# Cost Inflation Index (CII) for FY25 to compute Capital Gains

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Cost Inflation Index (CII); Long Term Capital Gains

## Why in the News?

• The Income Tax Department has notified the cost inflation index (CII) for the current fiscal to calculate long-term capital gains arising from the sale of immovable property, securities and jewellery.
• The CII is used by a taxpayer to compute gains arising out of the sale of capital assets after adjusting for inflation.

## CII Values:

• For FY 2024-25, the CII is set at 363.
• Previous years’ CII values were 348 for FY 2023-24 and 331 for FY 2022-23.

## What isCost Inflation Index (CII)?

• CII is a measure used by the Income Tax Department of India to account for inflation when calculating the capital gains on the sale of long-term capital assets.
• It helps to adjust the purchase price of assets to reflect the effect of inflation.
• CII adjusts the cost of acquisition of assets to the price level inflation at the time of sale.
• This ensures that taxpayers pay taxes on the real gains rather than on the inflationary component of the price rise.
• It is defined under Section 48 of the Income-tax Act, 1961.
• The index is revised annually to keep up with inflation, with the base year being periodically reset (currently the base year is 2001-02 in India).

## Application of CII

• CII is used to compute the indexed cost of acquisition of a capital asset that has been held for more than 36 months (considered as long-term capital assets).
• Different holding periods apply for certain types of assets like immovable property and listed securities.

## Tax Calculation:

• The formula used is:

• This formula helps determine the adjusted cost basis from which any sale proceeds are subtracted to calculate capital gains.

## Back2Basics: Long Term Capital Gains

• In India, long-term capital gains (LTCG) refer to the profit earned from the sale of a capital asset held for a specific period, qualifying it as “long-term” based on the duration of holding.
• The tax implications and treatment of these gains are distinct from those of short-term capital gains.

## Definition of Long-Term Capital Assets

• Equity or Preference Shares, Listed Securities, Units of UTI, etc.: These are considered long-term if held for more than 12 months before sale.
• Immovable Property (e.g., Land, Building): Considered long-term if held for more than 24 months.
• Other Assets (e.g., Jewellery, Debt-oriented Mutual Funds, etc.): These need to be held for more than 36 months to be considered long-term.

## Taxation of Long-Term Capital Gains

• Equity Investments:
• LTCG from the sale of listed shares or equity-oriented mutual funds over ₹1 lakh is taxed at 10% without the benefit of indexation, provided the securities transaction tax (STT) was paid at the time of sale.
• Non-Equity Investments:
• LTCG from assets like debt mutual funds, real estate, gold, etc., is taxed at 20% with the benefit of indexation.
• Indexation Benefit:
• For non-equity assets, the Cost Inflation Index (CII) is used to adjust the purchase price of the asset to reflect inflation. This reduces the taxable gain by increasing the acquisition cost.

## Calculation of Long-Term Capital Gains

The general formula for calculating LTCG is:

Where:

Full Value of Consideration is the sale price of the asset.

Indexed Cost of Acquisition is the purchase price adjusted by the CII.

Indexed Cost of Improvement refers to the cost of any improvements made to the asset, adjusted by the CII.

Cost of Transfer includes expenses directly related to the sale or transfer of the asset.

## Exemptions and Deductions

• Section 54: Exemption on LTCG from the sale of a residential property if the proceeds are reinvested in another residential property in India.
• Section 54EC: Exemption by investing LTCG in bonds issued by NHAI or REC within 6 months of the asset sale, subject to a cap of ₹50 lakhs.

## PYQ:

[2015]  Which reference to inflation in India, which of the following statements is correct?

(a) Controlling the inflation in India is the responsibility of the Government of India only

(b) The Reserve Bank of India has no role in controlling the inflation

(c) Decreased money circulation helps in controlling the inflation

(d) Increased money circulation helps in controlling the inflation

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