The cost of inflation index (CII) for the financial year 2019-20 has been notified by the Ministry of Finance. The ministry has set the Cost Inflation Index FY 2019-20 as 289. For the previous FY 2018-19, CII was 280.
The rate of inflation for indexation purposes have been specified by the Indian Government for every financial year. The base year has been considered as 2001-02.
The base year has been shifted from 1981 to 2001 in Budget 2017.
This CII number is important as it is used to arrive at the inflation adjusted purchasing price of assets (indexed cost of acquisition) which have been sold or planned to be sold in FY 219-20.
The indexed cost of acquisition can then be used in the calculation of Long-term capital gains (LTCG) or Long Term Capital Losses (LTCL).
Kindly note that CII is used to calculate inflation-adjusted cost only for those assets where inflation-adjusted (indexation benefit) is allowed. For example, in the cases of debt mutual funds, real-estate property, gold etc.,
Latest Cost Inflation Index FY 2019-20 | CII Chart FY 2019-20
Here is the table of Cost Inflation Index numbers, as stipulated by the Income Tax Department. You can take values from the table to compute the indexed or inflation-adjusted cost of acquisition.
How do you calculate the indexed cost of purchase or indexed cost of acquisition (ICoA)?
The indexed cost is calculated with the help of a table of cost inflation index as given above.
Divide the cost at which you purchased the Property by the index as on the date of the purchase. Multiply this by the index as on the date of sale.
ICoA = Original cost of acquisition * (CII of the year of sale/CII of year of purchase)
Let’s say you have invested in a debt fund in August 2014. Your investment amount was Rs 2,00,000 (20,000 units @ Rs 10 each). Five years later, you redeemed your investments in August 2019, at a value of Rs 3,00,000 ( 20,000 units @ Rs 15 each).
Hence, when you sold your investments, the value of your investments was Rs 3,00,000. Your investment made capital gains worth Rs 1,00,000. However, you need not pay tax on this entire amount of Rs 1,00,000.
All you need to do is apply the formula.
- Cost of acquisition is Rs 2 lakh.
- CII number for purchase year (2014-15) was 240.
- CII during sale year (2019-20) is 289.
This would mean that your indexed cost price of acquisition would be – (2,00,000 * 289/240) = Rs 2,40,833.
As again, your Long term capital gains would come down to Rs. 59,167 (Rs 3,00,000- Rs.2,40,833), you will be taxed 20% of this amount (as compared to Rs 1,00,000 without indexation) which will again, greatly reduce your tax obligations.
Thus, with Indexation, you can enjoy the benefits of your own investments without losing an excessive amount of taxes.
Continue reading :
- What is Inflation?
- What is Indexation of Mutual Funds and why is it important for you?
- How to save Capital Gains Tax on Sale of Land / House Property?
- Different Asset classes have different Tax implications – How Returns are taxed?
(Post published on :13-September-2019)