What is Cost Inflation Index (CII) and how can it help you to save tax for FY 2019-20 and AY 2020-21?
Do you know that Inflation will help you in Saving Tax? Confusing?
What do you mean by Cost Inflation Index?
Cost inflation index is an index started in FY 1981-82 with 100 as the base.
On 5th June, 2017, the government changed the base year of cost inflation index from 1981 to 2001.
Also, if you hold the immovable property for 2 years and then sell it, the gains from the sale of land or building will qualify as long-term capital gains.
CBDT New Cost Inflation Index FY 2019-20 and AY 2020-21
CBDT new cost inflation index for FY 2018-19 and AY 2019-20 is 280.
It has yet to announce cost inflation index for FY 2019-20 and AY 2020-21.
The reason for introducing the new cost inflation index is that taxpayers were not able to calculate the capital gains on the assets purchased on or before 1981.
How do you calculate the inflation rate?
The government calculates the inflation rate every year.
Then the cost inflation index value for each year is declared by the government considering the inflation in the country. The value for FY 2018-19 and AY 2019-20 is 280. This index is useful in arriving at the indexed cost of a capital asset like property, mutual funds etc.
Old Cost Inflation Index
Here is the table for old cost inflation index from 1981 to 2000. There was no cost inflation index before 1981.
|Financial Year||Cost Inflation Index(CII)||Financial Year||Cost Inflation Index(CII)|
New Cost Inflation Index Table for FY 2019-2020
Cost Inflation Index base year 2001
The cost inflation index for FY 2019-20 and AY 2020-21 is 289
Here is the cost inflation index table for FY 2019-2020
|S. No||Financial Year||Cost Inflation Index(CII)|
Cost Inflation Index Chart
Here is the cost inflation index chart for FY 2019-2020 and AY 2020-21
Cost Inflation Index for Long-Term Capital Gains 2019-20
Knowledge of Cost Inflation Index is necessary for computing Long-Term Capital Gains. The Capital Gains will be computed after deducting the indexed cost of acquisition from the sale value. The cost of purchase of the asset will be increased by applying the Cost Inflation Index (CII). Once the Cost Inflation Index is applied to the cost of acquisition, it becomes an indexed cost of acquisition.
If you are selling a capital asset after 2 years of its purchase, the gains will be considered as Long-Term Capital Gains. Otherwise, the gain will be Short-Term Capital Gains. For Mutual Funds and ETFs, this period is 1 year. The tax rate of Long-Term Capital Gains is 20% with indexation benefits . The tax rate for Short-Term Capital Gains is the same as your tax slab.
How is Capital Gains Tax calculated?
Capital Gains Index Calculation
Suppose, you have purchased a property in FY 2000-2001 for Rs. 10 Lakhs and sold it in FY 2011-12 for Rs. 25 Lakhs.
Cost Inflation Index for FY 2000-2001: 100
Cost Inflation Index for FY 2011-12: 184
Purchase Price: Rs. 10 Lakhs; Indexed Purchase Price = Rs. 10,00,000 x 184/100 = Rs. 18,40,000.
Sale Price: Rs. 25 Lakhs; Long-Term Capital Gains = Rs. 25,00,000 – Rs. 18,40,000 = Rs. 6,60,000.
Long-Term Capital Gains Tax @ 20% = 20% of Rs. 6,60,000 = Rs. 1,32,000.
You also need to pay cess in addition to 20% tax.
Though the actual gain in the sale is Rs. 15 Lakhs (Rs. 25 lakhs – Rs. 10 Lakhs), the Long-Term Capital Gains for taxation after indexation benefit is only Rs. 6,60,000 and you have to pay tax for this amount only at the rate of 20% plus cess. This is how the Cost Inflation Index will help you in reducing the tax on Capital Gains. The value of this Index will be high during periods of high inflation.
Long-Term Capital Gains = Selling Price – Indexed Purchase Price
If you have spent any amount for repair (improvement) of the property after purchase, that cost also can be indexed and added to the indexed purchase price to arrive at the Capital Gains.
If the property is purchased before 1st April, 2001, the same has to be valued from registered value and then indexed accordingly.
Fair market value
Suppose, I have purchased a property in 1990 and I want to sell the same in FY 2017-18.
How will cost inflation index work for me?
In this case, you need to calculate the fair market value of your property which can be done through sale records of the registration office.
Fair value can move like cost inflation index or it may be higher or lower. Suppose, you had purchased a house in 1981 at a price of Rs. 10,00,000. If the fair value has moved like Cost Inflation Index, the fair value of the house in 2001 would be:
Cost Inflation Index for FY 2000-2001: 406
Cost Inflation Index for FY 1981-1982: 100
Fair Market Value – Rs. 10,00,000 * 406/100= Rs. 40,60,000
Or it may be higher or lower depending upon the property price in FY 2000-2001.
How to save LTCG tax on the sale of Land and Property?
Section 54, 54EC
If you are buying another house and invests the Capital Gains in that, you can avoid Capital Gains Tax under Section 54. You can either buy a new house within 2 years from the date of sale of the old one or you can construct a new house within 3 years. You can also buy a house 1 year prior to selling the old house.
If after selling the property, you are unable to identify a new property, then you have to deposit the Capital Gains amount in Capital Gains Account Scheme. All the withdrawal from this account should be made only for the purchase of a new property. But, if you cannot invest the amount in 3 years, then the entire amount will be exposed to Long-Term Capital Gains Tax.
There is one more way to save Long-Term Capital Gains Tax. Under Section 54EC, you can invest the Capital Gains in specified bonds issued by Rural Electrification Corporation (REC) or National Highways Authority of India (NHAI). But there is an upper limit of Rs. 50 Lakhs in this. Such bonds now offer 6% returns and there is a lock-in period of 3 years.
The government may introduce such bonds from other sectors in FY 2019-20.
Cost Inflation Index – Tax Saver
Cost Inflation Index will help you in saving tax and it will offset the effect of inflation. If you are selling a Debt Mutual Fund after 1 year, there too you can apply the Cost Inflation Index to increase the purchase cost and save tax.
So now you know how to save tax by applying cost inflation index. Let me know if you still have any doubts.