Cost-adjusted inflation: The purchase price of a capital asset needs to be fixed as per the rate of inflation for the duration of its holding. This is referred to as indexation. When calculating the long-term gains on goods at the time of sale, this inflated cost is assumed as the price at which it was purchased.

The government fixes cost inflation index (CII) numbers in its official gazette every year to account for inflation. CII for 2001, the base year for income tax purposes, is fixed at 100 and increases for every subsequent year. CII values allow for inflation adjustment in the cost of capital to arrive at its actual value as per the market rate at present.

The cost inflation index:-

Financial year Cost inflation index

2001-2002

100

2002-2003

105

2003-2004

109

2004-2005

113

2005-2006

117

2006-2007

122

2007-2008

129

2008-2009

137

2009-2010

148

2010-2011

167

2011-2012

184

2012-2013

200

2013-2014

220

2014-2015

240

2015-2016

254

2016-2017

264

2017-2018

272

2018-2019

280

2019-2020

289

2020-2021

301

2021-2022

317

2022-2023

331

Impact of the base year: The revision of the base year to 2001, means that if a capital asset bought prior to April 1, 2001 is sold in 2015, its cost would be its FMV as on April 1, 2001, the base year for income tax purposes. Since gold prices have appreciated only after 2007, those holding on to it would not feel much impact.

Individuals with unlisted shares on which securities transaction tax (STT) has been paid would get an advantage. Their tax outgo could be reduced by considering the FMV on April 1, 2001, as the purchase price when calculating profits on shares that increased in value between the time that they were bought and April 1, 2001.

Who benefits the most?

The revision of the base year has been most beneficial to property owners. This is because while property prices have risen nearly around10 times between 1981 and 2001, the index has only quadrupled from 100 to 406. Those who have invested in property will thus get the full benefit of indexation with the index being in tune with the corresponding rise in the property.

Calculation of cost of acquisition :

1. 1. F.M.V. of property on 1-04-2001       XXX

OR

S.D.V. of property on 1-04-2001 XXX

Whichever is lower                      XXX

2. cost of acquisition                   XXX

= Whichever is higher                 XXX

Suppose Mr. X bought a house for ₹ 45 lakh in 1990 and sold it for ₹ 3 crores. His long term capital gains would be as follows:

Particulars Sale during 2016-17 Sale during 2017-18 FMV > acquisition cost Sale during 2017-18 FMV < acquisition cost

FMV as on 1.4.2001

Not Applicable

1,10,00,000

40,00,000

Sale amount

3,00,00,000

3,00,00,000

3,00,00,000

Indexed cost of acquisition

2,78,15,934 (Purchase price * CII of 2016-17 / CII of 1990-91) (45,00,000*1125/182)

2,99,20,000 (FMV * CII of 2017-18 / CII of 2001-02) (1,10,00,000*272/100)

1,22,40,000(FMV or purchase price whichever is higher* CII of 2017-18 / CII of 2001-02) 45,00,000*272/100)

Long Term Capital Gains

21,84066

80,000

1,77,60,000