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Capital Gains

AKSHIT MALHOTRA (C.A Final Student) (1337 Points)

04 July 2011

IN CAPITAL GAINS I HAV NOT UNDERSTOOD COST INFLATION INDEX.

PLEASE TELL ME.

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6 Replies

praveen (Chartered Accountant) (6971 Points)
Replied 04 July 2011

The value of money does not remain the same every year. Say if you have invested 2,00,000 in 1990 to buy a house and then sell it at Rs.43,00,000 today, you will be incurring a gain of 41,00,000 Rs. But it is not correct in the real world as the value of 2L is not the same as on 1990 and that of today. Hence the government has come up with the Cost of inflation index through which 2 L of 1990 will be greater.

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AKSHIT MALHOTRA (C.A Final Student) (1337 Points)
Replied 04 July 2011

THANKS A LOT SIR.

CS Bijoy (Expert) (6394 Points)
Replied 04 July 2011

It act as a measure of inflation that finds application in tax law, when computing long-term capital gains on sale of assets. Section 48 of the IT Act 1961 defines the index as what is notified by the Central Government every year, having regard to 75 per cent of average rise in the consumer price index (CPI) for urban non-manual employees for the immediately preceding previous year. Therefore, if we consider that price of a capital asset has risen in tandem with base price rise, then if one want to sell an asset and replace it, the cost allowed even after indexation will be lesser than the price payable for new asset.