The Central Board of Direct Taxes (CBDT) has specified a value for the cost inflation index for 2013-14.

A cost inflation index helps reduce the inflationary gains, thereby reducing the long-term capital gains tax payout for a taxpayer.

Last year, the index was ‘852’, and this year it is ‘939’. This would mean that there has been a 10.2 per cent rise in the cost inflation index for 2013-14.

The index is useful for income-tax assesses in the computation of tax on long-term capital gains (for indexation purposes). In the previous year (2011-12), the cost inflation index increased 8.5 per cent.

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.

Timing

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

“The timing of the latest notification is progressive and seemingly the CBDT has appreciated the viewpoint that it should happen before the tax obligation cycle commences”, said Aseem Chawla, Partner, MPCLegal, a legal firm.

The concept of indexation has been preserved even under the proposed direct taxes code, which may 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.

srivats.kr@thehindu.co.in

(This article was published on June 7, 2013)
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