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.

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.

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

 

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. 

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. 

FAQs

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.