Cost Inflation Index set higher at 363, long term capital gain to be lower on land, trademarks, patents

Long-term capital gain liability on the sale or transfer of any capital asset, such as land, property, trademarks and patents is expected to be lower this year as Cost Inflation Index (CII) for Financial Year 2024-25 has been fixed at 363 as against 348 for Financial Year 2023-24. This shows a rise of 4.3 per cent.

The Central Board of Direct Taxes (CBDT) has notified the index.

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“This notification shall come into force with effect from the 1st day of April, 2025 and shall accordingly apply in relation to the assessment year 2025-26 and subsequent assessment years.” it said. The CII number assists in determining the long-term capital gains on which an assessee is required to pay taxes when she/he files income tax returns (ITR) next year.

Explaining the importance of this index, Sandeep Sehgal, Partner-Tax, AKM Global said, “The index is useful to adjust the capital gains for inflation so that the taxpayers are taxed on real appreciation of the assets and not the gains due to inflation. Taxpayers can use this to calculate gains for the long-term capital assets sold during FY 24-25 and reduce the tax liability accordingly.”

CII is a way to calculate inflation, that is, an estimated increase in the price of a good or service over the years. Indexation is used to adjust the purchase price of an investment to reflect the effect of inflation on it. A higher purchase price means lesser profits, which effectively means a lower tax.

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With the help of indexation, one will be able to lower her/his long-term capital gains, which brings down taxable income. The rate of inflation to be used for indexation can be obtained from the government’s CII.

The Central government notifies the index. Usually, for the calculation of CII, gains on long-term capital are taken into account.  To benefit the taxpayers, the CII is applied to the long-term capital assets, due to which purchase cost increases, resulting in lesser profits and lesser taxes.

The indexation was in news last year as Finance Act 2023 removed this for debt mutual funds.  From April 1 and onwards gain for funds are taxed at the investor’s tax slab rates, rather than the previous 20 per cent with indexation benefit and 10 per cent without that as a result, if the investor is subject to the highest tax bracket, this rate would be 35.8 per cent (including surcharge and cess).