The Central Board of Direct Taxes (CBDT) has specified a new value for the cost inflation index for 2012-13. The index last year was ‘785’. 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 assesses in the computation of tax on long-term capital gains (for indexation purposes).
In the last two years, the cost inflation index rose by 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, income-tax law allows long-term capital gains to be computed after adjusting for inflation.
The cost of acquisition as well as 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. 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, it had specified the index in June. “The exercise of notifying the cost inflation index should be done 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 varies for different assets when deciding the applicability of long-term capital gains. Under the proposed code, for non-business assets, it 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.