The purchasing power of money (the amount of products that one unit of money can buy) decreases when the price of goods rises over time. Due to inflation, if two units of products could be purchased for Rs 100 today, just one unit could be purchased for Rs 100 tomorrow. The Cost Inflation Index (CII) is a tool for estimating inflation-related increases in the cost of goods and assets over time.
How is the cost inflation index for FY 2021-22 calculated?
You will pay the taxes on these gains when you file your income tax returns (ITR) for FY 2020-21. (AY 2021-22). (CII of the year of sale/CII of the year of purchase) * Actual cost price is the formula for calculating inflation-adjusted cost price.
In India, how is the cost inflation index calculated?
Consider the following example to learn how to calculate cost inflation index:
On August 1, 2004, I paid Rs. 30 lakhs for a property.
On April 1, 2018, the property was sold for Rs. 85 lakhs.
In India, how is CII calculated?
It is a measure of inflation used in tax legislation to calculate long-term capital gains on the sale of assets. The index is defined under Section 48 of the Income-Tax Act as what is notified by the Central Government every year, taking into account 75% of the average rise in the consumer price index (CPI) for urban non-manual employees for the previous year. As a result, if the price of a capital asset has risen in lockstep with the base price, the cost allowed to sell an asset and replace it, even after indexation, will be less than the price payable for a new asset. However, the price rise for many capital assets is less than the market price, and in many situations, it is more.
What role does the Cost Inflation Index (CII) play in calculating capital gains? As you may be aware, capital gain occurs when the net sale consideration of a capital asset exceeds the cost. Because “cost of acquisition” is a historical figure, the concept of indexed cost allows the taxpayer to account for inflation. As a result, capital gains are taxed at a lesser rate than if historical cost was factored into the calculations.
(Index for the year of sale/Index for the year of purchase) x cost is the formula for calculating indexed cost.
For example, if a home acquired for Rs 20 lakh in 1991-92 was sold for Rs 80 lakh in 2009-10, the indexed cost would be (582/199) x 20 = Rs 58.49 lakh. Long-term capital gains will be Rs 21.51, or Rs 80 lakh less Rs 58.49 lakh.
What is the cost inflation index for the 2020-21 fiscal year?
In a statement dated June 15, 2021, the Central Board of Direct Taxes (CBDT) announced the cost inflation index (CII) for FY 2021-22 as 317. CII was notified as 301 for the prior fiscal year, FY 2020-21. The CII is used to compute an asset’s inflation-adjusted cost price.
How do you figure out the inflation rate?
Last but not least, simply plug it into the inflation formula and run the numbers. You’ll divide it by the starting date and remove the initial price (A) from the later price (B) (A). The inflation rate % is then calculated by multiplying the figure by 100.
How to Find Inflation Rate Using a Base Year
When you calculate inflation over time, you’re looking for the percentage change from the starting point, which is your base year. To determine the inflation rate, you can choose any year as a base year. The index would likewise be considered 100 if a different year was chosen.
Step 1: Find the CPI of What You Want to Calculate
Choose which commodities or services you wish to examine and the years for which you want to calculate inflation. You can do so by using historical average prices data or gathering CPI data from the Bureau of Labor Statistics.
If you wish to compute using the average price of a good or service, you must first calculate the CPI for each one by selecting a base year and applying the CPI formula:
Let’s imagine you wish to compute the inflation rate of a gallon of milk from January 2020 to January 2021, and your base year is January 2019. If you look up the CPI average data for milk, you’ll notice that the average price for a gallon of milk in January 2020 was $3.253, $3.468 in January 2021, and $2.913 in the base year.
Step 2: Write Down the Information
Once you’ve located the CPI figures, jot them down or make a chart. Make sure you have the CPIs for the starting date, the later date, and the base year for the good or service.
What is the purpose of Section 54 of the Income Tax Act?
If the capital gains from the sale of a residential property are invested in the acquisition or building of a residential property, an individual or HUF can benefit from tax exemptions under Section 54 of the Income Tax Act.
What does it cost to index?
Because the government levies a tax on such transactions, the owner would be responsible for a significant tax bill. To avoid paying a huge tax bill, the asset’s sale price can be indexed to reflect the asset’s current value, taking inflation into account. As a result, the profit from the sale would be lesser, lowering the amount of capital gains to be paid.
As a result, indexation aids in reflecting the asset’s actual value at current market rates while also accounting for the degradation of value due to inflation.
The purchase price is referred to as the indexed cost of acquisition when selling an item. As a result, the cost inflation index (CII) is the indexed price at which the asset is purchased. The government determines the CII for a given year and releases it for tax purposes before the accounting year closes.
Is the US 45 chargeable?
Section 45 Ingredients 1 (1).
According to Section 45(1) of the Income Tax Act of 1961, any profit or gain arising from the transfer of capital assets in a prior year is taxable under the head of capital gain and is assumed to be the income of the preceding year in which the transfer occurred.
2. Chargeability of capital gains is subject to three conditions:
How can I avoid paying capital gains tax in India?
If you are unable to build a house immediately after receiving a capital gain (but intend to do so in the near future), you can deposit the profit in any public sector bank under the Capital Gains Account Scheme (CGAS). If you do this, you’ll have three years to get your ducks in a row and start building your property. If this is not the case, the capital gain will be taxed as a long-term capital gain (at 20 percent plus a 3 percent cess).
There are two types of accounts available under the CGAS scheme: savings deposit accounts (also known as Type-A accounts) and term deposit accounts (called Type-B accounts). There are two types of interest in Type-B accounts: cumulative and non-cumulative. You can move money between the two accounts by paying the fixed fees, but you can only withdraw money from Type-A accounts if you sign a statement stating that the funds will be used to build a home within 60 days. Any money that have not been used must be re-deposited.
If you’ve sold land and want to save money on taxes, you can invest in certain financial assets to protect your hard-earned capital gains from being taxed under Section 54EC of the Income Tax Act of 1961. You must invest in notified bonds within 6 months after the transfer to do so.
The Rural Electrification Corporation and NHAI, in particular, are the issuers of the bonds (the National Highways Authority of India). If you transfer or accept a loan against these bonds within three years, you will be assessed capital gains tax. Keep in mind that per financial year, you can only deposit Rs.50,000 in these bonds.
Unless it is within the bounds of (or up to 8 kilometers away from) a municipality, municipal corporation, town committee, cantonment board, or any other civic entity with a population of (or over) 10,000, the sale of farm land is not subject to capital gains tax.
FAQs on Capital Gain Tax on Sale of Property
Yes, NRIs who sell their property in India would have to pay capital gains tax. The amount of tax due will be determined by whether the gain is long or short term.
Short-term capital gains will be taxed according to the income tax slab rate. You will have to pay an applicable capital gain tax based on your annual income.
Long-term capital gains tax, on the other hand, will be 20.8 percent with indexation.
You can reduce capital gains tax on your property in a variety of ways, including:
- Setting off all of your capital gain losses is one of the most effective ways to reduce capital gains tax. You can put your capital gain profits against your losses, but your losses must trace back to a previous date. You can also match your short-term capital losses to short-term gains and your long-term losses to long-term gains. You can deduct your long-term losses from your long-term gains if you carry them forward for eight years. You must, however, file your taxes on time before the deadline.
- Investing in a Capital Gains Account Scheme is one option to reduce your capital gains tax (CGAS). This plan is designed for those who are unable to purchase a new home before filing their tax returns. The investment period in this scheme is three years. This permits you to save money in order to buy a home of your own. However, you must enroll in this program before filing your income tax returns. It’s important to know that just a few Indian banks are authorized to allow their customers to invest in CGAS.
- Investing in bonds within six months after selling a home and getting the benefits is one approach to reduce your capital gains tax. Section 54EC of the Indian Income Tax Act, 1961 allows you to claim a tax deduction for bond investments. However, you must commit to investing in these bonds for at least three years. It is recommended that you do not invest for more than three years because you will not receive any interest and will not be able to transfer the bonds to anybody else.