Why we need it CII for Income Tax Calculation

Although after 23th July 2024, all the Long Term Capital Gains will be taxed at flat rate of 12.5% without any indexation benefit. But we still need Indexation Rates for calculation of Income Tax Because:

• Capital gains taxpayers who have sold long-term assets prior to 23rd July need CII for Tax Calculation for FY 2025-26.
• Due date for the first advance tax is 15th June 2025 which is nearing fast.
• Also Long Term capital gain on immovable property sold after 22nd July 2024, but bought before 23rd July 24 to be taxed at more beneficial rate i.e. 20% with indexation or 12.5% without indexation, whichever is beneficial.

There will be no clarity on long-term capital gain consumption if no Cost Inflation Index is available.

Normally, CBDT notifies about the CII around April-May each year. Last year it was notified on May 24, 2024 for FY 2024-25. However, this year it is still pending.

Sort of Assets Eligible for CII Adjustment

CII can be applied upon certain items, such as:

• Property
• Land and Building
• Unlisted Shares (Sold upto 22nd July 2024)
• Debt Mutual Funds (Sold upto 22nd July 2024)

Cost Inflation Indexation cannot be applied to:

• Listed Equity Shares
• Equity Mutual Funds

Cost Inflation Index Table Upto FY 2024-25

How is Indexation Applied for Long-Term Capital Assets?

Indexation for long-term capital assets helps in adjustment of the purchase price of the asset with the use of CII to account for inflation, hence giving reduced taxable capital gain. The formulas are listed below:

Indexed Cost of Asset Acquisition = (CII for the year of asset transfer x Cost of asset acquisition) / CII for the year of asset Purchase or year 2001-02, whichever comes later

Indexed Cost of Asset Improvement = (CII for the year of asset transfer x Cost of asset improvement) / CII for the year of asset improvement.

Calculation of Capital Gain using CII

Reena purchased a house in FY 2001-02 for Rs 10 Lakh. She sells the same in FY 2023-24 on 25.07.2024 for Rs 40 Lakh. What will be the indexed cost of acquisition?

Solution:

Here, CII for year 2001-02 is 100; CII for year 2024-25 is 363. The indexed cost of acquisition = 10,00,000 * 363/100 = 36,30,000

Tax on Capital Gain @ 12.5% = Rs. 3,75,000

Tax on Capital Gain @ 20%

Capital Gain is 3,70,000 (40,00,000 – 36,30,000)

Tax = 74,000

Thus, the Maximum Capital gain tax will be limited to Rs. 74,000.

The Base Year Concept

In the relation of CII, the “Base Year Concept” is used to calculate inflation adjusted values of assets to fulfill taxation objectives.
The index value is set to 100 for the base year, for calculation purposes( 2001-2002).

If an asset is aquired before 2001-2002, for tax purposes its aquisition cost is determined as the higher of two values:

• The actual cost of aquisition.
• The Fair Market Value of the asset as of April 1, 2001.