InvestorQ : How is the cost inflation index arrived and how does that impact my capital gains on assets sold?
Bhavika Nehru made post

How is the cost inflation index arrived and how does that impact my capital gains on assets sold?

Answer
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Abhisha Yadav answered.
1 year ago


We all face inflation on a daily basis. Due to the impact of inflation, the value of the rupee goes down. The Rs.75 lakhs that you paid in 2008 will be worth a lot more today. Obviously, asking you to pay tax on the difference is actually unfair to you. That is where Income Tax offers you the benefit of cost inflation indexing. The Income Tax Department announces the relevant index number for every financial year (as captured in the table above). You can use this cost inflation index number to calculate your revised capital gains. What you effectively do is to inflate the cost of your purchase to the present day using the cost inflation index numbers and recalculate the capital gains. You have to pay tax only on the indexed capital gains which is calculated after considering the indexation factor. Thus indexation is fair to you as you don’t need to pay on old costs, which would unnecessarily inflate your capital gains in a manner that is totally erroneous.