CBDT notifies Cost Inflation Index for Assessment Year:2021-2022

The Central Board of Direct Taxes(CBDT) vide Notification no.32/2020 dated 12th June 2020 has notified the Cost Inflation Index(CII) for the assessment year 2021-2022 and subsequent years by inserting "S.I.No.20".

For Starters, Cost Inflation Index is basically a price inflation adjustment due to the timing difference between the date of purchase of asset and date of sale of the asset. It is present purchase value of the asset that is to be sold.

Cost Inflation Index is a tool used in the calculation of an estimated yearly increase in an asset’s price as a result of inflation. The Central Government fixes this index and publishes it in its official gazette for measuring inflation. This index, notified each year by the Government is defined under Section 48 of the Income Tax Act, 1961.

The intention of the legislature is to tax the real gain on transfer of the capital asset, not the profit due to inflation. In order to achieve this objective, the “Indexation” is introduced in capital gain taxation. The indexation benefit is meant to take into account the inflationary trends between the year of purchase and the year of sale. The costs incurred on the sale are allowed as deduction while calculating gains from the sale of both short-term and long-term assets.

Text of Explanation (v) to section 48

“COST INFLATION INDEX” in relation to a previous year, means such index as the Central Government may, having regard to 75% of average rise in the Consumer Price Index (urban) for the immediately preceding previous year to such previous year, by notification in the Official Gazette, specify, in this behalf.

This will come useful for calculating Capital Gains arising on transfer of Capital Assets. For Assessment year 2020-2021, the index was set at "289".Now, It has been increased by 12 points to 301.

Source: incomtaxindia.gov.in

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