COST INFLATION INDEX- AN ANALYSIS.

Relevant links and references

Section 48 of Income Tax Act, 1961.

Relevant notifications for CII or the updated table of CII.

Cost inflation index (CII):

CII is prescribed by notification by the Central Government every year for the purpose of computation of capital gains when capital assets transferred is a long-term capital asset and the cost of acquisition and cost of improvement of assets are allowed to be inflated and claimed against the consideration accruing on transfer of asset. CII of the year in which cost of acquisition was incurred and cost of improvement was incurred is applied with reference to CII for the year in which the asset is sold. The provisions being very popular they need not illustration.

For applicability of CII readers are requested to refer to various provisos to section 48 of the income tax act, 1961.

The terms 'indexed cost of acquisition' and 'indexed cost of any improvement' and 'cost inflation index' are also defined in the Explanation to S.48.

CII takes into account only 75% of average rise in the consumer price index for urban non-manual employees for the immediately preceding previous year.

Therefore, if we consider that price of a capital asset has risen in tandem with base price rise, then if one want to sell an asset and replace it, the cost allowed even after indexation will be lesser than the price payable for new asset. However, in case of many capital asset the price rise is lesser than market price and in many cases it is higher.

CII for the Financial Year 2010-11:

CII for the Financial Year 2010-11 is notified as 711. This number is relevant for working out capital gains on transfer of long term capital assets during the FY 2010-11. This will be relevant in future when any capital asset acquired during FY 2010-11 will be transferred after it attains status of long-term capital asset, if the provisions relating to allowing CII remain on the same line in the year of sale or transfer of capital asset.

Basket of assets:

As found above, entire amount of price escalation is not considered but only 75% is allowed to inflate the costs. Depending on increase in price of any assets and relevant CII of year of purchase and year of sale capital gains will depend. In many cases where there has not been increase in price or where there is decline in price there will be loss allowable under the head 'capital gain' where such an asset is transferred.

Accordingly in practice we find that there are many assets transfer of which results into capital gains and many which results into allowable loss under the head capital gains. Therefore, a person having various assets can plan his affairs to reduce taxable capital gains if it is desirable to transfer some assets which result into loss after indexation.

Table of CII and analysis thereof:

In the following table CII from FY 1981-82 to 2010-20100 are given. In column three increase allowed is given and in the last column real inflation is worked out.

COST INFLATION INDEX NALYSIS

From the above table we find that in eleven years real inflation have been more than 10%.

Readers are requested to send COMMENTS AND FEDBACK and further analysis and experience about CII and computation of capital gains and loss.