Cost Inflation Index (CII) Notified For FY 2020-21

Cost Inflation Index, abbreviated as 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 CBDT has notified the CII for the Financial Year 2020-21 by way of Notification 32/2020 dated 12th June 2020 as follows:

Financial Year	Cost Inflation Index
2020-21	301

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Cost Inflation Index for the Financial Year 2020-21 stands at 301. 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.

Significance of Cost Inflation Index in Long-Term Capital Gains

To calculate capital gains under the Income Tax, Section 48 requires you 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

You 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.

CII For Earlier Years

The CII for various financial years can be referred from the below table.

Sl. No.	Financial Year	Cost Inflation Index
1	2001-02	100
2	2002-03	105
3	2003-04	109
4	2004-05	113
5	2005-06	117
6	2006-07	122
7	2007-08	129
8	2008-09	137
9	2009-10	148
10	2010-11	167
11	2011-12	184
12	2012-13	200
13	2013-14	220
14	2014-15	240
15	2015-16	254
16	2016-17	264
17	2017-18	272
18	2018-19	280
19	2019-20	289

The Cost Inflation Index for the Financial Year 2020-21 has been notified as 301 and shall form part of the above table as a line item in S.No. 20. The same shall be effective from 1st April 2020.

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Frequently Asked Questions

Common questions about Cost Inflation Index (CII) for FY 2020.

The Cost Inflation Index (CII) is a number notified by the Central Government for each financial year. It is used to calculate the indexed cost of acquisition and indexed cost of improvement of capital assets for computing long-term capital gains. The CII helps provide relief to taxpayers by adjusting the cost of assets according to inflation.

The CII is used to determine the indexed cost of acquisition and indexed cost of improvement of capital assets. These indexed costs are calculated by multiplying the actual cost by the ratio of CII for the year of transfer to CII for the year of acquisition/improvement. The indexed costs are then used instead of the actual costs to compute long-term capital gains.

No, the indexation benefit is not available for certain types of capital assets. It cannot be claimed for equity shares, units of equity-oriented funds, and units of business trusts where Securities Transaction Tax (STT) has been paid on their transfer. Non-residents also cannot claim indexation for shares or debentures acquired in foreign currency.

The CII notified for the Financial Year 2020-21 is 301.

The indexed cost of acquisition is calculated as: Cost of Acquisition * (CII of the year of transfer / CII of the year of acquisition or 2001-02, whichever is later).

The indexed cost of improvement is calculated as: Cost of Improvement * (CII of the year of transfer / CII of the year of improvement).

Indexation is necessary to provide relief to taxpayers on account of inflation in the economy. Without indexation, the capital gains would be calculated based on the original cost of acquisition/improvement, which may not reflect the true value of the asset due to inflation over the years.

No, the CII is specifically used for calculating long-term capital gains. Short-term capital gains are computed using the actual cost of acquisition and actual cost of improvement, without any indexation benefit.

The CII is specifically used for calculating long-term capital gains on the transfer of capital assets. It is not applicable for other types of income like salary, business income, or short-term capital gains.

The article provides a table with the CII for financial years from 2001-02 to 2019-20. You can refer to this table to find the CII for previous years when computing long-term capital gains.