Capital-Gains-Tax

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

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 YearCost Inflation Index
2020-21301
CII

The 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:

  1. Expenditures incurred in relation to the transfer of capital assets
  2. 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 YearCost Inflation Index
12001-02100
22002-03105
32003-04109
42004-05113
52005-06117
62006-07122
72007-08129
82008-09137
92009-10148
102010-11167
112011-12184
122012-13200
132013-14220
142014-15240
152015-16254
162016-17264
172017-18272
182018-19280
192019-20289

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.

Post by Niti Gupta

Niti Gupta is a Chartered Accountant who has experience working with different industries. She loves to write about anything and everything, but majorly research and write about finance and taxation.