Cost Inflation Index and Indexed Cost of Acquisition

                           Cost Inflation Index (CII)– Meaning

Cost Inflation Index (CII) is a measure of inflation. And it is used when computing long-term capital gains on transfer (sale,exchange etc.) of capital assets. While computing Long term Capital Gain, Cost Inflation Index (CII) is used for computing Indexed cost of acquisition and Indexed Cost of improvement.
As per Explanation (iii) to section 48 of Income Tax Act, Cost Inflation Index (CII) means such index as notified by the Central Government (every year) by way of notification in Official Gazette.Cost Inflation Index (CII) of previous year is 75 per cent of average rise in the consumer price index (CPI) for urban non-manual employees for the immediately preceding previous year.

Cost Inflation Index (CII) helps tax payers to factor the impact of inflation on the cost of acquisition and cost of improvement on transfer of capital assets. It reduces the long term capital gain and also helps to minimize the overall tax liability of tax payers.

Before computation of Indexed Cost, We must know – 

1) The Cost of acquisition or Improvement.

2) Cost Inflation Index (CII) of the previous year in which assets transferred and

3) Cost Inflation Index (CII) of the year in which assets first held by the assessee.

             Indexed Cost of Acquisition/Improvement

1) Indexed Cost of Acquisition / Improvement If assets acquired by assessee himself after  01.04.2001.
= Cost of Acquisition  X  CII of the year of transfer / CII of the year of acquisition

2) Indexed Cost of Acquisition / Improvement If assets acquired by assessee himself before 01.04.2001.
= Cost of Acquisition or improvement or Fair Market value as on 01.04.2001  X  CII of the year of transfer / 100 (CII of the previous year 2001-02)

Note:Remember, It is optional to choose between Fair Market Value as on 01.04.2001 or actual cost of acquisition. It is beneficial to choose the value whichever is higher in order to reduce capital gain. If assets was acquired before 01.04.2001 and Fair Market value as on 01.04.2001 is higher than actual cost of acquisition then we must use market value as on 01.04.2001 for indexation otherwise actual cost of acquisition.

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3) If assets acquired by assessee from previous owner in any mode given u/s 49(1)
then the year in which the asset was first held by the assessee is to be considered.

Example – B bought property and after 5 years gifted to C. Later C sold that property. Now we must consider the CII of the year in which B acquired the property. It means the year in which assets was first acquired by B.

Indexed Cost of Acquisition = Cost of acquisition to the previous owner  X  CII of the year of transfer / CII of the year in which the asset is first held.

In Finance Bill 2017 the Government has amended the base year from 1981 to 2001. This amendments will take effect from 1st April 2018 and will apply to the Assessment year 2018-19 and subsequent year.

 As per Notification no. So 1790(e)[no. 44/2017 (f. No. 370142/11/2017-tpl)], dated 5-6-2017, following table should be used for the Cost Inflation Index from FY 2017-18 (AY 2018-19) :

                        NEW COST INFLATION INDEX ( From AY 2017-18)

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However, The following table should be used for Cost Inflation Index upto FY 2016-17.

                            COST INFLATION INDEX (upto FY 2016-17)

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