COST INFLATION INDEX [EXPLANATION (v) TO SECTION 48]

BACKGROUND

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.”

How to do indexation

Cost of acquisition is computed with the help of following formula:—

Cost of acquisition

(Fair Market Value on 01.04.2001 or

Cost of Acquisition, whichever is more) X   Cost Inflation Index of year of transfer of capital asset

                                                       Cost Inflation Index of the year of acquisition
                                                       (or Base Year i.e. 100)

                                     

    PROVISIONS ILLUSTRATED:

Mr. `X’ purchased a house for  Rs. 1,50,000/- in 1998. The fair market value on 01.04.2001 was  Rs. 7,00,000/-. He sold the house for  Rs. 24,00,000 on 19.03.2019. Find out the Indexed cost of acquisition.
SOLUTION:
Cost of acquisition  (Fair Market Value on 01.04.2001 or  Cost of Acquisition, whichever is more) X Cost Inflation Index of the year in which the asset is transferred                              Cost Inflation Index of the year of acquisition (or Base Year i.e. 100)
7,00,000  x  280 =  Rs. 19,60,000                                               100

Central Government notifies the cost inflation index

Central Government specifies the cost inflation index by notifying in the official gazette.

Cost Inflation Index = 75% of the average rise in the Consumer Price Index* (urban) for the immediately preceding year

*Consumer Price Index compares the current price of a basket of goods and services (which represent the economy) with the price of the same basket of goods and services in the previous year to calculate the increase in prices.

KEY NOTE:

Consumer Price Index (Urban) – Applicable from the assessment year 2016-17.

Indexation of cost to be allowed

 (i)   Indexation of cost will be allowed in case of capital indexed bonds

 (ii)   In case of long-term capital gains arising from the transfer of sovereign gold

bond (Third proviso to section 48)

With effect from assessment year 2017-18, the following third proviso has been substituted by the Finance Act, 2016:—

 “Provided also that nothing contained in the second proviso (relating to indexation of cost) shall apply to the long-term capital gain arising from the transfer of a long-term capital asset, being a bond or debenture other than—

 (a) capital indexed bonds issued by the Government; or

 (b) Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, 2015.”

Thus, besides capital indexed bonds, indexation benefits to long-term capital gains arising on transfer of Sovereign Gold Bond shall be allowed to all classes of assessees.

Cases where benefit of indexation is not available in the case of long-term capital assets

       In the following cases, the benefit of indexation is not available even if such asset is a long-term capital asset:—

S. No.	Nature of long-term capital asset transferred	Assessee (Transferor) not eligible for indexation benefit
(i)	Short-term capital assets v  In case of depreciable assets, there is no question of any indexation as capital gain arising from the transfer of depreciable asset shall always be short-term capital gain.	All Assessees
(ii)	BONDS AND DEBENTURES   Transfer of Bonds or Debentures of any company whether public or private or Government company or bonds of Government [however, benefit is available to capital indexed bonds issued by Government] except the following:	All Assessees
	(a) Capital indexed Bonds issued by the   Government; or
	(b) Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, 2015 [(Clause (b) inserted by the Finance Act, 2016, with effect from assessment year 2017-18)]        (Proviso to section 48)
(iii)	SLUMP SALE UNDER SECTION 50B Undertaking or division transferred by way of slump sale as covered by section 50B	All Assessees
(iv)	SALE OF SHARES BY NON-RESIDENT Transfer of Shares or Debentures acquired by a non-resident in foreign currency in an Indian company (by utilizing convertible foreign exchange) (Provisos 1 and 2 to Section 48)	Non-Residents
(v)	DEPRECIABLE ASSETS Other than an asset used by a power generating unit eligible for depreciation on straight line basis. KEY NOTE In case of depreciable assets for which     All Assessees block of assets system is followed, there is no question of any indexation a capital gain arising from the transfer of depreciable asset shall always be short-term capital gain	All Assessees
(vi)	Transfer of Units of Unit Trust of India or Mutual Fund covered under section 10(23D) purchased in Foreign Currency by overseas financial organization also known as offshore funds (section 115AB)	Off Shore Fund
(vii)	Receipts (GDR) or bonds of an Indian company or share or bonds of public sector company sold by the Government and purchased in foreign currency by a non-resident (section 115AC)	Non-Residents
(viii)	Global Depository Receipts (GDR) purchased in foreign currencies by an individual resident in India and employee of an Indian company (section 115ACA)	Resident individual
(ix)	Transfer of Securities held by Foreign Institutional Investors (section 115AD)	Foreign Institutional Investors (FII)
(x)	Transfer of Foreign Exchange Asset held    by a Non-Resident Indian (NRI) (section 115D)	Non-Resident Indian(NRI)
(xi)	Transfer of unlisted securities by non-resident [Clause (c) of proviso to section 112(1)]	Non-Resident (not being a company) or a foreign company

         

In the above cases, the provisions relating to indexed cost of acquisition and indexed cost of improvement are not applicable.

Sale of inherited property – cost inflation index has to be applied with reference to year in which said capital asset was first acquired by previous owner [Section 55(2)(b)(ii)]

        Dismissing the appeal of the revenue , the Tribunal held that ; where assessee sells an inherited property, for computing amount of capital gain, cost inflation index has to be applied with reference to year in which said capital asset was first acquired by previous owner. (Assessment year 2007-08)

[ITO v. Sudip Roy (2016) 161 ITD 709 (ITAT Kolata)]

Indexed cost of gifted assets has to be determined with reference to previous owner

      The facts of the case are that the assessee acquired a residential flat as a gift from her daughter under a gift deed dated 02.01.2003. The said flat was originally acquired by the previous owner on 29.01.1993. The assessee sold the flat on 30.06.2003 and offered long-term capital gains. While calculating the capital gains, she took the index of year 1993-94. The ITO recomputed the capital gains with index of 2002-03 and passed order accordingly. The appeal before CIT (Appeals) and the ITAT was decided in favour of the assessee. The revenue preferred appeal before the Bombay High Court which was again decided in favour of the assessee. While delivering the order, the Bombay High Court, laid down that when the law provides to consider the period of holding of the previous owner also, then a different treatment cannot be accorded for calculation of the indexed cost of acquisition by not adopting the cost inflation index of the year in which the asset was acquired by the previous owner. Therefore, the court said, indexation should be allowed from the year in which such asset was acquired by the previous owner.—[CIT v. Manjula J. Shah (2011) 16 Taxmann.com 42]

Indexed cost of acquisition of house inherited from father – Sale of house inherited from father – Cost of acquisition of house to the assessee has to be deemed to be the cost for which the previous owner had acquired it

      The facts of the case are that the assessee and her sister were owners of one residential Kothi in Chandigarh and the same was sold by them in the accounting year 1992-93. The said house was inherited by the above mentioned ladies from their father, who died on 17.02.1991. Their father had built the house long back, i.e., much earlier to 01.04.1981 and had bequeathed the same to his daughters. Capital gain is worked out by applying the cost inflation index (denominator) of financial year 1981-82. The ITO and the CIT (Appeals) did not agree with this, since their view was that the indexed cost of acquisition was to be worked out with reference to the date on which the father of the assessee expired i.e. on 17.02.1991 by applying Explanation (iii) to section 48. The assessee preferred second appeal before the ITAT which decided the case in favour of the assessees. The Tribunal observed that as the asset was acquired prior to 1981, the indexed cost of acquisition in the hands of the previous owner as on 01.04.1981 (100) was to be considered for computing the capital gains.— [Mrs. Pushpa Sofat v. ITO (2004) 89 TTJ 499 (2002) 81 ITD 1 (ITAT Chandigarh)]

Cost of acquisition – Property inherited indexed cost to be determined as on 01.04.1981

    The assessee has declared long-term capital gain, claiming the indexation cost as on 1st April, 1981. The Assessing Officer held that the father of the assessee had expired on 6th April, 1990 hence indexation will be available only with the reference to financial year 1990-91. In appeal, the Commissioner (Appeals) allowed the claim of indexation from 01.04.1981. On appeal by revenue, the Tribunal held that as the property was acquired by assessee’s father in 1965 and inherited by assessee on death of his father in 1990, indexed cost of acquisition of property shall have to be determined as on 1st April, 1981, for purpose of computation of capital gains. (Related Assessment year 2007-08)—[ACIT v. Suresh Verma (2012) 135 ITD 102 : 72 DTR 82 (ITAT Delhi)]

Gifted property : Indexation

      In case of transfer by gift, will, trust, etc. indexed cost to be determined with reference to holding by previous owner

      To be computed with reference to the year in which the previous owner first held the property.—[Arun Shungloo Trust v. CIT (Del.) ITA No. 116 of 2011, dated 13.02.2012]

Family arrangement is analogous to partition attracting Section 49 [Family arrangement (Settlement)]

      In case of property acquired by way of family settlement dated 01.09.1997, effective from 31.07.1992, for purposes of computing capital gains, deduction has to be allowed on indexed cost of acquisition by taking into account its fair market value as on 01.04.1981 [The property was acquired by the previous owner in 1966] —[ACIT v. Baldev Raj Charla (2009) 121 TTJ 366 : 18 DTR 413 (Del)]

Cost Inflation Index

                  Applicable from Assessment Year 2018-19 [with Base Year 2001-02]

S. No.	Financial year	Cost Inflation Index
1	2001-02	100
2.	2002-03	105
3.	2003-04	109
4	2004-05	113
5	2005-06	117
6	2006-07	122
7	2007-08	129
8	2008-09	137
9	2009-10	148
10	2010-11	167
11	2011-12	184
12	2012-13	200
13	2013-14	220
14	2014-15	240
15	2015-16	254
16	2016-17	264
17	2017-18	272
18.	2018-19	280

             Applicable up to Assessment Year 2017-18 [with Base Year 1981-82]

S. No.	Financial year	Cost Inflation Index
1.	1981-1982	100
2.	1983-1983	109
3.	1983-1984	116
4.	1984-1985	125
5.	1985-1986	133
6.	1986-1987	140
7.	1987-1988	150
8.	1988-1989	161
9.	1989-1990	172
10.	1990-1991	182
11.	1991-1992	199
12.	1992-1993	223
13.	1993-1994	244
14.	1994-1995	259
15.	1995-1996	281
16.	1996-1997	305
17.	1997-1998	331
18.	1998-1999	351
19.	1999-2000	389
20.	2000-2001	406
21.	2001-2002	426
22.	2002-2003	447
23.	2003-2004	463
24.	2004-2005	480
25.	2005-2006	497
26.	2006-2007	519
27.	2007-2008	551
28.	2008-2009	582
29.	2009-2010	632
30.	2010-2011	711
31.	2011-2012	785
32.	2012-2013	852
33.	2013-2014	939
34.	2014-2015	1024
35.	2015-2016	1081
36.	2016-2017	1125