The Cost Inflation Index (CII) is a number published by the Central Board of Direct Taxes (CBDT) for every financial year that is used to calculate capital gains on selling a capital asset like real estate, mutual funds, stocks or bonds.
The CII figure is published at the beginning of every financial year. It is used to rebase the purchase price of a capital asset, utilising the concept of indexation.
The CII figure may be taken as a proxy for inflation. To understand how CII models inflation, have a look at how the value of ₹1,000 has changed over the years as per CII changes.
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What is the value of ₹1000 today as per the latest CII value?
The value of something that cost ₹1000 in FY 2001-02 would be around ₹ 3630 today.
Since the index started in FY 2001-02, we can think that the value of the Rupee has steadily decreased as per the change in the CII index. If the value of something was ₹100 when CII was 200, then that item should cost around ₹150 when CII rises to 300 (150 = 100 * 300/200). This is of course an approximation. The actual increase would depend on the product and the time period considered.
The second column of the table has the financial year, which runs from 1st April to 31st March. The sale or purchase date of the asset is to be checked against this table, and the appropriate CII is to be picked up. For assets purchased before 1st April 2001, the seller has to use a government-approved valuer to determine the fair market price of the asset on 1st April 2001. In 2017, the government changed the base year for CII from 1981 to 2001.
We define the following terms:
the purchase price or book value (BV): the original price paid at the time of purchase
the sale price or market value (MV): the sale price of the asset
the cost of improvement of the asset (E): for house property, for example, this will be maintenance activities
CII in the financial year of purchase (CII0)
CII in the financial year of sale (CII1)
Indexed purchase price = BV * CII1 / CII0
Capital Gains = MV - E - Indexed purchase price
Since CII1 > CII0, Indexed purchase price > BV, meaning that the capital gains, and hence the capital gains tax you pay, is lower due to indexation.
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As the above table shows, it is easy to calculate the indexed purchase price. In the table above, an asset purchased in FY 2008-09 (CII = 137) and being sold in FY 2017-18 (CII = 272), will have an indexed purchase price of ₹198.54.
Using the CII to know if 20% tax rate with indexation is better than 10% without for stocks and mutual funds
For a long-term portfolio, it might be better to have assets that are taxed debt-type over equivalent portfolios that are taxed using the 10% without indexation rule.
Here is an indicative list of assets for whose sale you need to use CII to calculate the capital gains tax:
debt, some hybrid, international and gold/silver mutual funds purchased before 1st April 2023 (read this article to understand the change regarding units purchased after 1st April 2023)
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This post titled How to use the Cost Inflation Index (CII): latest value and historical rates first appeared on 29 Jun 2022 at https://arthgyaan.com
