Cost Inflation Index(CII)

A Cost Inflation Index(CII) or consumer price index(CPI) measures changes in the price level of a weighted average market basket of consumer goods and services purchased by households.

A CII is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically. Sub-indices and sub-sub-indices can be computed for different categories and sub-categories of goods and services, being combined to produce the overall index with weights reflecting their shares in the total of the consumer expenditures covered by the index. It is one of several price indices calculated by most national statistical agencies. The annual percentage change is measure of inflation in simple terms. 

A CII can be used to index the real value of increase in wages, salaries, and pensions given by companies or government over years, to regulate prices; and to deflate monetary magnitudes to show changes in real values. In most countries, the CII, along with the population census, is one of the most closely watched national economic statistics.

Let us have a look at how it has had a change over the year in India:-

It is given by the Income tax department every year and is a measure of inflation that finds application in tax law, when computing long-term capital gains on sale of assets. The most important factor to be actually looked at here is the rate at which it increases as this actually helps us identify the inflation of the country at a broader aspect every year.

How does Cost Inflation Index (CII) help in capital gains computation? Capital gain, as you know, arises when the net sale consideration of a capital asset is more than the cost. Since “cost of acquisition” is historical, the concept of indexed cost allows the taxpayer to factor in the impact of inflation on cost. Consequently, a lower amount of capital gains gets to be taxed than if historical cost had been considered in the computations.

The CII always helps us choose our right investment and could be a fundamental criteria for considering our actual growth in profit in consideration to the inflation of the country. We can see that the index has always had a significant growth over more than the last 20 years. Our country has been always a growing country and in such a country the CII could be a great criteria for understanding and choosing our investment.