Cost Inflation Index and determination of Capital Gain

Cost Inflation Index and determination of Capital Gain

How does Cost Inflation Index determine the quantum of Capital Gains?

Section 45 of Income Tax Act says any profit and gain arisen on Transfer of a Capital Asset shall be chargeable to Income Tax under the Head Capital Gain. Section 48 lays down the Method of computation of Capital Gain.

Sale Consideration Received on Transfer of Capital Asset	XXXXXXXXX
Less : Cost of Acquisition of Asset (COA)	XXXXXXXXX
Less :Cost of Improvement (COI)	XXXXXXXXX
Less : Expenditure Incurred Wholly & exclusively for Such Transfer	XXXXXXXXX

Income Chargeable under the Head Capital Gain :-          xxxxxxxxx

Cost Inflation Index is basically price Inflation Adjustment due to the timing difference between date of Purchase of Asset and date of sale of Asset. It is present Purchase value of the asset that is to be sold.

As per Second Proviso to section 48 of Income Tax Act, Cost of Acquisition of an Asset is calculated as per below formula -:

Cost of Acquisition  X  Cost Inflation Index for the year in which asset is transferred ÷  Cost Inflation Index for the year in which asset was held by Assessee

From the Finance Act 2017 the CII base year has been changed to FY 2001-02 that means if asset has been purchased on or before 1st April, 2001 then FMV As on that date can be taken as Cost of Acquisition of Asset. Previously CII base year was 1981 .The benefit of Indexation is available only for long term capital Asset. Different Capital Asset have Different holding period for qualify as a long term capital.

Property held as a Capital Asset	24 Month or more
Listed Securities, Units of UTI, Zero coupon bond, Units of Equity Oriented mutual Fund	12 Month or more
Unlisted securities	24 Month or more
Units of Debt oriented mutual Fund, Units of Business Trust	36 month or more

Experts reckon that it is mostly the property owners who would benefit from this revision in base year. This is because the inflation rate in property market between 1981 and 2001 is not captured in the current index. For one, between 1981 and 2001, the index has jumped four times from 100 to 406 whereas property prices have surged 10 times in the same period. The shift in base year will help align the index with the actual rise in property rates, and help investors get the full benefit of index.

The Impact of Change in Base year can be elaborated with the following Example:-

NOW AND BEFORE

HOW A PROPERTY SELLER COULD GAIN OR LOSE AFTER SHIFT IN BASE YEAR ?

Case 1:-

Purchase price (Rs): 1,000,000

Sale price (Rs): 7,500,000

Purchase date: April 1, 1995

Date of sale: September 30, 2017

CII (1995-96): 281

CII (2001-02): 426

CII (2016-17): 1125

Calculation of Capital Gain Taking 1981 As a Base year

Sale Consideration Received on Transfer of Capital Asset	7500000
Less : Cost of Acquisition of Asset (COA) <1000000*1125/281>	4003559
Income Chargeable under the Head Capital Gain  :-	3496441
Tax Payable @20% on Long Term Capital gain	699290

Case 2:-

Purchase price (Rs): 1,000,000 (FMV of the Property as on 1st April 2000 is Rs 1700000)

Sale price (Rs): 7,500,000

Purchase date: April 1, 1995

Date of sale: September 30, 2017

CII (2000-01): 100

CII (2016-17): 264

Calculation of Capital Gain Taking 2000 As a Base year

Sale Consideration Received on Transfer of Capital Asset	7500000
Less : Cost of Acquisition of Asset (COA) <1700000*264/100>	4488000
Income Chargeable under the Head Capital Gain  :-	3012000
Tax Payable @20% on Long Term Capital gain	602400

There has been a Tax Saving of Rs 96890 due to shift in base year as FMV as on 1st April has been Taken leading to Increase in Cost of Acquisition & reduction in Capital Gain.

Cost Inflation Index under Section 48 which has been notified by the Income Tax Department is given below in the Table -:

Financial Year	Cost Inflation Index
2000-01	100
2001-02	105
2002-03	109
2003-04	113
2004-05	117
2005-06	122
2006-07	129
2007-08	137
2008-09	148
2009-10	167
2010-11	184
2011-12	200
2012-13	220
2013-14	240
2015-16	254
2016-17	264
2017-18	272

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