Cost Inflation Index

We generally hear people saying that the goods which we used to buy at INR 10 earlier, the same is now available at say INR 50 the reason for the increase in the price is cost inflation. Taking the cost inflation concept into ‘capitalassets’ it can be said that the cost inflation index is an index which reflects the impact of inflation in the prices of the capital assets.

Under the present article we would try to understand the necessity of indexation in case of capital assets along with the present list of cost inflation index and other relevant concept like the base year.

Necessity of Indexation In Case of Capital Assets –

As we all know, on the basis of the holding period of the ‘capital assets’, they are classified into ‘short term capital assets’ and ‘long term capital assets’.  

Cost Inflation Index is not to be applied in case of ‘short term capital assets’ since the holding period is less. However, in the case of ‘long term capital assets’, the holding period of capital assets is more and hence the inflation effect to the same needs to be given.

The capital assets which is sold out is recorded at the purchase price in the books of account without giving effect to the inflation which results into higher taxation at the time of its sale. Hence, in order to benefit the tax payer and to give inflation effect, the cost inflation index benefit is made available which increases the purchase price, thereby, reducing the net tax payment.

Following is the basic formula for arriving at the long term capital gain –

Full value of consideration                         XXXX

(-) Indexed cost of acquisition       (XXXX)

Long term capital gain                     XXXX

When indexed / inflation benefit is applied to the cost of acquisition, the same is termed as ‘indexed cost of acquisition’.

Cost of Inflation Index List –

Vide notification dated 5^th June, 2017, the new cost of inflation index has been notified and the same is tabulated hereunder for ready reference –

FINANCIAL YEAR	COST INFLATION INDEX
2001-2002	100 (Base Year)
2002-2003	105
2003-2004	109
2004-2005	113
2005-2006	117
2006-2007	122
2007-2008	129
2008-2009	137
2009-2010	148
2010-2011	167
2011-2012	184
2012-2013	200
2013-2014	220
2014-2015	240
2015-2016	254
2016-2017	264
2017-2018	272
2018-2019	280

The base year as mentioned above is 2001-2002 is the first year of the cost inflation index and the index value of the base year is INR 100. Index value of all the year is compared on the basis of the base year.

In case the capital asset is purchased before the base year (i.e. 2001-2002), the purchase value of the said capital assets would be considered as higher of the actual cost or Fair Market Value as on the 1^st day of the base year.

Understanding the cost inflation index with an example –

Let us assume that an asset was acquired in the year 2014-2015 for INR 100 and the same has been sold out in the year 2018-2019. In such case indexed cost of acquisition would be as under –

Indexed cost of acquisition = purchase price of the asset X (Cost of inflation for the year of sale / Cost of Inflation for the year of Purchase)

In above referred example –

Purchase Price = INR 100

Cost of inflation for the year of sale i.e. 2018-2019 = 280; and

Cost of Inflation for the year of purchase i.e. 2014-2015 = 240

Therefore Indexed cost of acquisition = 100 * [280/240] = 100*1.167 = 116

Thus understanding in simple terms, goods bought for INR 100 in the year 2014-15 the same goods can be bought at INR 116 in the year 2018-2019.