It is crucial to protect your investments from the damaging effects of inflation. The concept of indexed cost plays a vital role in maintaining the true value of assets while confidently managing the complexities of the tax system. Grasping the idea of indexed cost ensures your tax liabilities are both fair and precise. Read on to learn more about the meaning, importance, and calculation of indexed cost in India.
See also: What is section 54EC of Income Tax Act?
Indexed cost: Meaning
Indexed cost refers to the adjusted cost of an asset, accounting for inflation. This adjustment is crucial for determining the taxable capital gains on the sale of long-term capital assets in India, enabling investors to accurately estimate their gains or losses and make informed decisions. By adjusting the asset’s purchase price for inflation, indexed cost helps reduce the tax burden on the seller. This process, known as indexation, involves applying the Cost Inflation Index (CII) published by the Income Tax Department to the asset’s purchase price. Indexation ensures that the impact of inflation on the cost of acquiring an asset is appropriately reflected.
Benefit of indexation
Indexation significantly reduces the taxable capital gains on the sale of long-term capital assets by adjusting the purchase price for inflation. This ensures individuals are taxed only on their real gains, not the nominal gains caused by inflation. This tax-saving provision is especially beneficial for those who have held assets for an extended period, as it helps preserve wealth and encourages long-term investments. Additionally, indexed cost plays a crucial role in providing a fair assessment of the property’s actual value, further promoting long-term investments in real estate.
How to calculate indexed cost?
The indexed cost is calculated by multiplying the purchase price of the asset by the Cost Inflation Index (CII) of the year of sale and then dividing it by the CII of the year of purchase. The formula is:
Indexed Cost = (Purchase Price X CII of the Year of Sale) / CII of the Year of Purchase
The CII, released by the Central Board of Direct Taxes (CBDT), adjusts the purchase price based on the inflation rate. The CII values for both the year of purchase and the year of sale are needed for accurate calculation.
For example, if an individual purchased a property in 2010 for Rs 50 Lakh and sold it in 2022, the indexed cost would be calculated as follows:
Indexed Cost = (50,00,000 X 317) / 148 = Rs 1,07,09,459
Here, 148 is the CII value for FY 2009-10 and 317 is the CII value for FY 2021-22.
Cost Inflation Index from FY 2001-02 to FY 2023-24
Here are the cost inflation index values from FY 2001-02 to FY 2023-24:
| Fiscal Year | Cost Inflation Index |
| 2001-02 | 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 |
| 2022-23 | 330 |
| 2023-24 | 344 |
Indexed cost calculation: Examples
For residential property
Let’s assume Sharan Gupta purchased a residential property in Delhi in May 2009 for Rs 40 Lakh. He sold the property in June 2022 for Rs 2 Cr. To calculate the indexed cost, we need to consider the Cost Inflation Index (CII) for the relevant years.
The CII for the year of purchase (2009-10) was 148, and for the year of sale (2022-23) was 330. Using the formula:
Indexed Cost = Purchase Price x (CII of Sale Year / CII of Purchase Year)
Indexed Cost = 40,00,000 x (330 / 148) = Rs 89,18,919
Therefore, the indexed cost of the residential property is Rs 89,18,919.
For shares and securities
Let’s assume Anuradha Mishra purchased shares of ABC Ltd in June 2013 for Rs 5 Lakh. She sold the shares in April 2022 for Rs 20 Lakh.Â
The CII for the year of purchase (2013-14) was 220, and for the year of sale (2022-23) was 330.Â
Using the formula:
Indexed Cost = Purchase Price x (CII of Sale Year / CII of Purchase Year)
Indexed Cost = 5,00,000 x (330 / 220) = Rs 7,50,000
Therefore, the indexed cost of the shares is Rs 7,50,000.Â
Housing.com POV
Understanding and utilising the concept of indexed cost is crucial for protecting your investments from the detrimental effects of inflation. By adjusting the purchase price of assets for inflation, indexed cost helps ensure that the tax liabilities are fair and based on real gains rather than nominal gains. This is particularly advantageous for long-term investors, as it aids in preserving wealth and encourages long-term investments. Indexation significantly reduces taxable capital gains, providing a fair assessment of an asset’s actual value. This tax-saving measure is especially beneficial for those holding assets over extended periods, promoting financial stability and investment in real estate. The process of calculating indexed cost, using the Cost Inflation Index (CII) provided by the Central Board of Direct Taxes (CBDT), is straight and can result in substantial tax savings. By comprehending the calculation and benefits of indexed cost, investors can make informed decisions, ultimately leading to more accurate tax obligations and better financial planning.
FAQs
What is indexed cost?
Indexed cost refers to the adjusted cost of an asset that accounts for inflation. This adjustment is essential for determining the taxable capital gains on the sale of long-term capital assets in India, enabling accurate estimation of gains or losses.
How does indexation benefit real estate investors?
Indexation benefits real estate investors by reducing the taxable capital gains on the sale of properties. It adjusts the purchase price for inflation, ensuring that individuals are taxed only on the real gains rather than the nominal gains caused by inflation.
How is the indexed cost calculated?
The indexed cost is calculated by multiplying the purchase price of the asset by the Cost Inflation Index (CII) of the year of sale and then dividing it by the CII of the year of purchase.
Where can I find the Cost Inflation Index (CII) values?
The Cost Inflation Index (CII) values are released by the Central Board of Direct Taxes (CBDT). These values are published annually and can be found on the official website of the Income Tax Department of India.
Are there any exceptions or limitations to use indexation?
Yes, there are certain exceptions and limitations. Indexation is primarily applicable to long-term capital assets, which are assets held for more than 36 months (24 months for immovable properties like land and buildings). Short-term capital assets, held for shorter durations, are not eligible for indexation benefits. Additionally, indexation benefits are not available for certain assets like bonds and debentures (except capital indexed bonds issued by the government).
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