Cost Inflation Index (CII) For FY 2021-22
Cost Inflation Index (CII) For FY 2021-22
Cost Inflation Index (CII) is used for calculating the indexed cost of acquisition and indexed cost of improvement of capital assets under Section 48 of the Income Tax Act, 1961 for the calculation of long-term capital gains. The section empowers the Central Government to notify the CII for any financial year. In terms of powers conferred under Section 48 of the Income Tax Act, The Central Board of Direct Taxes (CBDT) has notified the cost inflation index (CII) for FY 2021-22 as 317 via a notification dated June 15, 2021. The same was at 301 in the last year FY 2020-21, an increase of 5.32 percent over the preceding financial year.
Cost Inflation Index
Cost Inflation Index is used to calculate the notional increase in the value of an asset due to inflation. The importance of CII is that this number is used to arrive at the inflation-adjusted cost price of assets transferred for the purpose of computing long-term capital gains.
There are two things that individuals need to keep in mind regarding the cost inflation index.
- CII will be used to calculate inflation-adjusted cost only for those assets where inflation-adjusted (indexation benefit) is allowed. Therefore, the CII value cannot be used to arrive at long-term capital gains (LTCG) /Long-Term Capital Losses (LTCL) on equity mutual funds as the amount that exceeds Rs.1 lakh per fiscal is taxed at a flat rate of 10 percent without indexation benefit.
- CII number will be required to calculate LTCG for FY 2021-22 for the assets where indexation is allowed before the levy of LTCG tax. The taxes on these gains will be paid by you while filing your income tax returns (ITR) for FY 2021-22.
The CBDT Notification pertaining to Cost Inflation Index (CII) For FY 2021-22 is attached here for reference:notification_73_2021
Significance of CII in Long-Term Capital Gains
Let’s understand the concept of CII in reference to the computation of long-term capital gains under Section 48 of the Income Tax Act, 1961.
To calculate capital gains under the Income Tax, Section 48 of the act requires a person to deduct the following two amounts from the value of the consideration received or accrued on account of the transfer of capital assets:
- Expenditures incurred in relation to the transfer of capital assets
- Cost of acquisition of the asset and the cost of improvement, if any
Further, for the purposes of long-term capital gains, indexed cost of acquisition and indexed cost of improvement of the assets have to be taken into account instead of the normal costs. The amounts of indexed cost of acquisition and indexed cost of improvement can be calculated as follows:
Indexed Cost of Acquisition = Cost of Acquisition * [CII of the FY in the capital asset is transferred ÷ CII of the year in which asset is first held or for FY 2001-02, whichever is later]
Indexed Cost of Improvement = Cost of Improvement * [CII of the FY in the capital asset is transferred ÷ CII of the first year in which improvement took place]
Thus, for the purpose of calculating long-term capital gains indexed cost is to be calculated instead of the original cost, and this concept is known as indexation. The purpose of indexation is to provide relief to the taxpayers on account of inflation in the economy by letting them adjust their cost of assets with reference to an appropriate indicator of inflation, known as the Cost Inflation Index or CII. Thus, the capital gains that are calculated reflect the results of inflation.
However, there are some cases where indexation benefit is not allowed.
Cases Where Indexation Benefit is Not Allowed
Taxpayer can’t take the benefit of indexation for computing long-term capital gains arising out of the transfer of the following assets:
- Equity shares of the company in a case where STT has been paid on the transactions relating to their purchase and transfer (This applies for listed shares traded through a recognized stock exchange)
- Units of an equity-oriented fund where STT has been paid on the transfer of the units
- Units of a business trust where STT has been paid on the transfer of the units
- Bonds or debentures except for capital indexed bonds issued by the Government and sovereign gold bonds issued by the RBI
- Further, non-residents can’t claim indexation benefit in respect of shares or debentures of an Indian company that are acquired by them in foreign currency.
To understand how long-term capital gains are calculated for capital assets being equity shares, units of an equity-oriented fund, and units of business trust on which STT has been paid as described above, you may click here.
Concept of Base year in Cost Inflation Index
The base year is the first year of the cost inflation index and has an index value of 100. Index of all other years is compared to the base year to see the increase in inflation percentage.
For any capital asset purchased before the base year of the cost inflation index, taxpayers can take the purchase price as higher than the “actual cost or Fair Market Value (FMV) as on the 1st day of the base year.
Indexation benefit is applied to the purchase price so calculated. FMV is based on the valuation report of a registered value.
The base year of the Cost Inflation Index
Initially, 1981-82 was considered as the base year for computing CII. But, taxpayers were facing hardships in getting the properties valued which were purchased before 1st April 1981.
Tax authorities were also finding it difficult to rely on the valuation reports. Hence, the government decided to shift the base year to 2001 so that valuations can be done quickly and accurately. So, for a capital asset purchased before 1st April 2001, taxpayers can take higher of actual cost or FMV as on 1st April 2001 as the purchase price and avail benefit of indexation.
The CII for various financial years can be referred from the below table.
|Sl. No.||Financial Year||Cost Inflation Index|
The Cost Inflation Index for the Financial Year 2021-22 has been notified as 317 and shall form part of the above table as a line item in S.No. 21. The same shall be effective from 1st April 2021.