Context: The Central Board of Direct Taxes (CBDT) has notified the Cost Inflation Index (CII) of 363 for the financial year 2024-25, which will be used to calculate long-term capital gains. This notification will come into force from April 1, 2025 and will remain applicable for assessment year 2025-26 and subsequent assessment years also.

Important Points

About CII

• The CII is a tool used to measure inflation for computing long-term capital gains on the sale of assets, including immovable property, securities and jewellery.
• The CPI is a measure of inflation that reflects the average price level of a basket of goods and services consumed by households. 
• The Cost Inflation Index is based on the Consumer Price Index (CPI) for industrial workers.
• The Central Board of Direct Taxes (CBDT) fixes and publishes CII annually in its official gazette, under Section 48 of the Income Tax Act, 1961.
• The CII for a given financial year is calculated as follows:
• CII = [(CPI for the year of calculation)/(CPI for the base year)]*100

‘Base Year’ of CII

• The ‘base year’ in CII refers to the year from which the index is calculated and it is taken as the reference point for determining the rate of inflation in the subsequent years.

 Advantages of Using CII

• Inflation Adjustment: The primary purpose of the CII is to adjust the cost of acquisition and improvement of assets for inflation.  This ensures that taxpayers are not taxed on the nominal gains that result from inflation but rather on the real gains. 
• Fair Taxation: By indexing the cost, the CII ensures that only real gains are taxed, promoting fairness in the taxation system which prevents taxpayers from paying taxes on notional gains that arise purely due to inflation.
• Encourage Investment: By mitigating the impact of inflation on capital gains, the CII encourages long-term investments in assets like real estate and securities which fosters economic growth by promoting investment in productive assets. 

 Challenges of CII 

• Limited Coverage: CII applies only to long-term capital gains, not short-term gains.
• Imperfect Inflation Measure: CII might not perfectly reflect inflation for all asset classes.
• Limited to Long-term Gains: The benefit of CII is limited to long-term capital gains, with short-term gains being taxed at regular rates.  This creates a disparity in the taxation of short-term and long-term investments.

 Conclusion

• The Cost Inflation Index plays a pivotal role in India's taxation system by ensuring that taxpayers are taxed on real gains rather than inflationary increases. 
• This not only promotes fairness but also encourages long-term investments, contributing to economic stability and growth. 
• Despite its complexities and limitations, the CII remains an essential tool for aligning the taxation system with economic reality and promoting equitable taxation. 

Capital Gain Tax

• A tax imposed on the profits (gains) derived from the sale of assets such as land, shares, etc.
• It is of two types:-

Other Important Fact

Central Board of Direct Taxes (CBDT)

• CBDT is a statutory entity constituted under the Central Board of Revenue Act, 1963.
• CBDT is a section of the Department of Revenue of the Ministry of Finance of India.
• Organizational Structure: The Central Board of Direct Taxes consists of a Chairman and six members.
• Chairman: Nitin Gupta