The Income Tax Department has announced the Cost Inflation Index (CII) for the financial year 2024-25 (FY25) at 363. The CII is a critical tool used for computing long-term capital gains on the sale of assets, such as immovable property, securities, and jewelry, by adjusting the purchase price to reflect current inflation.
UNDERSTANDING THE COST INFLATION INDEX (CII)
The CII is based on the Consumer Price Index (CPI) of the preceding year. It adjusts the purchase price of assets to account for inflation, ensuring that taxpayers are taxed on real gains rather than nominal gains inflated by general price increases. This adjustment prevents disproportionate tax liabilities on gains primarily due to inflation rather than actual economic growth.
HOW TO USE CII
To compute long-term capital gains (LTCG) using the CII, follow these steps:
1. Determine the Indexed Cost of Acquisition (ICA):
2. Compute Long-term Capital Gains (LTCG):
EXAMPLES
Example 1: Sale of Immovable Property
• Purchase Year: FY18 (CII = 272) • Purchase Price: ₹50,00,000 • Sale Year: FY25 (CII = 363) • Sale Price: ₹1,20,00,000
Indexed Cost of Acquisition:
Long-term Capital Gain:
Example 2: Sale of Securities
• Purchase Year: FY20 (CII = 289) • Purchase Price: ₹10,00,000 • Sale Year: FY25 (CII = 363) • Sale Price: ₹18,00,000
Indexed Cost of Acquisition:
Long-term Capital Gain:
EXPLANATION OF CII NUMBERS
The CII numbers reflect the inflation adjustment needed for various fiscal years:
• FY25 (363): Indicates the index for the financial year 2024-25. • FY24 (348): Indicates the index for the financial year 2023-24. • FY23 (331): Indicates the index for the financial year 2022-23.
These numbers help in adjusting the purchase price of assets, ensuring that taxpayers are taxed on actual economic gains rather than inflation-inflated nominal gains. Using the CII for FY25, taxpayers can accurately calculate their long-term capital gains and reduce their tax liability accordingly.
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