Index (CPI) compares the price of goods of the current year with the same goods’ cost in the previous years.
Based on notification number S.O. 1879(E) [No. 32/2020 (F. No. 370142/17/2020-TPL)], dated 12-6-2020, the following table should be used for the Cost Inflation Index-
Cost Inflation Index from 2001-02 to 2020-2021
The Theory Behind A Base Year
In the first year of the Cost Inflation Index, having a predefined value of 100 is known as the base year. The Central Government decides the base year for CII by consulting it with Finance Minister or any Finance advisor.
Recently, the government has shifted base year from 1981-82 to 2001-02.
The government had the genuine reason behind shifting the base year from 1981-82 to 2001-02 when 1981-82 was considered a base year. Taxpayers were facing several difficulties in getting property valued purchase before 1 April 1981. And, relying upon the valuation reports were getting difficult for charge specialist as they were too old. Therefore, by shifting the base year from 1981-82 to 2001-02, the government favored both the charge specialist and the taxpayer, too, since now, valuation can be done effortlessly.
Calculating the exact percentile increment in the base year’s inflation index is compared with every other year.
Index for every other year is compared with the base year so the exact increase in inflation percentage could be calculated.
For any capital asset purchased before the base year of CII, taxpayers can take the acquisition price as higher of the “actual cost or Fair Market Value (FMV)” as on 1st day of the base year. The indexation benefit is applied to the purchase price calculated. FMV is based on the valuation report of registered value.
Use Of CII In The Income Tax Department
When assets are sold for a certain price, profit on sold items remains high due to the higher sale price compared to purchase price, which results in higher income tax.
On assets LTCA (Long Term Capital Assets) is applied, which results in higher purchase price so that there could be lesser profit and lesser taxes to benefit taxpayers.
Significant Points Concerning CII
- For capital indexation bonds or self-governing gold bonds issued by RBI only for these advantages of CII could be taken. Benefits could not be allowed in the case of debenture bonds.
- Before 1st, April 2001 if any development costs have been incurred, you should not pay any attention to it as it is before the base year.
- CII is considered for the year in which an asset has received a property at an individual will; here, the actual purchase year of assets could be ignored, and CII is considered for the year of purchase.
In FY 1993-1994, for Rs.1, 50,000 and investors purchased a capital asset. On 1st, April 2001 Rs.3, 20,000, was the FMV for the capital asset. And, in FY 2018-19, he decided to trade for the asset.
Find out the indexed cost of acquisition?
Before, the investor purchased the base year (2001-02) asset.
Hence, the cost of acquisition = Higher of authentic cost or FMV on 1st April 2001.
Here, Cost of Acquisition = Rs. 3, 20,000.
CII for the year 2001-02 and 2018-19 is 100 and 280, respectively.
Indexed cost of acquisition = 3, 20,000 x 280/100 = Rs. 8, 96,000.
Mrs. Paul invested in the purchase of a capital asset in Financial Year 1994-95 for Rs. 1, 00,000. Fair Market Value of this capital asset on April 1st, 2000 was Rs. 2, 25,000. He then proceeded to sell this asset in the financial year 2015-16.
In the case mentioned, the asset is purchased before the base year. Thus, the cost of asset acquisition, in this case, = Higher between FMV and actual cost of the asset, as on April 1st, 2000.
Therefore, the cost of acquisition of this asset = Rs. 2, 25,000/-
CII for the year 2001-02 and 2015-16 is 100 and 254 respectively.
Therefore, indexed cost of asset acquisition = (2, 25,000 x 254)/100 = Rs. 5, 71,500/-.
1. What is the percentile increase in CII of the current year than the previous year?
2. Why is CII advantageous for us?
Now for this capital of Rs. 10lakh, you will have to pay the tax. And no one wants to pay this huge tax to the government. But with the help of CII, you can minimize the capital gain.
5,000,000 is the acquisition price
CII of the year 2017 in which you are trading the property is 272, and
CII of the year 2014 in which you purchased the property is 264.
Rs. 5, 151, 51 will be the Indexed Cost of Acquisition.