Government notifies Cost Inflation Index (CII) for F Y 2020-21 at ‘301’

As per the Income tax Act, the Central Government is empowered to notify the cost inflation index for every year. Accordingly, it has notified the CII for current financial year 2020-21 at 301. It shall be applicable for the relevant transactions in current financial year and for the income tax returns for Assessment Year 2021-22.

What is Cost Inflation Index (CII)?

Let’s understand this through an example.

Shri Satish had bought a flat on 10/04/2004 (F Y 2004-05) for Rs. 20 lakhs. He sold this flat on 10/06/2020 (F Y 2020-21) for a price of Rs.60 lakhs. This means he earned a net profit of Rs. 40 lakhs. So, Is he required to pay tax on Rs.40 lakhs? NO.

The only actual or real gains of Shri Satish are computed for tax. For this, the cost of purchase as per current market prices must be compared against the sale price he is getting. For this, he is given a benefit of appreciation that has happened ONLY because of time. And this time-appreciation is linked to inflation in market and is called as Cost Inflation Index.

The purchase cost of Rs. 20 lakhs here is called as ‘Cost of Acquisition’ and the purchase cost after CII is called ‘Indexed Cost of Acquisition’

Let’s compute capital gains of Shri Satish

Net Profit to Shri Satish

(Sales Price – Cost of acquisition) = (60,00,000 – 20,00,000)= 40,00,000/-
Taxable Capital gains:
The formula for this is:-
(Sales Price – Indexed cost of acquisition) = (60,00,000–53,27,434*) = 6,72,566/-

{*Indexed cost of acquisition = (CII for the year of sale) x (Cost of acquisition) /CII for the year of acquisition}

Thus :-
(301) x (20,00,000)/ (113) = 53,27,434/-

Thus, because of application of Cost Inflation Index, Shri Satish is paying tax on Rs.6,72,566/- though he has earned a net profit of Rs. 40,00,000/- on sale of his flat.