Cost Inflation
Ever wondered how your grandparents bought a house with what would barely be enough to buy a used car today?
Yes, the prices for things are constantly rising, and the actual reason is inflation. Inflation measures how prices for goods and services rise steadily over time.
Traditional economics would dictate that there are two main causes for inflation. There is demand-pull inflation and cost-push inflation.
Cost-push inflation happens when business expenses increase and these extra costs are passed on to their customers.
So, with cost-push inflation, what happens is that the price of your raw materials goes up over time, and that could be because of anticipated events or unanticipated events, like say a natural disaster.
If two items are bought today for Rs 100, tomorrow only one item may be available for Rs 100 due to inflation.
We have seen a lot of supply chain bottlenecks, we’ve seen a rise in shipping costs, we’ve seen in certain areas a labor shortage, and because of this, most of those inputs will go into the price of manufacturing, inevitably that has led to higher costs.
The cost inflation index is used to evaluate the increase in the prices of goods and assets year-by-year due to inflation.
What is the Cost Inflation Index?
The fact of a reduction in the value of money, which rises to a surge in an individual’s cost of living, is known as inflation.
The Cost Inflation Index is a tool used in the calculation of and evaluating yearly increases in an asset’s price as a result of inflation.
The Central Government fixes this index and publishes it in its official publication to calculate inflation.
Each year government announces this index is defined under Section 48 of the Income Tax Act, 1961.
The profit made through the sale of sale of land, property, stocks, shares, trademarks, patents, or any capital assets is referred to as capital gain.
Long-term capital assets are typically logged in the books at their cost price. Even though asset prices are increasing, these capital assets cannot be revalued.
However, when these assets are sold the profit gained from them remains high due to their high sale price with respect to their acquisition.
Calculation of Cost Inflation Index
The income Tax department to calculate indexation benefits, notifies a Cost Inflation Index for ever financial year.
This number helps figure out the cost the inflation-adjusted cost of a long-term capital asset.
To calculate the taxable capital gain, subtract the inflation-adjusted purchase cost from the sale price of the asset.
However, the indexation benefit is permissible only for certain assets.
Cost Inflation Index numbers for Financial Years: FY 2001-02 Onwards
| Financial Year | Cost Inflation Index |
| 2024-25 | 363 |
| 2023-24 | 348 |
| 2022-23 | 331 |
| 2021-22 | 317 |
| 2020-21 | 301 |
| 2019-20 | 289 |
| 2018-19 | 280 |
| 2017-18 | 272 |
| 2016-17 | 264 |
| 2015-16 | 254 |
| 2014-15 | 240 |
| 2013-14 | 220 |
| 2012-13 | 200 |
| 2011-12 | 184 |
| 2010-11 | 167 |
| 2009-10 | 148 |
| 2008-09 | 137 |
| 2007-08 | 129 |
| 2006-07 | 122 |
| 2005-06 | 117 |
| 2004-05 | 113 |
| 2003-04 | 109 |
| 2002-03 | 105 |
| 2001-02 | 100 |
CBDT Notification
For the Latest Financial year 2024-25, the Central Board of Direct Taxes has announced the Cost Inflation Index as 363. The circular was issued on May 24, 2024.
Last Financial year for 2023-24 the Cost Inflation Index number was 348.
The Cost Inflation Index value of 348 will be used to measure the inflation-adjusted purchase price for specified assets sold from April 1, 2023, to March 31, 2024, and CII value of 363 will be used in the next financial year to calculate the inflation-adjusted purchase price of assets sold in current FY 2024-25 between April 1, 2024, and March 31, 2025.
Formula to Calculate the Inflation-Indexed Purchase Price
Formula to calculate the inflation-indexed purchase price using the Cost Inflation Index number.
Inflation Adjusted Price = (CII of the year of sale / CII of the year of purchase) X Actual price of the asset.
Example: Suppose an individual is bought a piece of land in FY 2002-03 for Rs 25 lakh. The inflation-adjusted price of that land in FY 2023-24 will be
(348/105) X Rs 25 lakh = Rs 82.85 lakh.
If the piece of land is sold in FY 2023-24 between April 1, 2023, and March 31, 2024, then this inflation-adjusted price of Rs 82.85 lakh will be subtracted from the sale price to arrive at the long-term capital gain or long-term capital loss.