Cost Inflation Index
What is Cost Inflation Index?
An asset that was purchased in the year 2013 would normally be more expensive than an Asset that was
purchased in the year 2005. The reason for the same is that Inflation keeps on increasing year after year as a Result of which Prices of most of the Assets increase year after year.
For eg: Ram purchased an Asset in the year 2005 for Rs. 100. Now in the year 2013, he sells this for Rs. 200. Simple mathematics says that the Profit on such a transaction is Rs. 100 but would it be justifiable to enforce taxes on this Rs. 100 as the sale price also includes a component of Inflation? To remove the Inflation component from this profit, the Govt. has introduced the concept of indexing the cost to adjust for inflation in the value of Assets held for more than 36 months. The Indexing shall be done to the Cost of Acquisition and Cost of Improvement by the applying the Cost Inflation Index Factor as explained below.
For long-term capital gains, indexed cost of acquisition and indexed cost of improvement is deducted instead of cost of acquisition and cost of improvement.
The cost of acquisition and cost of improvement is indexed based on certain percentage of consumer price index.
The following table shows Cost Inflation Index as notified by the Central Government:
|Financial Year||Cost Inflation Index|
What is the cost of acquisition and cost of improvement for years prior to 1981-82?
For capital assets that became the property of the owner before April 1, 1981, either the actual cost of the capital asset or the fair market value of the asset as of April 1, 1981, can be taken.
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