Volume 1, Issue 5

20th August, 2008 Tax Alert Cost Inflation Index for F.Y. 2008-09    The Central Government has, vide Notification No. 86/2008, dated 13-8-2008, and notified the Cost Inflation Index for the Financial Year 2008-09 at 582.

What is Cost Inflation Index (CII)?

It is a measure of inflation that finds application in tax law while computing long -term capital gains on transfer of assets.

How does CII help in capital gains computation?

Capital gain, as you know, arises when you transfer a capital asset and the net sale consideration exceeds its cost. Since `cost of acquisition' is historical, the concept of indexed cost allows the taxpayer to factor in the impact of inflation on that cost. Consequently, a lower amount of capital gains gets taxed than if historical cost had been considered in the computation.

Generally, capital gains are calculated by reducing the cost of acquisition from the sale price. All expenses incurred for buying the shares are added to the cost while all expenses incurred for selling the shares are reduced from the sale price.

If the asset is a long term capital asset then the cost has to be substituted by the Indexed Cost of Acquisition. This is arrived at by multiplying the actual cost with the Cost Inflation Index for the year of sale and dividing by the Cost Inflation Index for the year of purchase.

How to compute long term capital gains for current year (F.Y. 2008-09)?

Presuming that you have sold an immovable property on 12th August, 2008 for a sum of Rs. 1 crore, and further presuming that the said property was bought by you on 10th August, 1995 for a price of Rs. 15 lakhs, the long term capital gains would be computed as under:

Formula for computing indexed cost of acquisition:

 Cost of acquisition X Index for the year of sale Index in the year of acquisition

Thus, in the above example, the indexed cost of acquisition would be:

 ie  Rs. 15,00,000 x CII for the F.Y. 2008-09 CII for the F.Y. 1995-96

 ie   Rs. 15,00,000 x 582 281

 ie  Rs. 31,06,761

The capital gains would be Sale Price less Indexed Cost of acquisition

i.e. Rs. 1 crore – Rs. 31,06,762       i.e. Rs. 68,93,238