What is cost inflation index? Why is it important in calculation of capital gains?

Cost inflation index is the most important set of figures that one needs when computing capital gains tax. It's an index that is released by the government every year.

Cost inflation index and its use in computing capital gains tax

The index helps to compute capital gains tax. Capital gains tax is nothing, but the tax that you have to pay on sale of a capital asset like real estate, gold etc

Let's cite an example...

Say you purchased a flat in Mumbai for Rs 10 lakh in 1990 and sold the same at Rs 50 lakhs in 2014. Now, you have made a cool profit of Rs 40 lakhs from sale of the apartment. This does not mean that you have to pay tax on the entire Rs 40 lakhs. Since, inflation from 1990 to 2014 has escalated the cost of living you have to arrive at a fair value.

The table below shows you the cost inflation index.

So, in the above example the Indexed Cost of Acquisition = (Actual cost of purchase) x (CII Of Year of Sale)/(CII of Year of Purchase).

Therefore the indexed cost of acquisition in the above case would Rs 10 lakhs x 939/199 = Rs 47,18,592.

Therefore you would pay capital gains as follows: Sale price - minus indexed cost of acquisition = Rs 50,00,000 - 47,18,592 = Rs 2,81,400

Therefore the capital gains would be 20 per cent of Rs 2,81,400 = Rs 56,280

Table with cost inflation index since 1981-82

Year Cost Inflation Index

1981-82 100
1982-83 109
1983-84 116
1984-85 133
1985-86 140
1986-87 150
1987-88 161
1988-89 172
1989-90 182
1990-91 199
1991-92 223
1992-93 244
1993-94 259
1994-95 281
1996-97 305
1997-98 331
1998-99 351
1999-2000 389
2000-2001 406
2001-2002 426
2002-2003 447
2003-2004 463
2004-2005 480
2005-2006 497
2006-2007 519
2007-2008 551
2008-2009 582
2009-2010 632
2010-2011 711
2011-2012 785
2012-2013 852

2013-2014 939

Conclusion

Remember to always use the cost inflation index in computing capital gains tax. If you have made a profit on sale of a capital asset, you must pay capital gains tax. To know how to save capital gains tax in India click here

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