What is Cost Inflation Index (CII) for FY 2024-25, FY 2023-24 for income tax purposes?
Inflation is the overall increase in prices of goods and services throughout an economy. Inflation causes money to lose purchasing power, so over time, a given amount of money will be able to buy fewer goods and services. For example, tomorrow’s inflation may result in the availability of only one unit for Rs 100, even if you purchased two units of goods today for Rs 100. An instrument used to calculate the annual increase in prices of goods and services brought on by inflation is the cost inflation index. For the Financial year 2024-25, the Cost Inflation Index (CII) is 363 as notified by Income Tax Department.
Note: For the Financial year 2023–2024, the Cost Inflation Index (CII) is 348.
Cost Inflation Index: What Is It?
As per Income Tax Act, when calculating long-term capital gains from the sale of assets, inflation is measured using the cost inflation index (CII). Cost inflation considers the Consumer Price Index (CPI) for urban non-manual workers for the year before the current year.
Why Is the Cost Inflation Index Used?
Use of Cost Inflation Index The cost inflation index is used to adjust for inflation to provide fair value of the asset or goods in regard to the initially agreed value or price.
To know the actual long-term capital gains that arise from the transfer or sale of capital gains, you will need to look at the Cost Inflation Index table. Capital gain therefore refers to any income or profit that results from the sale or disposal of capital assets such as buildings land, shares, patents and other machinery.
As a result, even when asset prices are rising, these capital assets cannot be revalued. The gain or profit realized at the time of sale of these assets is substantial. As a result, assessors are required to pay a higher tax on the earnings from these assets. Over time, the asset acquisition cost is adjusted in line with the selling price through the use of the cost inflation index for capital gains.
Lower profits and a smaller tax burden are the outcomes of this. In February 2018, the Central Board of Direct Taxes released the 2017–18 Cost Inflation Index figures. The previous base year of 1981 was replaced with 2001 in this update, and its CII was set to 100. The indices for the years that followed were also suitably revised.
The base year was changed to account for the difficulties taxpayers had when determining the tax due on gains from capital assets purchased on or before 1981.
Table of Cost Inflation Index for Financial Years 2001-2002 to 2024–25
Below is the amended CII Table for the Base Year (Financial Year 2001–2002) to FY 2024–25:-
Why Is the Cost Inflation Index Used?
Accounting-wise, businesses usually report long-term capital assets (such as machinery) on their balance sheets at the original cost. But eventually, inflation might make these assets more valuable, making it impossible to change how much they are valued for in the accounting records.
Significant long-term capital gains result when such capital assets are eventually sold for a price that is higher than their initial cost. As a result, the profit from the sale is subject to a greater long-term capital gains tax obligation for the taxpayer.
Thus, based on this issue and to ensure justice in the taxation system, comes the concept of the Cost Inflation Index (CII). Losses from sales of assets are also tackled by the CII approach that permits the matching of value of the asset purchased with the value obtained from the sale of the asset. When using the above adjustment process, taxpayers can be in a position to reduce their long-term capacities of capital gains and thereby will be in a position to reducing the taxes they pay by just reducing inflation’s effects on the taxable profits.
In this manner, use of the CII in computations of capital gains means that reduce purchasing power has been portrayed more accurately by the taxpayers. It makes them or companies pay tax on their real gains as opposed to the stated ones in an effort to maintain a balance in taxation. Lastly, in analysis, applying the CII to capital gains taxation is argued as aligned with fairness and efficient budgeting, thus enhancing the equality and clarity in taxation.
What does the Cost Inflation Index Base Year mean?
India incorporates inflation into its capital gains tax calculations using the Cost Inflation Index (CII). The “base year,” upon which this index is based, was most recently modified from 1981 to 2001. Accordingly, the CII for the fiscal year 2001–2002 is regarded as 100, and the CII for all subsequent years is determined in relation to this initial value.
Why Does the Cost Inflation Index Use Base Year?
The Cost Inflation Index (CII) base year selection is crucial since it acts as a benchmark for calculating the CII in ensuing years. By using a consistent method to choose the base year, the effect of inflation on the indexed purchase cost is accurately reflected.
Modifications to the base year have the potential to significantly impact the calculation of the Cost Inflation Index.
In case of India, same has been set to hundred for the year 2001-02 due to change in the base year from 1981 to 2001 in calculating the CII.
List of Frequently Asked Questions on the Cost Inflation Index
1. Today, I’ve come across the term “CII” while working with income tax related calculations and reports.
Ans. The Cost Inflation Index abbreviated as CII in income tax refers to a computation relating to the manner how cost index will boost inflation on the price of goods and assets in a given year.
2. Cost Inflation Index Notification?
Ans. The Central Government notifies CII. Notification is issued at the official government gazette.
3. In simple terms, the value of cost inflation index for the FY 2024-2025?
Ans. The cost inflation index For 2024–2025: 363.
4. In India how far was the Cost Inflation Index put into practice?
Ans. Meanwhile in India, the Cost Inflation Index started as early as the Financial Year 1981.
