scorecardresearchHow does the cost inflation index help you determine inflation-adjusted

How does the cost inflation index help you determine inflation-adjusted value of assets? An explainer

Updated: 12 Apr 2023, 04:44 PM IST
TL;DR.

The cost inflation index (CII) is used by the Income Tax Department of India to compute the inflation-adjusted value of certain assets or securities. It takes the consumer price index into account and helps to ensure that taxpayers pay only what they should be paying in terms of taxes.

The cost inflation index (CII) is used by the Income Tax Department of India to compute the inflation-adjusted value of certain assets or securities.

The cost inflation index (CII) is used by the Income Tax Department of India to compute the inflation-adjusted value of certain assets or securities.

The Central Board of Direct Taxes (CBDT) has notified the cost inflation index for FY 2023-24 relevant to AY 2024-25 at 348, for the purpose of calculating long-term capital gains from the sale of immovable property, securities and jewellery.

The CII is released every year and is applicable to the financial year starting from 1 April. This index is used for taxation purposes and helps determine the amount of tax that a person has to pay on their capital gains.

What is the cost inflation index?

The cost inflation index (CII) is a tool used by the Income Tax Department of India for computing the inflation-adjusted value of certain assets or securities. It is calculated by taking the consumer price index (CPI) into account and is used to factor in the effects of inflation while computing the capital gains arising from the purchase or sale of certain assets.

This is done to ensure that the amount of capital gains is accurately determined. The CII helps to ensure that the capital gains are calculated based on the current market value of the asset or security, taking into account the inflation rate.

This affirms that the real value of the asset is accurately reflected in the amount of capital gains. This helps to ensure that the taxpayer pays only what he or she should be paying.

Why is the cost inflation index used?

The purpose of the cost inflation index is to provide an accurate calculation of the capital gains arising from the sale of certain assets. This is done by taking into account the effect of inflation on the value of the asset over the years. It helps taxpayers in determining the amount of taxes that need to be paid on their capital gains.

In order to qualify as "long-term capital gains," an asset must typically be held for more than 36 months (24 months for real estate and unlisted shares, 12 months for listed securities).

The CII is used to determine the inflation-adjusted purchase price of assets in order to calculate taxable long-term capital gains since rising prices for products cause a decline in purchasing power over time.

How is the cost inflation index calculated?

The CII is calculated by taking into account the changes in the consumer price index (CPI). It is calculated by taking the average of the CPI for the base year (1981-82) and the current year. The base year is used as the reference point and the CPI for the current year is used to compute the inflation-adjusted value of the asset.

The CII is used to calculate the long-term capital gains arising from the sale of certain assets. The capital gains tax is calculated by subtracting the indexed cost of acquisition (CII of the year in which the asset was purchased) from the indexed sale consideration (CII of the year in which the asset was sold). The difference between these two figures is the capital gain amount and this is used to calculate the amount of tax payable.

The CII helps to ensure that the taxpayer pays only what they should be paying in terms of taxes. Thus, the CII is an important tool for taxation purposes and helps to ensure that taxes are paid accurately.

 

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First Published: 12 Apr 2023, 04:44 PM IST