Cost Inflation Index is calculated/required every year to tally the prices to the inflation rate, or we can say that an increase in the inflation rate gradually will lead to a rise/increase in the prices.
The Central Government specifies/notifies the cost inflation index by publishing it in the official gazette notification.
Cost Inflation Index = 0.75 of the average increase in the previous year's Consumer Price Index* (urban).
*Consumer Price Index tallies the current price of a carton of goods and services, representing the economy, with the cost of the same carton of goods and services in the previous year to calculate the increase in prices.
2001-02 (Base year) 100
2002-03 105
2003-04 109
2004-05 113
2005-06 117
2006-07 122
2007-08 129
2008-09 137
2009-10 148
2010-11 167
2011-12 184
2012-13 200
2013-14 220
2014-15 240
2015-16 254
2016-17 264
2017-18 272
2018-19 280
2019-20 289
2020-21 301
2021-22 317
Long-Term Capital Assets are recorded/booked at the cost price in books. Despite rising inflation, they exist at the cost price and can't be revalued. When these assets are sold/transferred, the profit amount is high due to the higher sale price than the purchase price. This also results in a higher income tax. The cost inflation index (CII) is applied to the long-term capital assets. The purchase cost increases, resulting in lesser profits and lesser taxes to benefit taxpayers.
The cost inflation index (CII) benefit is applied to the long-term capital assets, by which purchase cost rises, resulting in lesser profits and lesser taxes.
The base year is the first & foremost year of the cost inflation index (CII) and always has an index value of 100. Then, the index of all the other years is compared to the base year to arrive at the increase in inflation percentage.
If any capital asset purchased before the base year, taxpayers can take the purchase price to be higher than the "actual cost or Fair Market Value (FMV) as on the 1st day of the base year. Indexation benefit is given to the purchase price so calculated, and FMV is based on the valuation report of a registered valuer.
Initially, the Year 1981-82 was considered as the base year for a long time. As a result, taxpayers were facing hardships/hassles in the valuation of properties purchased before 1st April 1981. Tax authorities also used to have a tough time relying on the valuation reports.
Hence, the government planned to shift the base year from 1981 to 2001 so that valuations can be done quickly and more accurately. So, for a capital asset purchased before 1st April 2001, taxpayers can take higher actual cost or FMV as on 1st April 2001 as the purchase price and avail the benefit of indexation.
When the Benefit of Indexation is applied to the "Cost of Acquisition" (also called purchase price) of the capital asset, it becomes "Indexed Cost of Acquisition".