Cost Inflation Index

Cost Inflation Index The basis of the index is acknowledgment of the fact that mounting inflation erodes the value of capital gains, and that in calculating such gains the present value of acquisition should be taken rather than its historical value.

For this purpose the government had notified a cost inflation index in the following manner. The cut-off date is taken as 1981-82, indexed at 100. Then, 1982-83: 109;1983-84:116;1984-85:125;1985-86:133; 1986-87:140;1987-88:150;1988-89:161; 1989-90:172; 1990-91:182: 1991-92: 199; 1992-93:223; 1993-94:244, 1994-94:259, 1995-96:281, 1996-97:305; 1997-978:331 and 1998-99:351.

For the purpose of computing the cost of acquisition, the cost of improvement and any other cost in connection with the acquisition (in the case of shares, etc. the broker’s commission and transfer costs) should be taken into consideration. The capital gain will thus be calculated:

Cost of acquisition (including other relevant costs) multiplied by the index for the year of realized gains, divided by the index for the year of acquisition. The result deducted from the sale price of the asset will represent the taxable capital gain. To put it in the form of an equation:

Let x be the cost of acquisition

Let y be the index for the year of acquisition

Let z be the index for the year of sale

Let a be the cost of acquisition for capital gains purposes

Let b be the sale price of the asset

Let c be the capital gain for tax purposes.

Tjus xz/y=a; then, b-a=c

or, to put it in actual figures:

x is Rs 11000

y is 1983-84

z is 1993

b is Rs 90,000

Then 11,000 * 244/116 = 23,138 (rounded off)

= 90,000-23,138 = 66,862.

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