How indexation cost of a capital asset has arrived?

Capital gains are calculated considering the net cost of acquisition (after deducting brokerage, stamp duty, advertisement, Travelling expenses in connection with the transfer, Broker’s commission related to the shares sold,   etc) and cost of improvement Expenses of a capital nature incurred in making any additions or alterations to the capital asset by the seller. Indexed cost is arrived using the Cost inflation Index given by the IT department every year. It is used for calculating the estimated increase in the value of assets due to inflation.

The indexed cost of acquisition is arrived by;

Cost of acquisition× Cost Inflation Index (CII) of the year in which the asset is transferred ÷ Cost inflation index (CII) of the year in which asset was first held by the seller or 2001-02 whichever is later. (CII numbers are effective only from April 1, 2001)

Plus Indexed cost of improvement = Cost of improvement× Cost inflation index of the year in which the asset is transferred ÷ Cost inflation index of the year in which improvement took place

Illustration: For an asset purchased in May 2002 for Rs. 10 lakh, the amount spent on improvement is Rs.5 lakh in the same year. Property sold in July 2020 for Rs.80 lakh. In this illustration, the inflation-indexed cost price will be calculated as (Rs 15,00000 × (301 / 105)) = Rs 4300000.  Hence, CGT is applicable to Rs. 37 lakh which is the difference between the sale price of 80 lakh and indexed cost of 43 lakh.

Indexation chart

Financial year	CII number
2001-02	100
2002-03	105
2003-04	109
2004-05	113
2005-06	117
2006-07	122
2007-08	129
2008-09	137
2009-10	145
2010-11	167
2011-12	184
2012-13	200
2013-14	220
2014-15	240
2015-16	254
2016-17	264
2017-18	272
2018-19	280
2019-20	289
2020-21	301