**Cost Inflation Index – Check Calculation for FY 2016-17 & AY 2017-18**

The rupee value keeps changes every now and then and the general increase in prices and fall in buying value of money, which we also call Inflation is affecting the increase of prices. Because of the rise in prices, we are ending up paying more for even a toothbrush. Similarly, it is not good to pay Capital Gain Tax without including inflation. Capital gain is nothing but the profit one make on selling a product or asset. The asset could be anything ranging from real estate, stocks, mutual funds, jewelry, housing etc.

The capital gain is classified based on the timeframe that was taken to sell the asset. If for suppose, the asset is sold after 36 months from the date of purchase, then it is classified as a long term capital gain and on the other hand if the asset is sold after one year from the date of purchase, it is classified as a short term capital gain. The government generally cuts the tax on the sale of the asset as well as on the capital gain. So, it also cuts the capital gains tax. Coming to the cost inflation index, it is an index published by Central Board of Direct Taxes. It is something that changes every financial year.

**Cost Inflation Index for Financial Year 2016-17**

Due to inflation, the value of the asset declines with the time. Indexation has a great hand of help in encountering the abrasion of the value of the assets with time. With the help of inflation index, one can increase the purchase price of the asset. This implies the adjusted price due to inflation in the year the asset is being sold. For the financial year 2016-17, the cost inflation index is 1125. If the asset is sold after more than three years of purchase, you can have the benefit of indexation.

**How to calculate Cost Inflation Index?**

The purchase price of the asset is indexed with the help of cost inflation index. There is a certain formula derived to calculate the cost inflation index. Below we have discussed the formula to calculate cost inflation index.

Cost Inflation Index (CII) = CII for the year the asset was transferred or sold / CII for the year the asset was acquired or bought

For instance, you bought an asset let that be a flat or something else for Rs.20 lakhs in January 2000 and sold it for Rs.35 lakhs after nine long years say it in January 2009, your capital gain will be Rs.15 lakhs.

So, with the values putting in the formula, you can calculate the CII. As the asset was bought in 2000, the CII of that particular FY is 389 and the year in which the asset was sold is 2009, whose CII is 582.

So, the cost inflation index is 582/389 = 1.49.

When it is calculated with tax, CII is multiplied with the price of purchase of the asset to get the indexed cost, which is the original cost of the asset.

Hence, the indexed cost of the asset = 20, 00, 000 x 1.49 = Rs.29,92,288

To calculate the long term capital gain you can to subtract the indexed cost of the asset from sale value of the asset i.e., 3, 50, 000 – 29, 92, 288 = Rs. 5, 07, 712.

The tax charged by the government will be 20 percent if the indexation is used. So, the tax liability will be 20%x 5, 07, 712 = Rs. 1, 01, 542.

If the indexation is not used, the tax liability will be 10% on the capital gain. This means the capital is the sale price of the apartment – cost of acquisition = 35,00,000 – 20,00,000 = Rs.15,00,000. So, the capital gains tax is 10% X 15,00,000 = Rs.1,50,000.

The indexation method gets rid of more taxes thereby adjusting the purchasing price of the apartment with the current market prices.

**How Cost Inflation Index Used to reduce tax?**

We have clearly shown you above how the tax could be reduced with the help of indexing on the long term capital gain. The indexation procedure is not applicable on short term capital gain. This method is also not available for NRIs. People have to satisfy certain criteria in order to get benefitted by indexation for long term capital gain.

- The cost of possession of the asset needs to be multiplied with the cost of inflation of the FY it was transferred.
- It needs to be divided by the cost inflation index for the year in which the asset got purchased.
- If the asset was purchased is before 1981, the cost inflation index of that particular must be considered.
- If you have gained capital from the asset, then you need to adjust the cost inflation index by multiplying with the CII of the year the gain was noted.