The Central Board of Direct Taxes (CBDT) has notified the cost inflation index (CII) for financial year (FY) 2023 through a notification on 14 June 2022. The CII for FY23 relevant to assessment year (AY) 2023-24 is 331.
This notification will take effect on 1 April 2023 and will apply to the assessment year 2023-24 and future years while calculating long-term capital gains (LTCG) (or losses). Since prices of goods increase over time resulting in a fall in the purchasing power, CII is used to arrive at the inflation adjusted purchasing price of assets to compute taxable LTCG.
Tax experts said this inflation index of 331 seems reasonable for the computation of capital gains in the case of sale of jewellery and real estate properties.
If an asset is purchased in year when cost inflation index was 100 and is sold in an year where such index is 300, then actual cost of such asset will be multiplied by 3, while calculating LTCG on such asset.
Normally, an asset is required to be retained for more than 36 months (24 months for immovable property and unlisted shares, 12 months for listed securities) to qualify as ‘long-term capital gains’.
By this notification, government has notified cost inflation index for FY22-23 as 331. For last FY, this index was 317. The index starts at 100 from FY01-02.
What Is CII?
It is an index that is used to calculate the inflation-adjusted rise in the value of an asset. When it comes to the cost inflation index, there are two factors to keep in mind. This number will be used to calculate inflation-adjusted cost for only those assets that allow for inflation-adjusted (indexation benefit).
As a result, the CII value cannot be used to calculate LTCG/LTCL on equity mutual funds because any gain above Rs1 lakh during the FY is taxed at a flat rate of 10% without the advantage of indexation.
Where Is the CII Used?
CII is used to compute an asset's inflation-adjusted cost price. LTCG or losses are then calculated using the inflation-adjusted price. The CII figure is used to compute the inflation-adjusted value of assets including land, buildings, houses, gold jewellery, debt mutual funds (MFs), and so on. It cannot, however, be utilised for gains on equity shares and equity MFs that are taxed at a rate of 10% without any indexation benefit.
This CII number will assist you determine the LTCG on which you are required to pay taxes when you file your income tax returns (ITR) next year.
Given below is the table showing CII numbers since FY01-02:
How Is Indexation Calculated
The formula to calculate inflation-adjusted cost price is: (CII of the year of sale/CII for the year of purchase) * Actual cost price.
The government declared in Budget 2017 that the base year would be changed from 1981 to 2001 due to challenges in obtaining appropriate information by taxpayers. In the case of an asset purchased prior to 1 April 2001, the cost of the asset is regarded as the fair market value on 1 April 2001.