Concept of Indexation

Concept of Indexation

 

Changes in the value of asset according to your living cost is called indexation.

The benefit of indexation is available only to long-term capital assets. For computation of indexed cost of acquisition following factors are to be considered:

  • Cost and Year of acquisition &/or improvement
  • Year of transfer
  • Cost inflation index of the year of acquisition &/or improvement
  • Cost inflation index of the year of transfer

 

Indexation Benefits

  • Helps to bring purchase price equivalent to market inflation (This process increases the cost of purchase which comes at par with the sale consideration, a higher cost price means lesser profits, which effectively means a lower tax).
  • Align asset with current market value
  • Provides higher purchase price

 

Calculation of indexed cost of acquisition

 

Indexed Cost of Acquisition =

Cost of Acquisition   X   CII for the year in which the asset is transferred

                                       CII for the year in which the asset was first held by

                                            assessee or P.Y. 2001-02, whichever is later.

 

Calculation of indexed cost of improvement

 

Indexed Cost of Improvement =

Cost of Improvement     X   CII of the year in which the asset is transferred

                                                       CII for the financial year in which the

                                                                 improvement took place

 

Meaning of Cost Inflation Index (CII):

It is used for estimating the prices of goods which has been increased year by year due to inflation.

Let’s say a price of an item was Rs. 100 in 2001, what will be the price of the same item today?

 

Meaning of inflation: It means decrease in purchasing power. A person who used to purchase 2 chocolates for Rs. 10, now can only purchase 1 chocolate only for the said amount.

 

 

COST INFLATION INDEX TABLE FROM FY 2001-02
FINANCIAL YEAR COST OF INFLATION INDEX (CII)
2001-02 (Base Year) 100
2002-03 105
2003-04 109
2004-05 113
2005-06 117
2006-07 122
2007-08 129
2008-09 137
2009-10 148
2010-11 167
2011-12 184
2012-13 200
2013-14 220
2014-15 240
2015-16 254
2016-17 264
2017-18 272
2018-19 280
2019-20 289
2020-21 301
2021-22 317

 

 

Let us take an example to calculate indexation:

Mr. Modi purchased Land in May 2012 for Rs. 1,00,000 with unit value Rs. 10 per unit and sold in January 2019 for Rs. 1,80,000.

Solution

Cost of Acquisition = Rs. 1,00,000

Financial Year of Acquisition = FY 2012-13

Calculation of Indexed Cost of Acquisition =

Cost of Acquisition   X   CII for the year in which the asset is transferred

                                       CII for the year in which the asset was first held by

                                            assessee or P.Y. 2001-02, whichever is later.

i.e.

= 1,00,000*(280/200))

= Rs. 1,40,000

Long Term Capital Gain = 1,80,000 – 1,40,000 = Rs. 40,000

Tax on Long term capital gains = Rs. 40,000*20% = Rs. 8,000

 

Disclaimer: The above-mentioned cases are illustrative and not exhaustive. This article is only for discussing general issues and hereby we do not express any opinion or give any consultation in whatsoever manner understood. The cases may differ from assessee to assessee. We recommend you to take expert advice depending upon your particular case.

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