One of the important aspects in personal finance is to keep track of the regulatory and policy changes in order to see if they affect you in any manner. While a lot of these changes are announced in the budget speech of the Finance minister, several of these can and do happen throughout the year. One such thing which many of us have missed is the new Cost Inflation Index ( CII ) with the new base year ( FY 2001-2002 ). Let us see what the changes are and what does this mean to you.
For those who are interested in the CBDT notification of the new CII read here. In simple terms the base year for the earlier CII was 1981 and the base was taken as 100. Every year the government announced the CII for that FY. In the year 2016-2017, the index was at 1125. In real terms it meant that if you had acquired an asset for 100 Rs in 1981 and was selling it in 2016, then you could take the cost of the asset to be 1125 Rs and look at your capital gains accordingly. Let me give a real life example to make this clear.
- Assume you bought a 3BHK flat in Kolkata for 18 lacs in 2001.
- You wanted to sell it in 2016 for 1 crore.
- CII in 2001 was 426 and in 2016 was 1125.
- The indexed purchase cost to be taken in 2016 will be 1125/426 x 18 lacs or 47.53 lacs. The capital gain will therefore be 53.47 crores.
- You can use the capital gain in buying another property or invest it in Capital gains bonds to avoid taxation.
- In case you do not do the above you will be charged at 20 % tax on the capital gain.
What are the changes then? As I said before, the new base year is 2001-2002 and the base is taken to be 100 for that year. The CII for subsequent years have now been recalculated and for the current FY 2017-2018 it is 272. Any asset sale being done in this year will be governed by the new Index for the purpose of capital gains determination and taxation.
Let us take the previous example now and assume that you sell the flat in 2017, instead of 2016. The indexed purchase price now will be 272/100 x 18 lacs or 48.96 lacs. For an apple to apple comparison if we took the 2016 CII of 264 then the indexed purchase price will be 2.64 x 18 lacs or 47.52 lacs. This is virtually the same as with the old CII.
How will the impact be on the Long term Capital Gains calculation of Debt funds or Bonds etc? I will cover this in the next post.