What is Cost Inflation Index (CII)?

Cost Inflation Index(CII) is a measure of inflation that is used for computing long-term capital gains on sale of capital assets. It comes under Section 48 of the Income-Tax Act, defines the index as what is notified by the Central Government every year, having regard to 75 per cent of average rise in the consumer price index (CPI) 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 is a figure that is announced by the tax authorities each year that represents the impact of the inflation in the economy. This is a figure that will determine the extent of the benefit that the individual will receive on their investments when they sell them and a capital gains tax has to be paid on it. The manner in which this works is that the CII is used to increase the cost on the investment based on the year of purchase and the year of sale

How does CII help in capital gains computation? Capital gain, as you know, arises when the net sale consideration of a capital asset is more than the cost. Since “cost of acquisition” is historical, the concept of indexed cost allows the taxpayer to factor in the impact of inflation on cost. Consequently, a lower amount of capital gains gets to be taxed than if historical cost had been considered in the computations.

Cost Inflation Index Chart:

Cost inflation index table is as follows: