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June 13, 2020

Cost Inflation Index for Financial Year 2020-21 under Income Tax Act

Cost inflation index for Financial Year 2020-21 AY 2021-22 under Income Tax Act

Cost Inflation Index is calculated to match the prices to the inflation rate. It is tool used to calculate the estimate increase in the value of asset due to inflation. In simple words, an increase in the inflation rate over time will lead to a rise in the prices. The government notifies the cost inflation index every year through official gazette. This index, notified each year by the Government is defined under Section 48 of the Income Tax Act, 1961. The government with Notification No. 32/2020-Income Tax dated 12th June, 2020 has notified the cost inflation index for Fy 2020-21 AY 2021-22 which is as follows:

Financial YearCost Inflation Index
2020-21301

This notification shall come into force with effect from 1st day of April, 2021 and shall accordingly apply to the assessment year 2021-22 and subsequent years.

Cost Inflation Index from FY 2001-02 to FY 2020-21

Below is the cost inflation index table notified till date from FY 2001-02 to FY 2020-21 by the government of India:

Financial YearCost Inflation Index
2020-21301
2019-20289
2018-19280
2017-18272
2016-17264
2015-16254
2014-15240
2013-14220
2012-13200
2011-12184
2010-11167
2009-10148
2008-09137
2007-08129
2006-07122
2005-06117
2004-05113
2003-04109
2002-03105
2001-02100

How is Cost Inflation Index used in Income Tax?

Cost Inflation Index is used at the time of calculating Long term capital gains on Long-Term Capital Assets which are recorded at cost price in books. In spite of increasing inflation, the capital asset exist at the cost price and cannot be revalued. At the time of sale of these assets, the capital gain is high due to the high sale price compared to purchase price. This also leads to a higher income tax. The cost inflation index is applied to the long-term capital assets, due to which purchase cost increases, resulting in lesser capital gain and benefit the taxpayers by saving taxes. It is used to calculate index price of the asset.

It is used as follows:

Indexed cost of acquisition =

Cost of acquisition of asset (X) Cost of Inflation for the year of transfer
__________________________________________
Cost of Inflation for the year of Purchase

Note: Long term capital asset are assets which held for more than 36 months by the assessee

Understand the concept with example

For instance,

Mr. X has purchased Capital asset as on 31st May 2005 for Rs. 25 Lakhs and sold the asset on 1st June 2020 for Rs. 2 Crore. Transfer expense for is Rs. 2,00,000

Cost inflation index is as follows:

FY 2005-06: 117

FY 2020-21: 301

Let us calculate the Long term capital gain on the above sale:

As asset is held for more than 36 month the asset is long term capital asset.

Calculation of Long term capital gain

ParticularsAmount
 Full Value of Consideration2,00,00,000
Less:Transfer Charges      2,00,000
Net Consideration1,98,00,000
Less:Indexation Cost of Asset (25,00,000 X 301/117= Rs. 64,31,624)64,31,624
Long term Capital Gains1,33,68,376

Read more :

How to take benefits of Capital Gain Exemptions in Income Tax?

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