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How to calculate Cost of Inflation index?

What is Inflation?

Inflation is a rise in price of a goods and services in particular period of time. In inflation the purchasing power is decreases. 

Example: Suppose on 25 may 2021 Mr. Gupta pays Rs. 20 for one pencil set and now in 2022 those pencil set cost Rs. 50. The rise in price shows the inflation and you can also notice that the value of money is decreases because those pencils which Mr. Gupta bought in Rs. 20 is now increases by Rs. 30. The price of product is definitely increases but the value of product is decreases.

What is Capital gain?

 Capital gain is rises due to sale of capital assets. It can be short term or long term.

Formula: 

Indexed cost of acquisition = Cost of acquisition * cost of inflation indexed of  the year the asset is being transferred / cost of inflation indexed of  the year the asset was acquired or 2000-01 (whichever is later)

Indexed cost of improvement = Cost of improvement * cost of inflation indexed of  the year the asset is being transferred / cost of inflation indexed of  the year in which the expenses for improving the asset were incurred 

 Long term gain/ short term gain = value of consideration- indexed cost of acquisition –indexed cost of improvement – other expense

Cost of inflation index:

It measures the inflation rate in given period of time. Due to inflation the price of assets increases and it also increases the tax amount. To know the correct value of assets rate of inflation at the time of purchase is calculated. It helps to pay tax on capital gain. To know the short term or long term gain subtract the indexed cost of acquisition and indexed cost of improvement and other expenses from value of consideration.

Value of consideration is an amount which seller receives after selling the assets. If the assets purchased before 1st April 2000 then the fair market value amount is taken as cost of acquisition.  

Example: Suppose Mr. Mehta purchase a house for Rs. 5, 30,000 in May 2011. In June 2019 he sells the house for Rs. 7, 00,000. The cost of inflation index on 2011-12 was 184 and the cost of inflation index on 2019-20 is 289. Find out the cost of acquisition.

Solution:  Indexed cost of acquisition = Cost of acquisition * cost of inflation indexed of  the year the asset is being transferred / cost of inflation indexed of  the year the asset was acquired or 2000-01 (whichever is later)

= 5, 30,000*289/184

= Rs. 8, 32,445.65

Example: Mr. Verma purchases shares Rs. 2, 20,000 on April 2001 and in June 2020 he sells the shares for Rs.3, 60,000. The cost of inflation index on 2000-01 was 100 and the cost of inflation index on 2020-21 is 301. Find out the cost of acquisition.

Solution:  Indexed cost of acquisition = Cost of acquisition * cost of inflation indexed of  the year the asset is being transferred / cost of inflation indexed of  the year the asset was acquired or 2000-01 (whichever is later)

= 2, 20,000*301/100

= Rs. 6, 62,200

 

 

 


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