Understanding the Cost Inflation Index (CII) in India
The Cost Inflation Index (CII) is a crucial tool in the Indian tax system, especially for calculating long-term capital gains on the sale of assets like real estate. It allows taxpayers to adjust the purchase price of their assets for inflation, thereby reducing the capital gains tax liability.
What is the Cost Inflation Index (CII)?
1. Meaning of CII
- CII Explained: The Cost Inflation Index (CII) is an index issued by the Indian government that reflects the inflation rate in the country. It is used to calculate the inflation-adjusted cost of assets, which helps in determining the long-term capital gains tax.
- Purpose of CII: The primary purpose of CII is to ensure that taxpayers are not unfairly taxed on the nominal gains arising from inflation. Instead, CII adjusts the purchase price of assets to reflect true capital gains.
2. Role of CII in Capital Gains Calculation
- Inflation Adjustment: When you sell a long-term asset like real estate, CII allows you to adjust the original purchase price of the asset to account for inflation, thereby reducing the taxable capital gain.
- Impact on Taxes: By reducing the capital gains through inflation adjustment, CII helps lower the tax burden for individuals selling long-term assets.
Budget 2024 Update: Major Changes to CII Benefits
As of July 23, 2024, the Indian government has made significant changes to the use of CII for calculating long-term capital gains. The indexation benefit, which allowed taxpayers to adjust the purchase price of their investments for inflation, has been discontinued. This means:
- No More Indexation for Long-Term Gains: Investors can no longer use CII to reduce their capital gains tax liability. The gains will now be computed based on the actual purchase price, leading to potentially higher taxable gains.
- Increased Tax Liability: Without the indexation benefit, long-term capital gains on the sale of assets like real estate will likely result in a higher tax burden for investors.
Cost Inflation Index (CII) Table for FY 2024-25
Below is the CII table from the base year 2001-02 to the current financial year 2024-25. This table is crucial for calculating long-term capital gains for property and other assets.
| 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 |
| 2021-22 | 317 |
| 2022-23 | 331 |
| 2023-24 | 348 |
| 2024-25 | 363 |
How to Calculate Capital Gains Using CII
1. Formula for Calculating Indexed Cost
To calculate the indexed cost of acquisition (which adjusts the purchase price for inflation), use the following formula:Indexed Cost=Original Purchase Price×CII of the Year of SaleCII of the Year of Purchase\text{Indexed Cost} = \text{Original Purchase Price} \times \frac{\text{CII of the Year of Sale}}{\text{CII of the Year of Purchase}}Indexed Cost=Original Purchase Price×CII of the Year of PurchaseCII of the Year of Sale​
2. Example Calculation
Suppose you bought a property in 2012-13 for ₹50 lakh and sold it in 2024-25 for ₹1 crore. The indexed cost of acquisition would be:Indexed Cost=₹50,00,000×363200=₹90,75,000\text{Indexed Cost} = ₹50,00,000 \times \frac{363}{200} = ₹90,75,000Indexed Cost=₹50,00,000×200363​=₹90,75,000
Your taxable capital gain would be ₹1 crore – ₹90.75 lakh = ₹9.25 lakh.
The Importance of CII in Real Estate Transactions
The Cost Inflation Index (CII) has long been a vital tool for calculating capital gains tax in the real estate market. However, with the recent budget changes, the removal of the indexation benefit marks a significant shift in how capital gains will be taxed in the future. Real estate investors must now carefully consider these changes when planning their investments and sales to manage their tax liabilities effectively.
