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Wednesday, October 27, 2021

What is the Cost Inflation Index? Know how this index can reduce the tax burden on you?

The Central Board of Direct Taxes (CBDT) has declared the Cost Inflation Index (CII) 317 for the financial year 2021-22.

Cost Inflation Index (CII) And It’s Benefits: The Central Board of Direct Taxes i.e. CBDT said a few days ago that the Cost Inflation Index (CII) for the financial year 2021-22 will be 317. For its last financial year i.e. 2020-21, this index was 301. When CBDT released this index through a notification, some people will not be interested in it. Whereas some people must have raised the question that what is this index after all? What is its use? Let us know the answers to these questions, from which it will also be known how beneficial this index is for an income tax payer.

What is Cost Inflation Index?

The Cast Inflation Index is released every year by CBDT. This index shows how much the actual cost of an asset has increased over time due to rising inflation. With the help of this index, you can know that if you adjust the inflation rate of the property you bought five, ten or twenty years from now, then what will be its true cost at current prices.

Why CBDT releases Cast Inflation Index?

The next question that may arise in your mind is that why does the CBDT issue the Cost Inflation Index (CII) which adjusts the cost according to the inflation rate? This is because this index is issued to help in calculating the exact tax to be collected from the income tax payers.

CII helps in the calculation of which tax?

Long Term Capital Gains (LTCG) tax is calculated with the help of Cost Inflation Index. With the help of this, long-term capital gains are calculated on the sale of those properties, on which the taxpayers get the benefit of indexation in the tax levied. If this index is not there, it can be very difficult to calculate LTCG accurately, as the cost of an asset has increased due to inflation, it can be calculated in different ways by different people. If this happens, the exact figure of tax can get embroiled in disputes, which can create unnecessary difficulties for both the taxpayer and the Income Tax Department. But with the help of CII, this calculation is done very easily.

This example will make it easier to understand

Suppose you bought a property in the year 2010 for Rs 50 lakh and in 2016 you sold it for Rs 75 lakh. Looking at these figures, at first glance, it seems that you have made a long term capital gain of Rs 25 lakh on selling this property. If this is true, then you will have to pay LTCG tax on Rs 25 lakh. But in reality it is not so. On this profit you will get the benefit of indexation. That is, the increase in the cost of the property between the purchase and sale due to inflation will not be considered as profit. Due to which your tax liability will be reduced significantly. But the question here is, how much is the increase in the cost of property due to inflation? The answer is – with the help of the Cast Inflation Index.

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.

CII numbers from the year 2001-02 till date

For this calculation, we should have the CII data announced by the government every year. The CII numbers from 2001-02 till date are as follows:

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 government changed the base year of CII from 1981-82 to 2001-02. Therefore, now the cost of the property purchased before 2001 is also calculated on the basis of the index of April 1, 2001.

In which cases the benefit of CII is not available?

It is important to keep in mind that the benefit of adjusting inflation 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.

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Nisha Chawlahttps://www.businesskhabar.com/
She is an expert in Banking, Finance and working with an international bank. She sharing her ideas and knowledge with Business Khabar.
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