indexation

Indexation

In simple terms indexation refers to technique to adjust income payments by means of a price index, in order to maintain the purchasing power of the public after inflation. To overcome the problem of inflation the concept of indexation was introduced.
For tax purposes indexation is the term used for arriving at the current actual cost. The purchasing power of money decreases with an increase in inflation which results in an increase in prices of goods. Indexed cost allows the assessee to claim a higher deduction in respect of the cost of the asset by taking inflated cost while calculating capital gains.
The overall cost of acquisition is adjusted per the prevailing Cost Inflation Index for the year and the year in which acquisition took place.

Calculation of Indexed Cost:

Firstly, calculate the cost of acquisition of the capital assets. Then,

 

Cost Inflation Index of the year in which

Indexed Cost of acquisition = Cost of acquisition  x   asset is transferred_________________

Cost Inflation Index of the year in

which asset is first held by assessee or

CII of 2001-02, whichever is later

Note: Cost inflation index is the index for the inflation rate in the country. Central Board of Direct Taxes (CBDT) issues this index every year.
Indexation can be done on the cost of improvement also in the same manner as the cost of acquisition. Any expense incurred on account of improvement before 01/04/2001 is to be completely ignored and only expense incurred after 01/04/2001 is to be considered for indexation as the cost of improvement before 01/04/2001 is already considered in fair market value.

 

Cost inflated index of the year in

Indexed Cost of Improvement = Cost of Improvement  x  which expense incurred_______

Cost Inflation Index of the year in

which asset is first held by assessee

or CII of 2001-02, whichever is later

Indexation benefit is available only for transfer of long term capital asset. Depreciable Assets are always deemed as short-term capital assets. Thus, no indexation benefits shall be available on such assets and where a non-resident acquires shares or debentures of an Indian company in foreign currency, the scheme of indexation does not apply.
No indexation benefit is available for slump sale.

Calculation of Fair market value:

1. Average price of similar properties in the same area
2. Based on the circle rates
3. Based on the Real estate Indices
4. Valuation from registered valuers.
Indexation table as per Income tax act, 1961:
Central Government specifies the cost inflation index by notifying in the official gazette.
Cost Inflation Index = 75% of the average rise in the Consumer Price Index* (urban) for the immediately preceding year.
*Consumer Price Index compares the current price of a basket of goods and services (which represent the economy) with the price of the same basket of goods and services in the previous year to calculate the increase in prices.

Financial Year Cost Inflation Index (CII)
2019-20 289
2018-19 280
2017-18 272
2016-17 264
2015-16 254
2014-15 240
2013-14 220
2012-13 200
2011-12 184
2010-11 167
2009-10 148
2008-09 137
2007-08 129
2006-07 122
2005-06 117
2004-05 113
2003-04 109
2002-03 105
2001-02 100
Any time before 1st April 2001 100

This above-stated indices will come into force with effect from the 1st day of April 2019 and will accordingly apply to the Assessment Year 2019-20 and subsequent years.
As the cost of indexation starts from 2001-02 than for the assets purchased before 01/04/2001 the fair market value of the assets as on 01/04/2001 shall be taken into account. The taxpayer shall be given the option to either take the fair market value as on 01/04/2001 as cost of acquisition or actual price as the cost of acquisition
For CII Calculator Visit: https://www.incometaxindia.gov.in/Pages/utilities/Cost-Inflation-Index.aspx
COST INFLATION INDEX (CII) APPLICABLE FOR FINANCIAL YEAR 2016-17 AND PRECEDING YEARS

Financial Year Cost Inflation Index (CII)
2016-17 1125
2015-16 1081
2014-15 1024
2013-14 939
2012-13 852
2011-12 785
2010-11 711
2009-10 632
2008-09 582
2007-08 551
2006-07 519
2005-06 497
2004-05 480
2003-04 463
2002-03 447
2001-02 426
2000-01 406
1999-00 389
1998-99 351
1997-98 331
1996-97 305
1995-96 281
1994-95 259
1993-94 244
1992-93 223
1991-92 199
1990-91 182
1989-90 172
1988-89 161
1987-88 150
1986-87 140
1985-86 133
1984-85 125
1983-84 116
1982-83 109
1981-82 100
Anytime before 1st April 1981 100

As the cost of indexation starts from 1981-82 than for the assets purchased before 01/04/1981 the fair market value of the assets as on 01/04/1981 shall be taken into account. The taxpayer shall be given the option to either take the fair market value as on 01/04/1981 as cost of acquisition or actual price as the cost of acquisition

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