CBDT Notifies Cost Inflation Index for FY 2015-16
Cost Inflation Index notified for Financial Year 2015-16
Recently the Central Board of Direct Taxes ( CBDT ) has notified the Cost Inflation Index (CII) for the current financial year (2015-16) at 1081. This index figure is essential for computing long term capital gains on transfer of any long term capital asset.
What is CII?
While computing capital gains, generally, the cost of acquisition is reduced from the sale price.This cost of acquisition is always historical and if this is taken into consideration for computing the capital gains in respect of old assets, it is possible that the concerned tax payer is forced to pay tax on the gains that have arisen on account of inflation and not necessarily on account of real increase in value of the asset. In order to avoid taxing gains that have arisen only on account of inflation, the concept of indexed cost was introduced into the Income-tax Act.
Cost Inflation Index (CII)is a measure of inflation that is used for computing long-term capital gains on transfer of capital assets. It allows the taxpayer to factor in the impact of inflation on cost. Consequently, a lower amount of capital gains gets to be taxed than if historical cost had been considered in the computations. Every financial year, CBDT notifies the CII for that year. For the FY 2015-16, the CII has been notified to be 1081. This notification was issued on 24th July.
How to use the CII?
This is illustrated with the help of an example below:
If a property is purchased in financial year 1995-96 for Rs 20 lakhs and is sold in financial year 2015-16 for Rs 5 crore, then the long term capital gain without considering CII would be Rs 4,80,00,000 i.e. Rs. 5 crores as reduced by Rs. 20 lakhs.
However, if the CII is taken into consideration the long term capital gains would be calculated as under:-
|Cost of Acquisition||20,00,000|
|Indexed cost of Acquisition|
|CII for 1995- 96||281|
|CII for 2015-16||1081|
|Indexed Cost of Acquisition = Cost of Acquisition x CII for year of sale / CII for year of purchase i.e. 20,00,000*1081/281||76,93,950|
|Long term Capital Gains||4,23,06,050|
It can be seen from the above that after considering the CII, the capital gain has reduced resulting in lower tax liability to be paid by the tax payer.
The current financial year began on 1st April, 2015. Yet, the CII for the current year has been notified in the fourth week of July. This results in a situation where the gains earned in the first few months of the year have to be computed on the basis of an estimated CII for the year. This is not a desirable situation. It wo uld be better if the CBDT notifies the CII for every year at the beginning of the year itself. This will help tax payers in computing their tax liabilities accurately. It would in turn, avoid unnecessary payment of interest for default in advance tax. We hope that in future, the CII is notified well in time by the CBDT.