Cost Inflation Index in Income Tax: Overview, Calculation, and FY 2024-25 Update
Cost Inflation Index in Income Tax: Overview, Calculation, and FY 2024-25 Update
Overview:
Cost Inflation Index (CII) is a tool used in India to adjust the purchase price of assets for inflation. It helps taxpayers account for inflationary increases in the value of an asset, thereby reducing the taxable capital gains when the asset is sold. The primary objective of CII is to provide a more accurate reflection of the actual gain on the sale of an asset, as it takes into consideration the increase of the asset value over time due to inflation.
Applicable for calculating long-term capital gains on the sale of assets like real estate, jewellery, bonds, debentures, and other capital assets.
By indexing the cost of acquisition and improvement, the taxable capital gain is significantly reduced, thereby lowering the tax liability.
This benefit is particularly substantial for assets held over long periods, where inflation has significantly increased the value of money.
Cost Inflation Index updated by Central Board of Direct Taxes vide Notification No. 44/2024/F.No.370142/10/2024-TPL on 24th May, 2024 for F.Y. 2024-25 is 363. You can access notification with this link.
https://incometaxindia.gov.in/communications/notification/notification-44-2024.pdf
Lets understand the concept of Indexation with example:
Example:
Suppose if you bought a property in FY 2004-05 for Rs. 10,00,000 and current sale consideration is Rs. 60,00,000 towards sale of such property in FY 2024-25
Do you need to pay tax on the Rs. 50,00,000 Gain?
No, this is where the concept of Indexation comes into play
Considering CII for Purchase Year 2004-05 i.e. 113 to CII of Current Financial Year 2024-25 i.e. 363
Indexed Cost of Acquisition will be 10,00,000*363/113
That is Rs. 32,12,390
Therefore, Long Term Capital Gain will be (Rs. 60,00,000 - Rs. 32,12,390) Rs. 27,87,610
Benefits of CII:
1. Helps in reducing the taxable capital gains, leading to lower tax outflows for taxpayers.
2. Provides a fair adjustment for inflation, ensuring that taxpayers are not overtaxed on nominal gains that merely reflect inflation.
3. By reducing the capital gains tax burden, it encourages long-term investments in assets like real estate and gold.
In conclusion, the Cost Inflation Index is a important tool in the Indian tax system that ensures taxpayers are taxed fairly on their real gains, accounting for the inflationary rise in asset values.
Disclaimer: This material and the information contained herein is intended for clients and other Chartered Accountants to provide updates and is not an exhaustive treatment of such subject. We are not, by means of this material, rendering any professional advice or services. It should not be relied upon as the sole basis for any decision which may affect you or your business.
