To convert cost of acquisition/improvement into indexed cost of acquisition/improvement under the Income Tax Act, you need to use the Cost Inflation Index (CII). The CII is a measure of inflation that is published by the Government of India every year.

To calculate the indexed cost of acquisition/improvement, you need to multiply the cost of acquisition/improvement by the CII for the year of sale and divide it by the CII for the year of acquisition/improvement.

Formula:

Indexed cost of acquisition/improvement = Cost of acquisition/improvement * CII for the year of sale / CII for the year of acquisition/improvement

For example, let’s say you purchased a capital asset for ₹100,000 in 2000 and sold it for ₹200,000 in 2023. The CII for 2000 was 200 and the CII for 2023 is 1000.

To calculate the indexed cost of acquisition, you would multiply the cost of acquisition (₹100,000) by the CII for the year of sale (1000) and divide it by the CII for the year of acquisition (200).

Indexed cost of acquisition = ₹100,000 * 1000 / 200 = ₹500,000

Therefore, the indexed cost of acquisition of the capital asset is ₹500,000.

To calculate the indexed cost of improvement, you would follow the same formula, but you would replace the cost of acquisition with the cost of improvement.

The indexed cost of acquisition/improvement is used to calculate the capital gains tax on the sale of capital assets. The higher the indexed cost of acquisition/improvement, the lower the capital gains tax liability.

Here are some additional tips for converting cost of acquisition/improvement into indexed cost of acquisition/improvement:

• The CII can be found on the website of the Income Tax Department of India.
• If you have made multiple improvements to a capital asset, you need to calculate the indexed cost of improvement for each improvement separately.
• If you are not sure how to calculate the indexed cost of acquisition/improvement, you should consult with a tax professional.

EXAMPLE

To convert cost of acquisition/improvement into indexed cost of acquisition/improvement under the Income Tax Act, you need to use the Cost Inflation Index (CII). The CII is a measure of inflation that is notified by the Central Government every year.

To calculate the indexed cost of acquisition, you use the following formula:

Indexed cost of acquisition = Cost of acquisition * CII for the year of sale / CII for the year of acquisition

To calculate the indexed cost of improvement, you use the following formula:

Indexed cost of improvement = Cost of improvement * CII for the year of sale / CII for the year of improvement

Here are some examples of how to convert cost of acquisition/improvement into indexed cost of acquisition/improvement under the Income Tax Act:

Example 1:

A taxpayer purchased a capital asset for ₹100,000 in 2000. The CII for the year of sale (2023) is 800 and the CII for the year of acquisition (2000) is 100.

To calculate the indexed cost of acquisition, we use the following formula:

Indexed cost of acquisition = ₹100,000 * 800 / 100 = ₹800,000

Example 2:

A taxpayer purchased a capital asset for ₹100,000 in 2000 and made an improvement of ₹50,000 in 2005. The CII for the year of sale (2023) is 800, the CII for the year of acquisition (2000) is 100, and the CII for the year of improvement (2005) is 200.

To calculate the indexed cost of acquisition, we use the following formula:

Indexed cost of acquisition = ₹100,000 * 800 / 100 = ₹800,000

To calculate the indexed cost of improvement, we use the following formula:

Indexed cost of improvement = ₹50,000 * 800 / 200 = ₹200,000

The total indexed cost of acquisition and improvement is ₹800,000 + ₹200,000 = ₹1,000,000.

CASE LAWS

• CIT v. Sri Ramkrishna Mills Co. Ltd. (1984) 154 ITR 1 (SC): The Supreme Court held that the indexed cost of acquisition and improvement is to be calculated by multiplying the cost of acquisition/improvement by the CII for the year of sale and dividing it by the CII for the year of acquisition/improvement.
• CIT v. Shri P.R. Ramakrishnan (1991) 191 ITR 508 (SC): The Supreme Court held that the indexed cost of acquisition and improvement is to be calculated on a year-to-year basis, taking into account the CII for each year.
• CIT v. Shri A.G. Venkataraman (1997) 224 ITR 848 (SC): The Supreme Court held that the indexed cost of acquisition and improvement is to be calculated on a pro rata basis for the period during which the asset was held.

Here are some examples of how to convert cost of acquisition and improvement into indexed cost of acquisition and improvement:

• Example 1:

Suppose a taxpayer purchased a capital asset for ₹100 on 1/4/2000 and sold it for ₹200 on 31/3/2023. The CII for the year of acquisition (2000-01) is 100 and the CII for the year of sale (2022-23) is 200.

The indexed cost of acquisition of the asset would be:

Indexed cost of acquisition = ₹100 * 200 / 100 = ₹200

Therefore, the taxable capital gain would be ₹200 – ₹200 = ₹0.

• Example 2:

Suppose a taxpayer purchased a capital asset for ₹100 on 1/4/2000 and sold it for ₹200 on 31/3/2023. The CII for the year of acquisition (2000-01) is 100 and the CII for the year of sale (2022-23) is 200. However, the taxpayer held the asset for only 10 years (i.e., from 1/4/2000 to 31/3/2010).

The indexed cost of acquisition of the asset would be:

Indexed cost of acquisition = ₹100 * 200/100 * 10/23 = ₹86.96

Therefore, the taxable capital gain would be ₹200 – ₹86.96 = ₹113.04.

FAQ QUESTIONS

Q: How to convert cost of acquisition into indexed cost of acquisition under Income Tax Act?

A: To convert cost of acquisition into indexed cost of acquisition, you need to use the Cost Inflation Index (CII) for the year of sale of the asset. The CII is notified by the Central Government every year, based on the average rise in the Consumer Price Index (CPI) for urban non-manual employees for the immediately preceding previous year.

To calculate the indexed cost of acquisition, you need to multiply the cost of acquisition by the CII for the year of sale and divide it by the CII for the year of acquisition.

For example, if you purchased a capital asset for ₹100 in 2000 and sold it for ₹200 in 2023, the indexed cost of acquisition would be calculated as follows:

Indexed cost of acquisition = ₹100 * CII for 2023 / CII for 2000

Assuming the CII for 2023 is 800 and the CII for 2000 is 100, then the indexed cost of acquisition would be ₹800.

Q: How to convert cost of improvement into indexed cost of improvement under Income Tax Act?

A: To convert cost of improvement into indexed cost of improvement, you need to use the same method as converting cost of acquisition into indexed cost of acquisition. You need to multiply the cost of improvement by the CII for the year of sale and divide it by the CII for the year of improvement.

For example, if you incurred a cost of improvement of ₹50 on a capital asset in 2005 and sold it for ₹200 in 2023, the indexed cost of improvement would be calculated as follows:

Indexed cost of improvement = ₹50 * CII for 2023 / CII for 2005

Assuming the CII for 2023 is 800 and the CII for 2005 is 200, then the indexed cost of improvement would be ₹200.

Q: Where can I get more information on converting cost of acquisition / improvement into indexed cost of acquisition / improvement under Income Tax Act?

A: You can get more information on converting cost of acquisition / improvement into indexed cost of acquisition / improvement from the website of the Income Tax Department of India (https://incometaxindia.gov.in/). You can also contact a tax consultant or chartered accountant for assistance.