The CBDT has notified the Cost Inflation Index (CII) for FY 2021-22 as 317 via notification released on 15th June 2021. The CII helps in calculating the increase in the price of goods due to inflation. The CBDT calculates the unique three-digit CII number every year and notifies it in the official gazette.
In income tax, the CII is used to calculate the inflation-adjusted purchase price of the capital asset. Therefore, indexing the asset cost helps in reducing the number of capital gains, thereby reducing the income tax liability. However, the Income Tax Act allows indexation for long-term capital assets. Hence, if you plan to sell assets such as gold, land, building, mutual funds, etc., you can take advantage of indexation while filing your income tax returns.
The taxpayer can use the CII number as below to calculate the indexed cost price of an asset:-
Indexed Cost of Acquisition= Cost of Acquisition X (CII for the year of transfer/CII for the year of acquisition)
There is a concept of base year for calculating the indexed cost of acquisition. For instance, if the base year is 2001, it will be treated as the 1st year of CII, and it will have an index value of 100. This index value of 100 will then be used to calculate the index value for the following years. Initially, the base year was 1981-82, which was shifted to 2001-02 by the Finance Act 2017.
If the asset is purchased before the base year, the acquisition cost will be the asset’s fair market value as on 1st day of the base year, and the CII of the base year will be used while calculating the indexed cost of acquisition.
It is to be noted that taxpayers can use CII to calculate long-term capital gains only for those assets where indexation is allowed in the Income Tax Act.