The Central Board of Direct Taxes (CBDT) has specified a rise of 10.2% in the value for the Cost Inflation Index (CII) for 2013-14. In 2012, the index was ‘852’, and this year it is ‘939’ which shows a 10.2% increase in the cost inflation index for 2013-14.
What is Cost Inflation Index?
It is a measure of inflation that finds application in tax law, when computing long-term capital gains on sale of assets. Section 48 of the Income-Tax Act defines the index as what is notified by the Central Government every year, having regard to 75% of average rise in the Consumer Price Index (CPI) for urban non-manual employees for the immediately preceding previous year.
How does it help?
- A cost inflation index helps reduce the inflationary gains, thereby reducing the long-term capital gains tax payout for a taxpayer. Currently, the income-tax law allows long-term capital gains to be computed after adjusting for inflation. At present,
- The cost of acquisition as well as the cost of improvement is adjusted for inflation b/w the date of purchase and date of sale (through the CII) before the long-term capital gain is ascertained. Currently, the holding period is different for different assets for deciding the applicability of long-term capital gains.
- Under the new Direct Taxes Code which will be effective from April 1, 2014, the test for non-business assets will be a uniform holding period of one year.