The Central Board of Direct Taxes (CBDT), which declares the Cost Inflation Index (CII) value every year, has set the CII for FY2019-20 as 289, from 280 in FY2018-19. The base year for CII was changed from 1981 to 2001 through the Finance Act, 2017.
CII is the number used to arrive at the inflation-adjusted cost of acquisition of assets and investments while calculating long-term capital gains (LTCG) from such assets. You can bring down your tax liability on LTCG—made on transfer of assets such as real estate and debt mutual funds—by adjusting the investment amount against the CII value of the relevant financial years of purchase and sale.
For instance, any gains arising out of property transfer will attract capital gains tax. If the seller held the property for less than two years before transfer, then the gains from the transfer are considered as short-term capital gains (STCG). Such gains get added to the seller’s other income(s) and taxed as per the income tax slab rate applicable. If the seller held the property for more than two years at the time of transfer, then the gains are considered as LTCG, which is taxed at 20% with indexation. To calculate LTCG from the property, the seller has to calculate the indexed cost of acquisition.
To arrive at the indexed cost of acquisition, you need to use CII for the year of purchase and sale. Say, you bought a house in 2004-05 for ₹30 lakh and sold it for ₹80 lakh in 2018-19. To calculate the indexed costs of acquisition, find out the CII values on www.incometaxindia.gov.in for 2004-05 and 2018-19.
In the example, CII is 113 and 280 for the years of purchase and sale, respectively. So, the indexed cost of acquisition would be 74,33,628 [30,00,000 x (280/113)]. Accordingly, your LTCG would be ₹5,66,372 (80,00,000 - 74,33,628). This is the amount on which LTCG tax will apply.