The Central Board of Direct Taxes (CBDT) has specified a new value for the cost inflation index for 2012-13.

Last year the index was ‘785’, and this year it is ‘852’. This would mean that there has been an 8.5 per cent rise in the cost inflation index for 2012-13.

The index is useful for income-tax assessees in the computation of tax on long-term capital gains (for indexation purposes). In the previous two years, the cost inflation index rose 10 per cent and 12.5 per cent, respectively.

A cost inflation index helps reduce the inflationary gains, thereby reducing the long-term capital gains tax payout for the taxpayer. Currently, the income-tax law allows long-term capital gains to be computed after adjusting for inflation.

The cost of acquisition as well as the cost of improvement is adjusted for inflation between the date of purchase and date of sale (through the cost inflation index) before the long-term capital gain is ascertained.

The income-tax law requires the CBDT to specify the cost inflation index for a financial year after factoring in 75 per cent of average rise in consumer price index for urban non-manual employees for the immediately preceding financial year.

Last year, the CBDT had specified the cost inflation index in June. This year it has been done in September.

“The exercise of notifying cost inflation index should be done much earlier during the year before the tax obligation cycle begins,” said Aseem Chawla, Partner, MPCLegal, a legal firm.

The concept of indexation has been preserved even under the proposed direct taxes code, which is likely to come into force from April 1 next year.

Currently, the holding period is different for different assets for deciding the applicability of long-term capital gains. Under the proposed code, the test for non-business assets will be a uniform holding period of one year.

Once the new direct taxes code comes into effect, one can apply the cost inflation index, if one owns a house for more than one year. Now, it is three years for residential properties.

(This article was published on September 22, 2012)
XThese are links to The Hindu Business Line suggested by Outbrain, which may or may not be relevant to the other content on this page. You can read Outbrain's privacy and cookie policy here.