Everything you need to know about cost inflation index

The purchasing power of money (the number of products that one unit of money can buy) decreases when the price of goods increases over time. Due to inflation, if two units of commodities could be purchased for Rs 100 today, just one team could be bought for Rs 100 hereafter. The Cost Inflation Index (CII) is a technique for finding out inflation-related increases in the cost of goods and assets over time along with debit note and credit note

What is the main role of the Cost Inflation Index?

The Cost Inflation Index is mainly used to correlate prices to the inflation rate. To put it the other way, if the inflation rate increases over time, prices will also increase.

By Whom is the Cost Inflation Index notified?

The central government set the cost inflation index and published it in the official gazette.

The Cost Inflation Index equals 75% of the average increase in the Consumer Price Index* (urban) for the previous year.

*To calculate the increase in prices, the Customer Price Index makes a comparison of the current price of a basket of commodities and services (which represents the economy) to the cost of the same basket of commodities and services the previous year.

What is the Cost Inflation Index, and how is it used in income tax?

Long-Term Capital Assets are documented in books at their cost price. Despite rising inflation, they exist at the cost price and cannot be revalued. Because the sale price is larger than the acquisition price, the profit amount remains high when these assets are sold. A more significant income tax is also a result of this. Check out more detailed guide on tax hardship center.

What does “base year” mean in the Cost Inflation Index?

The cost inflation index’s base year is the first year, with an index value of 100. All other years’ indexes are compared to the base year to determine the percentage rise in inflation. Taxpayers can use the more increased “actual cost or Fair Market Value (FMV) as of the first day of the base year for any capital asset purchased before the base year of the cost inflation index.

When it comes to long-term capital assets, how can indexation help?

When the indexation advantage is applied to the capital asset’s “Cost of Acquisition” (buying price), the result is “Indexed Cost of Acquisition.”

What is the Cost Inflation Index right now?

What does the term “base year” mean in the Cost Inflation Index?

The base year of the cost inflation index is the first year, with an index value of 100. All other years’ indexes are compared to the base year to determine the percentage rise in inflation. Taxpayers can use the higher “actual cost or Fair Market Value (FMV) as of the first day of the base year” for any capital item purchased before the cost inflation index’s base year.