CBDT Notified '363' Cost Inflation Index (CII) for Financial Year 2024-25

The Central Board of Direct Taxes (CBDT) recently announced a new Cost Inflation Index (CII) of 363 for the financial year (FY) 2024-25. This seemingly simple number holds significant weight for taxpayers in India, particularly those dealing with capital gains tax. This blog dives deep into the CII, explaining its purpose, how it's used, and its implications for your upcoming tax filing (Assessment Year 2025-26).

What is the Cost Inflation Index (CII)?

The CII is a tool used by the Indian Income Tax department to account for inflation when calculating capital gains tax on certain assets. Inflation erodes the purchasing power of money over time. Imagine buying a piece of land for Rs. 100,000 in 2010. If you sell it today for the same amount, you haven't truly made a gain, considering inflation. The CII helps adjust the purchase price for inflation, providing a more accurate picture of your actual capital gain.

How is the CII Used?

The CII is particularly relevant when calculating long-term capital gains tax on assets like:

• Immovable property (land, buildings)
• Securities (stocks, shares)
• Jewellery

Here's how it works:

1. Determine your cost of acquisition: This is the original purchase price of the asset, including any incidental expenses incurred during purchase (registration fees, etc.).
2. Apply the CII: Multiply the cost of acquisition by the relevant CII index for the year you held the asset.
3. Calculate the indexed cost: This adjusted figure represents the purchase price considering inflation.
4. Calculate the capital gain: Subtract the indexed cost from the sale price of the asset. This will be your actual capital gain used for tax purposes.

CII for FY 2024-25 (AY 2025-26)

The CBDT has set the CII for FY 2024-25 at 363. This signifies a rise from 348 in the previous year, indicating a government-estimated inflation rate of approximately 4.3%.

Impact of the Increased CII

A higher CII benefits taxpayers by inflating the indexed cost of the asset. This, in turn, can potentially reduce your taxable capital gain and consequently, your tax liability.

Example:

You purchased a plot of land in 2015 for Rs. 500,000.
You plan to sell it in FY 2024-25 (AY 2025-26) for Rs. 1,000,000.
CII for FY 2024-25 (AY 2025-26) = 363

Without CII:
Capital Gain = Sale Price - Purchase Price
= Rs. 1,000,000 - Rs. 500,000
= Rs. 500,000 (Taxable on the entire amount)

With CII:
Indexed Cost = Purchase Price * CII
= Rs. 500,000 * 363
= Rs. 181,500

Capital Gain = Sale Price - Indexed Cost
= Rs. 1,000,000 - Rs. 181,500
= Rs. 818,500 (Taxable on a lower amount)

As you can see, using the CII reduces your taxable capital gain by Rs. 181,500, potentially leading to lower tax outgo.

Key Updates for Assessment Year 2025-26 (AY 2025-26)

• The CII for FY 2024-25 is 363, representing a 15-point increase from the previous year's index of 348. This implies an annual inflation rate of around 4.3 percent.
• The adjustments to the CII will apply to income of assessees during AY 2025-26 and subsequent assessment years.
• The index for depreciation of tangible assets (plant and machinery) has been set at 245 for the AY 2025-26. This is higher than the cost inflation index.
• The depreciation rates for expenditure incurred in previous financial years will also be revised, as per the guidelines issued by the Department of Direct Taxes (DDT).

Rectification of Members' Registers in Registered Societies

In the context of rectification of members' registers in registered societies, it is important to note that CII has no impact on such rectifications. Rectification in a members' register involves the removal of a name, or addition of a new name. It is done in response to a change in the society's membership.

However, in the case of expenditure adjustments or write-offs in the hands of assessees, the cost inflation index would be applicable, and adjustments would need to be made based on the revised CII.

Important Considerations:

• The CII only applies to long-term capital gains, typically arising from assets held for more than a specific period (e.g., 36 months for land).
• Short-term capital gains are taxed at a flat rate and are not adjusted for inflation.
• It's crucial to maintain proper records of purchase documents and sale proceeds for accurate tax calculations.

Conclusion

Understanding the CII is essential for anyone dealing with long-term capital gains tax in India. With the new CII of 363 for FY 2024-25, you might benefit from a reduced tax burden. Remember, consulting a tax advisor is always recommended for personalized guidance on your specific situation.

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