The Income Tax Department has set the Cost Inflation Index (CII) for the financial year 2024-25 (FY25) at 363. The CII serves as an essential tool for calculating long-term capital gains (LTCG) from the sale of various assets, including immovable property, securities, and jewelry. By adjusting the purchase price to reflect current inflation, the CII ensures that taxpayers are taxed on real gains instead of nominal gains that are inflated due to general price increases.
The CII is derived from the Consumer Price Index (CPI) of the previous year. Its purpose is to adjust the purchase price of assets, allowing for accurate taxation on actual gains rather than inflated figures. This adjustment is crucial in preventing disproportionately high tax liabilities that arise from inflationary pressures rather than genuine economic growth.
To compute long-term capital gains using the CII, follow these steps:
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: (To be calculated)
• Long-term Capital Gain: (To be calculated)
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: (To be calculated)
• Long-term Capital Gain: (To be calculated)
The CII numbers provide necessary inflation adjustments for different fiscal years:
These indices assist in adjusting the purchase price of assets, ensuring that taxpayers are taxed based on real economic gains rather than nominal gains distorted by inflation. By utilizing the CII for FY25, taxpayers can accurately compute their long-term capital gains and effectively minimize their tax liabilities.
Q1. What is the significance of the Cost Inflation Index?
Answer: The Cost Inflation Index (CII) helps taxpayers adjust the purchase price of assets for inflation, ensuring taxation is based on real gains rather than nominal values inflated by price increases.
Q2. How is the CII calculated for different financial years?
Answer: The CII is based on the Consumer Price Index (CPI) of the previous year, reflecting the inflation adjustment necessary for different fiscal years.
Q3. Why is the CII important for capital gains tax calculations?
Answer: The CII prevents taxpayers from facing disproportionate tax liabilities by ensuring that capital gains are calculated based on adjusted values, accounting for inflation.
Q4. What are the steps to calculate long-term capital gains using CII?
Answer: To calculate long-term capital gains, determine the Indexed Cost of Acquisition (ICA) and subtract it from the sale price of the asset, adjusting for the CII.
Q5. How does the CII impact taxpayers in FY25?
Answer: For FY25, with the CII set at 363, taxpayers can accurately compute their long-term capital gains, which helps in reducing their overall tax liabilities.
Question 1: What is the CII for FY25?
A) 272
B) 289
C) 363
D) 348
Correct Answer: C
Question 2: What does the CII adjust for in capital gains calculation?
A) Purchase price
B) Inflation
C) Sale price
D) Tax rates
Correct Answer: B
Question 3: Which fiscal year does a CII of 348 correspond to?
A) FY23
B) FY24
C) FY25
D) FY22
Correct Answer: B
Question 4: Why is the CII based on the CPI of the previous year?
A) To inflate asset prices
B) To reflect last year's tax rates
C) To adjust for inflation accurately
D) To simplify tax calculations
Correct Answer: C
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