The Central Board of Direct Taxes
(‘CBDT’) has recently issued a
Notification providing for the Cost
Inflation Index for FY 2010‐11. The
provisions relating to Cost Inflation
Index (‘CII’) and the new CII form
the subject matter of this Tax Alert.
Under the Income‐tax Act, 1961
(‘Act’), the gain arising from transfer
of any capital asset is charged to tax
as ‘capital gains’. The Act follows
the commercial way of computing
capital gains i.e. sale value minus
cost price. However, in respect of
long term capital assets i.e. assets
which are held for a period of more
than 12/36 months, the taxable gain
is computed by reducing the sale
value from the ‘indexed cost of
acquisition’. The objective to allow
indexation of cost is to provide for
the effect of inflation and to tax the
gain in real terms.
Indexed cost of acquisition is
computed as under:
|
|
CII of the year of
transfer |
ICOA = COA |
x |
|
|
|
CII of the year of
acquisition by the |
ICOA: Indexed Cost of Acquisition
COA: Cost of Acquisition
CII: Cost Inflation Index
The is determined by the CBDT
having regard to 75 per cent of
average rise in the Consumer Price
Index for urban non‐manual labour
for the immediately preceding
financial year.
The CBDT has notified ‘711’ as the
CII for FY 2010‐11. Accordingly,
where a long term capital asset
which is eligible to claim the benefit
of indexation is transferred in FY 2010‐11, the numerator to compute the Indexed
Cost of Acquisition will be 711.
To illustrate, if a house purchased in FY 1991‐92
(CII: 199) for Rs. 10 lacs is sold in FY 2010‐11, the
indexed cost of acquisition will be computed as
under:
|
|
711 |
ICOA = 10,00,000 |
x |
|
|
|
199 |
= 35.73 lacs |
|
|
It is pertinent to note that the CII remains the
same for all the days of the financial year. That is,
the indexed cost of acquisition for a long term
capital asset which is transferred on 1st April 2010
or on 31st March 2011 will be computed by using
the same CII of 711.
The CII may be borne in mind while computing
capital gains earned during the year while
estimating the advance tax payable for the year. |