How does Cost Inflation Index determine the quantum of Capital Gains?
Section 45 of Income Tax Act says any profit and gain arisen on Transfer of a Capital Asset shall be chargeable to Income Tax under the Head Capital Gain. Section 48 lays down the Method of computation of Capital Gain.
| Sale Consideration Received on Transfer of Capital Asset | XXXXXXXXX |
| Less : Cost of Acquisition of Asset (COA) | XXXXXXXXX |
| Less :Cost of Improvement (COI) | XXXXXXXXX |
| Less : Expenditure Incurred Wholly & exclusively for Such Transfer | XXXXXXXXX |
Income Chargeable under the Head Capital Gain :- xxxxxxxxx
Cost Inflation Index is basically price Inflation Adjustment due to the timing difference between date of Purchase of Asset and date of sale of Asset. It is present Purchase value of the asset that is to be sold.
As per Second Proviso to section 48 of Income Tax Act, Cost of Acquisition of an Asset is calculated as per below formula -:
Cost of Acquisition X Cost Inflation Index for the year in which asset is transferred ÷ Cost Inflation Index for the year in which asset was held by Assessee
From the Finance Act 2017 the CII base year has been changed to FY 2001-02 that means if asset has been purchased on or before 1st April, 2001 then FMV As on that date can be taken as Cost of Acquisition of Asset. Previously CII base year was 1981 .The benefit of Indexation is available only for long term capital Asset. Different Capital Asset have Different holding period for qualify as a long term capital.
| Property held as a Capital Asset | 24 Month or more |
| Listed Securities, Units of UTI, Zero coupon bond, Units of Equity Oriented mutual Fund | 12 Month or more |
| Unlisted securities | 24 Month or more |
| Units of Debt oriented mutual Fund, Units of Business Trust | 36 month or more |
Experts reckon that it is mostly the property owners who would benefit from this revision in base year. This is because the inflation rate in property market between 1981 and 2001 is not captured in the current index. For one, between 1981 and 2001, the index has jumped four times from 100 to 406 whereas property prices have surged 10 times in the same period. The shift in base year will help align the index with the actual rise in property rates, and help investors get the full benefit of index.
The Impact of Change in Base year can be elaborated with the following Example:-
NOW AND BEFORE
HOW A PROPERTY SELLER COULD GAIN OR LOSE AFTER SHIFT IN BASE YEAR ?
Case 1:-
Purchase price (Rs): 1,000,000
Sale price (Rs): 7,500,000
Purchase date: April 1, 1995
Date of sale: September 30, 2017
CII (1995-96): 281
CII (2001-02): 426
CII (2016-17): 1125
Calculation of Capital Gain Taking 1981 As a Base year
| Sale Consideration Received on Transfer of Capital Asset | 7500000 |
| Less : Cost of Acquisition of Asset (COA) <1000000*1125/281> | 4003559 |
| Income Chargeable under the Head Capital Gain :- | 3496441 |
| Tax Payable @20% on Long Term Capital gain | 699290 |
Case 2:-
Purchase price (Rs): 1,000,000 (FMV of the Property as on 1st April 2000 is Rs 1700000)
Sale price (Rs): 7,500,000
Purchase date: April 1, 1995
Date of sale: September 30, 2017
CII (2000-01): 100
CII (2016-17): 264
Calculation of Capital Gain Taking 2000 As a Base year
| Sale Consideration Received on Transfer of Capital Asset | 7500000 |
| Less : Cost of Acquisition of Asset (COA) <1700000*264/100> | 4488000 |
| Income Chargeable under the Head Capital Gain :- | 3012000 |
| Tax Payable @20% on Long Term Capital gain | 602400 |
There has been a Tax Saving of Rs 96890 due to shift in base year as FMV as on 1st April has been Taken leading to Increase in Cost of Acquisition & reduction in Capital Gain.
Cost Inflation Index under Section 48 which has been notified by the Income Tax Department is given below in the Table -:
| Financial Year | Cost Inflation Index |
| 2000-01 | 100 |
| 2001-02 | 105 |
| 2002-03 | 109 |
| 2003-04 | 113 |
| 2004-05 | 117 |
| 2005-06 | 122 |
| 2006-07 | 129 |
| 2007-08 | 137 |
| 2008-09 | 148 |
| 2009-10 | 167 |
| 2010-11 | 184 |
| 2011-12 | 200 |
| 2012-13 | 220 |
| 2013-14 | 240 |
| 2015-16 | 254 |
| 2016-17 | 264 |
| 2017-18 | 272 |
Author Bio
What if the FMV as on 1.04.2001 is less than actual cost of acquisition which was before 01.04.2001? For eg. I purchased an asset for Rs. 10 Lakh in 1994-95 and FMV of this asset on 01.04.2001 is Rs. 9 Lakh, then 9 Lakh would be considered for cal. Indexed Cost of acquisition?
In Case 2 above, the value of the property has been taken as on 1.4.2000 and also the CII for the financial year 2000-01 as 100.
If one is allowed to take the fair value of the property as on 1.4.2001 (CII 105), it is not clear why in Case 2 above the value as on 1.4.2000 has been taken.
Furthermore, if the sale took place on 30.9.2017, then the CII for FY 2017-18 (272) should be taken. In other words, the factor to be applied (on the value as on 1.4.2001) should be 272/105, instead of the factor 264/100 on the 1.4.2000 value in this example.
The CII table shown is the new series with FY 2000-01 as the base year. For those who are not familiar with the change, it would help if the author would explain how the CII factor in Case 1 have been taken as 281 and 1125.
I request the author to clarify.
Thanks.
how capital gains on debt and equity mutual funds are calculated. could you pl show with exmaple as done for property.
thanks
srinivas