What is Cost Inflation Index (CII)?
It is a measure of inflation that finds application in tax law, when computing long-term capital gains on sale of assets. Section 48 of the Income-Tax Act defines the index as what is notified by the Central Government every year, having regard to 75 per cent of average rise in the consumer price index (CPI) for urban non-manual employees for the immediately preceding previous year.
How does CII help in capital gains computation? Capital gain, as you know, arises when the net sale consideration of a capital asset is more than the cost. Since “cost of acquisition” is historical, the concept of indexed cost allows the taxpayer to factor in the impact of inflation on cost. Consequently, a lower amount of capital gains gets to be taxed than if historical cost had been considered in the computations.
Formula for computing indexed cost is (Index for the year of sale/ Index in the year of acquisition) x cost.
For example, if a property purchased in 1991-92 for Rs 20 lakh were to be sold in A.Y. 2009 -10 for Rs 80 lakh, indexed cost = (582/199) x 20 = Rs 58.49 lakh. And the long-term capital gains would be Rs 21.51, that is Rs 80 lakh minus Rs 58.49 lakh.
Cost Inflation Index:- Cost inflation index (CII)as notified by Central Government is as under:
Financial Year (CII) Financial Year (CII)
1981-82 100 1996-1997 305
1982-83 109 1997-1998 331
1983-84 116 1998-1999 351
1984-85 125 1999-2000 389
1985-86 133 2000-2001 406
1986-87 140 2001-2002 426
1987-88 150 2002-2003 447
1988-89 161 2003-2004 463
1989-90 172 2004-2005 480
1990-91 182 2005-2006 497
1991-92 199 2006-2007 519
1992-93 223 2007-2008 551
1993-94 244 2008-2009 582
1994-95 259 2009-2010 632
1995-96 281 2010-2011 711
