The document discusses the Cost Inflation Index (CII) under the Indian Income Tax Act. CII is used to calculate inflation and adjust capital gains on long-term assets to account for the decrease in purchasing power of money over time due to inflation. It provides the annual CII rates since 2001-2002 and explains how to calculate the indexed cost of acquisition of assets using CII rates for the year of purchase and sale. Applying the indexation benefit through this adjustment can reduce capital gains taxes for taxpayers.

1. Introduction
In an economy, with time, the value of money keeps decreasing, which leads to a
notional increase in the cost/prices of all the commodities in that economy. The
increase in price decreases the purchasing power of a person. In other words,
with one unit of money, a person will be able to buy less and less of a commodity
with time. This decline in the power of money, which ultimately increases the
cost of living, is known as inflation. For instance, let’s suppose Ramesh was able
to buy 10 mangoes with Rs. 100 in the year 2000; however, in 2020, he could
only buy 2 mangoes with the same amount of money. This reduction in the
power of Rs 100 to buy the same number of mangoes over time is due to
inflation.
In case of long-term capital assets, it is very important to take into account the
effects of inflation while calculating the capital gains tax under the Income Tax
Act. Inflation not only increases the selling price of a capital asset but also makes
the capital gains look large thus accounting for a large tax. This article intends to
guide the readers about the impacts of inflation on long-term capital assets and
how Cost Inflation Index saves the taxpayers from a huge capital gains tax. It also
answers questions like: How to calculate capital gains with Cost Inflation Index?
And How can one benefit from Cost Inflation Index from while calculating long-
term capital gain tax on sale of property in India?
What is Cost Inflation Index?

2. The government of India has notified CII or Cost Inflation Index under Section 48
of the Income Tax Act, 1961. CII serves the purpose of calculating inflation, that
is, an estimated increase in the price of commodities/capital assets over the
years.
How is CII Calculated?
The Central Government calculates and publishes the CII in the official gazette.
The following table presents the value of CII for the last 21 years.
Notified Cost Inflation Index Under Section 48, Explanation (V)
As per Notification No. 2336(E) [No. 73/2021 (F. No. 370142/10/2021-TPL)],
Dated 15-6-2021 following table should be used for the Cost Inflation Index:
Cost Inflation Index Table
S. No. Financial
Year
Cost Inflation
Index
1 2001-02 100
2 2002-03 105
3 2003-04 109
4 2004-05 113
5 2005-06 117
6 2006-07 122
7 2007-08 129
8 2008-09 137
9 2009-10 148
10 2010-11 167
11 2011-12 184
12 2012-13 200
13 2013-14 220
14 2014-15 240
15 2015-16 254
16 2016-17 264
17 2017-18 272
18 2018-19 280
19 2019-20 289
20 2020-21 301
21 2021-22 317
Government of India has only released the CII for the FY 2021-2022. Cost
Inflation Index for FY 2022-23 will be released before the end this financial
year. Therefore, Cost Inflation Index for AY 2023-24 will be released soon so
that exact capital gains can be computated.

3. CII is generally used for calculating long-term capital gains under Income Tax
Act resulting from the sale of long-term capital assets such as land, bonds, stocks,
housing property, etc.
Cost Inflation Index = 75% of the average rise in the Consumer Price Index*
(urban) for the immediately preceding year.
• Consumer Price Index (CPI) compares and measures changes over the
years in the general price levels of goods and services that the public uses
for consumption purposes.
Role of Cost Inflation Index in Income Tax
Or
How to apply Cost Inflation Index in Capital Gains?
When a long-term capital asset is sold, its selling is naturally higher than the cost
price due to a linear increase in the price of the asset over several years. Selling
price also makes the profit larger and, in turn, leads to higher income tax on such
profits. However, due to inflation, the profits are inflated – indicating less
increase in the real selling price of the asset. To protect the taxpayers’ gains from
the effects of inflation, the government allows the Cost Inflation Index to be
applied to the long-term capital assets, which increases the purchasing price of
the assets in the books. This ultimately leads to lesser profits and lesser taxes,
thus providing taxpayers with the benefits of real gains from the sale of their
assets. The Government of India fixes the Cost Inflation Index annually before the
end of a financial year.
Concept of the base year in Cost Inflation Index
The first year which is set as a base for the cost inflation index is known as the
base year. The index of every other year and the increase in inflation is
determined after comparing it to the base year. If any capital asset was
purchased before the base year of cost inflation index, then the asset’s purchase
price will be valued at the actual cost or a “Fair Market Value” (FMV) as on the
1st day of the base year. The purchase price so arrived at will be used for
calculating the indexation benefit. Although a registered valuer can be consulted
for calculating FMV, nevertheless, there is no fixed formula for calculating the
FMV of an asset. One of the widely used techniques for arriving at FMV is to
compare the selling price of similar assets in the same location at that time.
Change of the Base Year of Cost Inflation Index from 1981 to 2001
The initial base year of 1981-82 was changed to 2001-02 for the convenience of
the taxpayers as they were facing difficulties in the valuation of their assets
purchased before 1st April 1981. Besides, the tax authorities did not find the

4. valuation reports based on the previous base year as very reliable. So for an asset
that was purchased before 1st April 2001, the taxpayer can either calculate an
FMV as on 1st April 2001 or a higher value than the purchase price for availing
the indexation benefit.
Applying Indexation Benefit to Long-term Capital Assets
Applying the indexation benefit to “Cost of Acquisition” (i.e., purchase price) of
the capital asset turns it into “Indexed Cost of Acquisition.”
Formulae:
Indexed Cost of Acquisition = (CII for the year of sale x Cost of purchase)/CII
for the year in which the capital asset was first held or year 2001-02, whichever
is later.
Indexed Cost of Improvement = (CII for the year of sale x Cost of
Improvement)/CII for the year in which improvement to the capital asset were
made
Important Points:
In case of property inherited through a will, CII has to be taken for the year in
which the asset was received. Here the actual year of the purchase of the asset
has to be ignored.
Any improvement cost added to the capital asset before 1st April 2001 has to be
ignored too.
Debentures and bonds (except sovereign gold bonds issued by the RBI or capital
indexation bonds) do not qualify for indexation benefit.
Illustrations:
Case I – Mrs. X purchased a house in FY 2001-02 for Rs. 20,00,000. She sold the
house in FY 2017-18. Calculate the indexed cost of acquisition for the house.
Here, Cost Inflation Index for FY 2001-02 and 2017-18 are 100 and 272,
respectively (See the Cost Inflation Index Chart). Therefore, the indexed cost of
acquisition for Mrs. X’s house = 20,00,000 x 272/100 = Rs. 54,40,000
Case II – Mr. Y bought a capital asset in FY 1995-1996 for Rs. 5,00,000. FMV of
the asset as on 01-April-2001 was arrived at Rs. 7,20,000. Mr. Y sold the capital
asset in FY 2016-2017. Determine the indexed cost of acquisition.
In this case, the capital asset was acquired before the base year. Therefore, the
cost of acquisition will either higher of actual cost or FMV as on 01-April-2001.
Therefore, the cost of acquisition will be Rs. 7,20,000.

5. CII for the FY 2001-02 and 2016-17 are 100 and 264, respectively.
Therefore, the indexed cost of acquisition = 7,20,000 x 264/100 = Rs. 19,00,800
Case III – Calculate the indexed cost of acquisition if Ram purchased equity
shares of Rs. 2,00,000 on 01-March-2015 and sold them on 01-April-2020.
CII for the FY 2014-15 (year of purchase) and FY 2020-2021 (year of sale) are
240 and 301 respectively. Therefore, the indexed cost of acquisition = 2,00,000 x
301/240 = Rs. 2,50,833
Case IV – Nitin purchased Sovereign Gold Bolds (SGB) in November 2015 at Rs.
4,00,000. He prematurely withdrew the bonds at the market price of Rs. 4,95,000
in January 2021. What is the indexed cost of acquisition for Nitin?
CII for the FY 2015-16 (the year of purchase) and FY 2020-21 (the year of sale)
are 254 and 301, respectively.
Therefore, the indexed cost of acquisition = Rs. 4,00,000 x 301/254 = Rs.
4,74,016
Source: https://www.manishanilgupta.com/blog-details/cost-inflation-index-
under-income-tax-act
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