Indexed Cost in Capital Gain Calculations:

It is a measure of inflation that finds application in tax law, when computing long-term capital gains on sale of assets. Section 48 of the Income-Tax Act defines the index as what is notified by the Central Government every year, having regard to 75 per cent of average rise in the consumer price index (CPI) for urban non-manual employees for the immediately preceding previous year. Therefore, if we consider that price of a capital asset has risen in tandem with base price rise, then if one want to sell an asset and replace it, the cost allowed even after indexation will be lesser than the price payable for new asset. However, in case of many capital asset the price rise is lesser than market price and in many cases it is higher.

Capital gain arises when the net sale consideration of a capital asset is more than the cost. Since “cost of acquisition” is historical, the concept of indexed cost 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.

Formula for computing indexed cost is (Index for the year of sale/ Index in the year of acquisition) x cost.

For example, if a property purchased in 1991-92 for Rs 20 lakh were to be sold in A.Y. 2009 -10 for Rs 80 lakh, indexed cost = (582/199) x 20 = Rs 58.49 lakh. And the long-term capital gains would be Rs 21.51, that is Rs 80 lakh minus Rs 58.49 lakh.

Cost Inflation Index:- Cost inflation index (CII)as notified by Central Government alongwith analysis of the same is as under:

FINANCIAL YEAR & COST INFLATION INDEX :
1981-1982 :100
1982-1983 :109
1983-1984 :116
1984-1985 :125
1985-1986 :133
1986-1987 :140
1987-1988 :150
1988-1989 :161
1989-1990 :172
1990-1991 :182
1991-1992 :199
1992-1993 :223
1993-1994 :244
1994-1995 :259
1995-1996 :281
1996-1997 :305
1997-1998 :331
1998-1999 :351
1999-2000 :389
2000-2001 :406
2001-2002 :426
2002-2003 :447
2003-2004 :463
2004-2005 :480
2005-2006 :497
2006-2007 :519
2007-2008 :551
2008-2009 :582
2009-2010 :632
2010-2011 :711
2011-2012 :785