How to reduce tax burden by using Cost Inflation Index: The value of Rupee changes with time. If you are buying a property today for Rs 50 lakh and selling it after 10 years for Rs 70 lakh, then it is not necessary that your actual profit should be only Rs 20 lakh (Rs 70 lakh-50 lakh). This is because the real value of the rupee would have eroded due to inflation in these 10 years. That is, the value of Rs 70 lakh will not be the same as it was ten years ago. In such a situation, the Cost Inflation Index comes in handy for calculating how much you have actually benefited. This index also plays a big role in the tax calculation, with the help of which the tax burden can be reduced if the profit is calculated correctly.
Understand the Cost Inflation Index with an example
For example, suppose you have an old property, which you bought in 2010-11 for Rs 50 lakh. You sold it for Rs 1 crore in the financial year 2021-22. You will get Long Term Capital Gain (LTCG) from this sale and you will have to pay tax on it. If you do not use the cost inflation index, then your profit will be full Rs 50 lakh (Rs 1 crore-50 lakh), on which you will have to pay tax. But in case of LTCG on sale of assets, the benefit of indexation is available. Under this, the cost of the asset is calculated by adjusting for inflation over 11 years and then LTCG is calculated by deducting it from the sale price. In this example, the inflation adjusted cost price of the property works out to Rs 94.91 lakh. Accordingly, you will have to pay tax on only Rs 5.09 lakh (1 crore – 94.91 lakh).
Tax On Mutual Funds: How is the tax on the income earned from mutual funds, know what are the rules of income tax?
How is the Cost Inflation Index calculated?
A formula is used to calculate inflation adjusted cost price. This is the formula:
Inflation Adjusted Cost Price = (CII of Year of Sale / CII of Year of Purchase) X Actual Purchase Price
In this way, after calculating the inflation adjusted cost price i.e. cost price, after subtracting it from the selling price, we will know the correct LTCG.
In the above case the calculation will be like this,
Inflation Adjusted Cost Price = (317/167) X 50 Lakh = Rs.94.91 Lakh
CBDT issues CII number every year
For this calculation, we should have the CII data announced every year by the government. It is issued every year by the Central Board of Direct Taxes (CBDT).
The CII numbers from 2001-02 till date are as follows:
Financial Year – CII
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
In the 2017 budget, the central government changed the base year of CII from 1981-82 to 2001-02, i.e. now on April 1, to calculate the inflation-adjusted value of the property purchased before 2001. The index of 2001 will be considered as the base.
Where do you get the benefit of indexation?
The benefit of adjusting the inflation rate through CII in tax calculations will be available only in the case of assets on which indexation benefit is allowed under the rules. Hence, it cannot be availed in case of equity shares or equity mutual funds. But in case of sale of property like house, this benefit can be availed. Apart from this, the benefit of indexation can also be taken in the case of debt funds.
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