What Is Cost Inflation Index (CII)?

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• 27 Feb 2023

At the time of selling any asset, the purchase price is called the indexed cost of acquisition. The CII is hence the asset’s purchasing price that has been indexed. The Cost Inflation Index for each year is released right before the conclusion of the financial year and is used for computing taxes. The Central Board of Direct Taxes issues the CII or the Cost Inflation Index and the figures change every year.

Example: When you were a child, you got 4 peppermints for 5 paisa. Now, the same would cost (if it were still available) Rs 2 per piece. This rise in cost is partly because of fluctuations in the rupee’s value due to inflation. As a result, the price of different products will only keep increasing owing to inflation, which means you will end up paying more for many items. The same principle applies to the value of the assets you hold including property, shares, gold, jewellery and more.

Capital gains refers to the profits that you incur on account of disposing of your asset such as the stock, real estate, jewellery, mutual funds etc. In case you choose to sell your asset after a period of thirty six months of purchasing the same, it is considered as long-term capital gain. However, if you sell your asset only a year later from the purchase date, then it is regarded as short-term capital gain. With little knowledge you can save capital gains tax. Learn more about the difference between short-term and long-term capital gains tax here...

However, the capital gains tax is not charged on the difference between the sale price and the purchase price. The purchase price is multiplied with the cost inflation index. The difference between the selling price and the purchase price so equated will be considered as capital gains by the IT department, on which you’ll be liable to pay the capital gains tax.

The CII indexes the purchasing price of any asset. Hence, one needs to use the following formula for calculating the CII:

CII = Cost Inflation Index for that particular year when an asset was sold or transferred/ CII for that year when an asset was purchased or acquired.

Say, you purchased an apartment for an amount of Rs 20 lakh in the month of January 2000 and later sold the same for a sum of Rs 35 lakh in the month of January in 2009. Then the profit or the capital gain incurred by you would be Rs 15 lakh. Now, the Cost Inflation Index when the flat was purchased was 389 whereas the same for when the flat was disposed of was 582. As a result, your CII would then be 582/389 = 1.49. When it comes to calculating the tax, the CII needs to be multiplied with the purchasing price that would finally yield the cost of purchasing that was indexed. This will give you the real cost of your asset. Hence, your indexed acquisition cost would be 20,00,000 X 1.49 = Rs 29, 92,288

The long-term capital gain will be calculated as:

Asset’s selling price – cost of acquisition indexed = 35, 00,00 – 29,92,288 = Rs 5,07,712

Long-term capital gains tax of 20% will apply in this case. The taxation liability would be 20% x 5,07,712 = Rs 1,01,542

It is important to note here that indexing allows you to save your taxes. It allows you to adjust your apartment’s purchase price in accordance with the prevailing or current market price. Also, indexing isn’t applicable in the case of short-term capital gains or losses. In fact, Non-Resident Indians (NRIs) cannot take advantage of indexation.

Does the thought of income tax play on your mind at the end of every fiscal year? Knowing the income tax slabs can certainly help you get rid of the worries. It will give you a clear idea of how much money would be deducted from your salary and where you can save. In this way, you can determine the take-home salary and choose how to enjoy tax benefits.

Here is an overview of the existing tax slabs so that you can make your plans in advance.

Taxpayers in India are classified into different groups based on their respective incomes. Each group has to pay income tax based on the slab they come under. There is a designated rate of tax deduction, which is usually revised every year. Before we proceed to the rates prescribed by the government, it is important to have a clear idea of the categories of tax-payers:

• Individuals and Hindu Individual Family (HUF) (<60 years)

• Senior citizens (>= 60 years, but <80 years)

• Senior citizens (>= 80 years)

• Domestic companies

Read more: Right time to start tax planning

Following these categories, the income tax slabs in India for the year 2019–20 are given below:

Annual Income Rate of Tax Charged Health and Education Cess
Up to Rs. 2.5 lakhNilNil
Rs 250,001–Rs 5 lakh5%4% of the income tax and surcharge
Rs. 500,001–Rs 10 lakh20%4% of the income tax and surcharge
More than Rs 10 lakh30%4% of the income tax and surcharge
Annual Income Rate of Tax Charged Health and Education Cess
Up to Rs 3 lakhNilNil
Rs 300,001–Rs 5 lakh5%4% of the income tax and surcharge
Rs. 500,001–Rs 10 lakh20%4% of the income tax and surcharge
More than Rs 10 lakh30%4% of the income tax and surcharge
Annual Income Rate of Tax Charged Health and Education Cess
Up to Rs 5 lakhNilNil
Rs 500,001–Rs 10 lakh20%4% of the income tax and surcharge
More than Rs 10 lakh30%4% of the income tax and surcharge

These rates are valid for FY 2019–20 and FY 2020-21.

When paying income tax for FY 2020–21, taxpayers can also opt for a new taxation regime with lower tax rates. However, under the new regime, the taxpayer cannot claim any tax exemptions and deductions. Take a look at the special tax rates here:

Annual Income (Rs) Rate of Tax Charged
Up to Rs 2,50,000Nil
Rs 2,50,001–Rs 5,00,0005%
Rs 5,00,001–Rs 7,50,00010%
Rs 7,50,001–Rs 10,00,00015%
Rs 10,00,001–Rs 12,50,00020%
Rs 12,50,001–Rs 15,00,00025%
Above Rs 15,00,00030%

If your annual income is above Rs 50 lakh, a additional surcharge is levied on your income. The rate of surcharge varies based on the income range, but the slabs are the same for all age groups. The current surcharge rates are given below:

Annual Income Rate of Surcharge Extent of Relief
Rs 50 lakh–Rs 1 crore10%Payable income tax and surcharge will not exceed the income tax on Rs 50 lakh by more than the amount of income exceeding Rs 50 lakh.
Rs 1 crore–Rs 2 crore15%Payable income tax and surcharge will not exceed the income tax on Rs 1 crore by more than the amount of income exceeding Rs 1 crore.
Rs 2 crore–Rs 5 crore25%Payable income tax and surcharge will not exceed the income tax on Rs 2 crore by more than the amount of income exceeding Rs 2 crore.
Rs 5 crore–Rs 10 crore Above Rs 10 crore37%Payable income tax and surcharge will not exceed the income tax on Rs 1 crore by more than the amount of income exceeding Rs 1 crore.

The government no longer differentiates between men and women as far as payment of tax is concerned. So, before you plan your investment in order to avail tax exemptions, it is important to know the income tax slab you fall under.

Company Turnover Rate of Tax Charged in AY 2020–21 Rate of Tax Charged in AY 2021–22
Company where total turnover during previous year (FY 2017–18) was less than Rs 400 crore25%NA
Company where total turnover during previous year (FY 2018–19) was less than Rs 400 croreNA25%
Any other domestic company30%30%/p>
• Rate of Surcharge

• Taxable income more than Rs 1 crore but less than Rs 10 crore: Surcharge of 7% will apply on the income tax payable. However, the total of income tax and surcharge will not exceed the income tax on Rs 1 crore by more than the amount of income exceeding Rs 1 crore.

• Taxable income more than Rs 10 crore: Surcharge of 12% will apply on the income tax payable. But the sum of income tax and surcharge will not exceed the income tax on Rs 10 crore by more than the amount of income exceeding Rs 10 crore.

• 4% Health and education cess: This will be levied on the total of income tax and surcharge.

Domestic companies can also opt for special tax rates under the new regime in AY 2020–21:

Section Chosen for Income Tax Purposes Rate of Tax Charged in AY 2020–21 Rate of Tax Charged in AY 2021–22
Section 115BA25%25%
Section 115BAA22%22%
Section 115BAB15%15%/p>

Who would not want to save as much as possible from their taxes? The Government of India offers provisions to do the same. Section 80C lists a number of tax-saving investments:

• Public Provident Fund (PPF)

• National Pension Scheme (NPS)

• Fixed Deposits

• Life Insurance

• Health Insurance

These are just a few of the tools that allow you to avail tax exemption (refer to Section 80C).

Read more: Investments under Section 80C

Investing in equity-linked savings schemes (ELSS) is considered to be the most profitable. These funds enjoy the shortest lock-in period but generate better income than PFF or NPS. The interest that your FD earns is not tax-free, but your income from ELSS is exempted from tax. (More on the benefits of ELSS)

All you need to do is set aside a little time from your busy schedule. Use this time to assess the pros and cons of each of these instruments. Then choose the ones that best suit your requirements.

Summing Up

A thorough understanding of the income tax slabs prescribed by the Indian government would help you plan your investment and savings. This is how you balance your income and expenditure. Read more: Reasons to file ITR