How To Calculate Cost Inflation Index

One of the major concerns in many NRIs mind is the question of the complete cost inflation index chart, as evidenced by even the most cursory google searches. Many people are unsure about the cost inflation index chart in India and how to calculate cost inflation index. As you probably already know, making sure you have the latest cost inflation index chart and know exactly how to calculate cost inflation index will help you save a lot of money on taxes. While this entire process may seem daunting and unnerving at first, we are here with a ready reckoner to ensure that you do not miss out on any of the tax breaks you may be eligible for. So, without any further ado, here is all the information you will need in order to calculate exactly what the latest cost inflation index chart in India is. We do hope this helps.

What is Cost Inflation Index?

As you already know, the value of any currency never remains the same over time. It is constantly changing. For example, the amount you may have paid to buy a bar of soap in 1995 would be drastically different to what you would pay for the same bar of soap in 2017. This is due to inflation of the currency. This change in value due to inflation also occurs on larger investments you may have made, like property or jewellery. Now, it is only fair that in the same way, when you have to pay the capital gains tax, inflation of currency is taken into account.The cost inflation index is a measure by which inflation is calculated. This is especially important while calculating long-term capital gain tax that is payable when you have earned a profit on sale of an asset. The cost inflation index also takes into account the consumer price index (CPI) for the previous year for urban, non-manual employees. The cost inflation index (CII), therefore, is the indexed price that the asset is purchased at. For example, if you purchased a house for INR 20 lakhs 5 years ago, then the present value of that purchase would be much higher. The CII for a particular year is fixed by the government and released before the accounting year ends, for the purpose of tax computation.

How Can You Calculate The Cost Inflation Index?

There is one key formula you will need to remember in order to calculate the cost inflation index. This is given below.

Cost Inflation Index (CII) = CII for the year the asset was transferred or sold / CII for the year the asset was acquired or bought

This is not as complicated as it looks. Let us suppose that you had purchased an apartment for INR 20 lakhs in 2000, and sold the same house at INR 35 lakhs in 2009. In this case, your capital gain would be INR 15 lakhs. But this does not take into account the inflation of currency over time. So, we must see what the CII for 2000 and the CII for 2009 is. In 2000, CII was 389, while in 2009, the CII was 582. Going by the above formula, the inflation index is 582/389 = 1.49

So, the indexed cost of acquisition of the asset is now at INR 2,92,288 (2,00,000 X 1.49)

Now, long term capital gain is equal to the sale value of the asset minus the indexed cost of acquisition. In this case, the calculation becomes: 35,00,00- 29,92,288 = Rs.5,07,712

Therefore, your tax liability at 20% would be Rs.1,01,542 (20% X 5,07,712)

Cost Inflation Index Chart For Ready Reference

Now that you know exactly what people mean when they talk about the complete cost inflation index chart, you are already on your way to calculating your capital gains tax and the tax breaks you may eligible for. As we have already stated above, knowing the latest cost index inflation chart as well as knowing the procedure of how to calculate cost inflation index, can put you a long way in making sure that you are not taxed unnecessarily. In addition, knowing the cost inflation index chart in India is essential for any NRI who has already made or who is planning to make an investment in India. We hope this article has helped you on your way, no matter where you are.