COST INFLATION INDEX (CII)
- The Cost Inflation Index (CII) is a measure used in India to adjust the purchase price of assets for inflation, primarily for calculating long-term capital gains tax.
- It is determined by the Central Board of Direct Taxes (CBDT) and is used to index the cost of acquisition, improvement, or transfer of a capital asset to reflect the effect of inflation over the years.
- The indexation helps reduce the overall tax burden on the seller by accounting for inflationary increases in asset prices
- The global economy is ever-changing and consistently evolving. One significant indicator of this change is the diminishing purchasing power of money, driven by a continuous rise in the prices of goods and services.
- This decline in money's value, which subsequently raises the cost of living for individuals, is termed inflation.
- The Cost Inflation Index (CII) is a tool employed to estimate the annual increase in an asset’s value due to inflation.
- This index is determined by the Central Government and published in its official gazette to measure inflation. It is updated annually by the government and is specified under Section 48 of the Income Tax Act, 1961
3. What is the Purpose of CII?
The primary purpose of the Cost Inflation Index (CII) is to account for inflation when calculating long-term capital gains tax on the sale of assets in India.
Here are the key objectives of CII:
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Adjusting for Inflation: CII helps in adjusting the historical cost of assets to reflect current inflation rates, ensuring that the calculation of capital gains is based on the real value of money rather than nominal values.
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Reducing Tax Burden: By indexing the cost of acquisition and improvement of an asset, taxpayers can reduce their taxable capital gains. This effectively lowers the amount of capital gains tax they need to pay.
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Fair Taxation: CII ensures a fairer taxation system by taking into account the erosion of purchasing power over time. This prevents taxpayers from being taxed on the inflationary increase in asset values rather than the actual real gains.
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Encouraging Investment: By mitigating the impact of inflation on capital gains tax, CII can encourage long-term investment in assets, as investors are assured that inflationary effects will not disproportionately increase their tax liabilities.
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Compliance with Tax Laws: The use of CII is mandated under Section 48 of the Income Tax Act, 1961. It ensures taxpayers comply with the legal provisions for calculating capital gains tax in a standardised manner.
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What Does a Base Year in CII Mean?
In the context of the Cost Inflation Index (CII), the base year is a specific year chosen by the government to serve as a reference point for measuring inflation. The index for the base year is set to a standard value, typically 100, and subsequent values of the CII reflect the inflationary increase relative to this base year. Here's what the base year signifies:
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