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.
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.
How is the indexed purchase cost calculated?
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- Calculation of the index acquisition cost = Purchase price of the property x CII of the financial year in which the property was sold / CII of the property’s purchase year
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:
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.
What does “indexed cost of acquisition” mean?
The indexed cost of purchase is determined by the country’s inflation rate. Simply put, the cost of acquisition is the cost of purchasing a property. If you keep the property for more than three years, you can calculate the cost using the inflation rate.
What is the formula for calculating capital gain using the cost inflation index?
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.
What is the improvement index cost?
The capital expenditure incurred by an assessee for any addition or upgrade to a capital asset is known as the cost of improvement. It also includes any costs associated with safeguarding or curing the title. To put it another way, cost of improvement refers to all expenses paid to increase the value of a capital asset. However, any cost of improvement that is deductible in computing income under the headings Income from House Property, Profits and Gains from Business or Profession, or Income from Other Sources (Interest on Securities) will not be included.
I In the event of an asset acquired prior to April 1, 1981, the cost of improvements incurred since April 1, 1981, whether by the previous owner or the assessee.
ii) All costs incurred by the former owner and assessee if the asset was acquired after April 1, 1981.
What is Income Tax Act Section 55?
If the assessee acquired capital assets before April 1, 1981, the cost of purchase will be either the actual cost to the assessee or the fair market value as of April 1, 1981, at the assessee’s discretion.
Section 55 specified that an assesee might deduct the cost of acquisition of the asset as well as the cost of improvement, if any, when computing capital gain up until the 2017-2018 fiscal year. However, the assessee has the option of using the fair market value of the asset as of 01.04.1981 or the actual cost of the asset as the cost of acquisition for computing capital gains in respect of an asset acquired before that date. The assessee might also claim a deduction for any costs of improvement undertaken after April 1, 1981.
Due to the lack of necessary information for computing the fair market value of a capital asset bought before 01.04.1981, assessees were having difficulty computing the capital gain in respect of a capital asset, particularly immovable property acquired before 01.04.1981.
Section 55 of the Act has been amended by the Finance Act, 2017 for the assessment year 2018-19 to provide that the cost of acquisition of an asset acquired before 01.04.2001 shall be allowed to be taken as fair market value as of 01.04.2001, and cost of improvement shall include only those capital expenses incurred after 01.04.2001, in order to revise the base year for computation of capital gains.
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.