Cost inflation index (CII) stands at 519 now. This is a five-fold growth in about quarter of a century. The base year for the index is 1981-82.
In the first few years, CII grew only by single digits. The latest jump is of 22 points, from 497 in 2005-06. The biggest increase thus far was in 1999-2000, when CII vaulted by 38 points to reach 389.
What is CII? It is a measure of inflation that finds application in tax law, when computing long-term capital gains on sale of assets. 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.
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.
An explanation in Section 48 defines `indexed cost of acquisition' as an amount which bears to the cost of acquisition the same proportion as CII for the year in which the asset is transferred bears to the CII for the first year in which the asset was held by the assessee or for the year beginning on April 1, 1981, whichever is later.
For instance, an asset of value Rs 1 lakh on April 1, 1981 can be reckoned to cost Rs 5.19 lakh, were it to be sold now. If the assets sold had been acquired before April 1, 1981, the taxpayer has the choice of substituting the actual cost with market value as on April 1, 1981.
Formula for computing indexed cost is (Index for the year of sale/ Index in the year of acquisition) x cost.
For example, if a property purchased in 1991-92 for Rs 10 lakh were to be sold now for Rs 40 lakh, indexed cost = (519/199) x 10 = Rs 26.08 lakh. And the long-term capital gains would be Rs 13.92, that is Rs 40 lakh minus Rs 26.08 lakh.