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

By Sunil Fernandes
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    What is cost inflation index? Why is it important in calculation of capital gain
    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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