## Cost Inflation Index - What is Cost Inflation Index? How to calculate CII?

The cost inflation index is a way to measure the inflation level for the current financial year furnished by the income tax department in each year’s budget. This helps us to calculate the changes in the value of assets or items that we purchased last year but sold in the current year. Generally, the prices of goods rise over time which decreases the purchasing power.

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## 1. What is the Cost Inflation Index?

(Cost inflation index) CII is simply put to calculate the asset’s value after adjusting the cost price along with inflation. However, you can’t put it to calculate the gains/losses on equities, mutual funds, and equity shares (amount above Rs.1 Lakh) taxed at a 10% rate without any advantage of indexation. For instance - If you have bought 5 units of goods today for Rs.1000, tomorrow only 2 units might be available for Rs. 1000. There comes a cost inflation index to measure this increment in the price of goods year-by-year. Tax Department has announced the Cost Inflation Index to ease the calculations of long-term gains. The cost inflation index is issued by them every financial year in the yearly Budget. The base year is Currently 2001.

## 2. Why is it important to calculate Cost Inflation Index?

The cost Inflation Index is essentially computed to match the prices to the increased inflation rate. In easy words, an increment in the inflation rates over time will lead to a rise in prices. The Old Cost Inflation Index Cost Inflation Index (CII) Financial Year 551 2007-08 582 2008-09 632 2009-10 711 2010-11 785 2011-12 852 2012-13 939 2013-14 1024 2014-15 1081 2015-16 1125 2016-17 The New Current Cost Inflation Index CII (Cost Inflation Index) Financial Year 2001-02 100 2002-03 105 2003-04 109 2004-05 113 2005-06 117 2006-07 122 2007-08 129 2008-09 137 2009-10 148 2008-11 167 2007-12 184 2012-13 200 2013-14 220 2014-15 240 2015-16 254 2016-17 264 2017-18 272 2018-19 280 2019-20 289 2020-21 301 2021-22 317 2022-23 331

## 3. How It is Calculated?

The prescribed formula to calculate the inflation cost price is - (CII of the year of sale/CII for the year of purchase)*Actual cost price. Let’s assume that Mr. Rohan purchased a house for RS. 30,00,000 in the year 2000 and sold it for Rs. 45,00,000. The accumulated profit made over the years by Mr. Rohan is Rs. 15,00,000. The cost inflation index in the year 2000 was 389 and 582 in the year 2009. Therefore, the CII = 582/389 = 1.49 The government had stated in the budget 2017 that the base year (earlier 1981) will be replaced with 2001 due to the challenges in receiving the relevant details by taxpayers.

## 4. What is the role of the base year in the Cost Inflation Index?

The base year in the cost inflation index is the foremost year which has an index value of 100. To calculate the increased percentage in inflation, other indexes of other years are compared with the base year. For any if in case of a capital asset that is purchased before the base year of CII, taxpayers can rise the purchasing price than the “actual cost or Fair Market Value on the 1st day of the base year. Indexation benefit is applied to the purchase price which is too calculated.

#### What is the cost inflation index for F.Y. 2015-16?

The cost inflation index for F.Y. 2015-16 is 254.

#### What is the base year in the new CII?

The base year in the new cost inflation index is 2001-02 with a base index of 100.

#### Which asset can not be adjusted for CII?

Indexation advantages can’t be used for bonds, debentures, and RBI-issued sovereign gold bonds.

#### Can CII be applied to asset improvement costs?

Yes, indexation can be used for the cost of asset improvement if the asset has been kept for more than two years.

#### Are Short-term capital gains eligible for indexation advantages?

No. The short-term gains are not eligible for indexation advantages.

Krishna Gopal Varshney co-founder & CEO of Myitronline.com. Myitronline is amongst the top emerging startups of Asia and authorized ERI by the Income Tax Department. A dedicated and tireless Expert Service Provider for the clients seeking tax filing assistance and all other essential requirements associated with Business/Professional establishment. Connect to us and let us give the Best Support to make you a Success. ”

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