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What Is Cost Inflation Index?

IndianMoney.com Research Team | Posted On Monday, March 11,2019, 02:44 PM

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What Is Cost Inflation Index?

 

 

The rise in prices of goods and services in India is called inflation.  Inflation rate is very important for the Government’s monetary and fiscal policy. Inflation in India is measured by WPI (Wholesale Price Index) and CPI (Consumer Price Index).

Wholesale Price Index or WPI index represents wholesale prices of a basket of goods. It measures the price changes in raw material, intermediate goods and capital goods. WPI measures prices of manufactured products, fuel and power and primary articles. India has shifted from WPI index to CPI index.

CPI index measures price changes like housing, fuel, clothing and footwear, food and beverages and miscellaneous (Pan, Tobacco and Intoxicants). RBI has switched from WPI to CPI index for monitoring inflation for fixing interest rates in India. CPI Inflation also called retail inflation was 2.05% for January 2019 compared to 2.11% for December 2018. RBI can cut interest rates (repo) if CPI inflation is low.

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What Is Cost Inflation Index?

Cost Inflation Index or CII is used to calculate estimated increase in prices of goods and services year-on-year because of inflation. The Central Government specifies Cost of Inflation Index by a notification in the official gazette.

Cost inflation index: What is base year in cost inflation index? The base year of cost inflation index is the first year of the cost inflation index which has index value of 100. In the Union Budget 2017, the base year of indexation was changed from 1981 to 2001.

SEE ALSO:  Cost Inflation Index

Cost Inflation Index Chart:

Cost Inflation Index for Financial Year 2018-19:

Why Cost Inflation Index?

Cost Inflation Index or CII is used to calculate long-term capital gains or LTCG. CII (Cost Inflation Index) for the year in which the asset was purchased and the year in which the asset was sold is considered when calculating capital gains. You get the benefit of cost indexing only for long-term capital gain.

Cost after indexing = Cost before indexing * CII for sale year / CII for purchase year.

Capital Gain = Sale Price – Cost after Indexing.

To compute long-term capital gains, you (property seller) have to calculate indexed cost of purchasing the property. You have to multiply property’s cost of acquisition with the cost inflation index for the year of transfer. This is divided by the cost inflation index for the year of purchase.

How to calculate Cost Inflation Index?

Case 1: Suresh purchased a property in Bengaluru on 1st August 2004 for Rs 25 Lakhs. He sold this property on 1st October 2017 for Rs 75 Lakhs. Let’s calculate cost inflation index.

Cost after indexing = Cost before indexing * CII for sale year / CII for purchase year.

Cost after indexing = 25,00,000 * 272 / 113 = Rs 60,17,699.

Long Term Capital Gain = Sale Price – Cost after Indexing.

Long Term Capital Gain = Rs 75,00,000 – Rs 60,17,699 = Rs 14,82,301.

Case 2: Ravi purchased a property in Chennai for FY 2005-06 for Rs 50 Lakhs.  He sold this property in FY 2017-18 for Rs 1.5 Crores. Let’s calculate cost inflation index.

Indexed Cost of Acquisition = 50,00,000 * 272 / 117 = Rs 1,16,23,932.

Long Term Capital Gain = Rs 1,50,00,000 – Rs 1,16,23,932 = Rs 33,76,069.

Cost Inflation Index (CII) is a measure of inflation used to compute LTCG on sale of capital assets. Capital asset is property which is expected to generate value over a long period of time. Some examples of capital assets are land and buildings, computer equipment, plant and machinery and vehicles.

Case 3: Ashwin purchased property in Mumbai in FY 2007-08 for Rs 50 Lakhs. Ashwin sold the property in FY 2017-18 for Rs 2 Crore.

Indexed cost of acquisition = 50,00,000 * 272/ 129 = Rs 1,05,42,636.

Long Term Capital Gain = Selling Price – Indexed Cost of Buying Property.

Long Term Capital Gain = Rs 2 Crore – Rs 1,05,42,636 = Rs 94,57,364.

SEE ALSO:  Calculate Cost Inflation Index

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