What is Indexed Cost of Acquisition?

Indexed cost of acquisition is based on the inflation in the country. The cost of acquisition in simple terms means the price of purchase of the property. If you hold on to the property for more than 3 years, you can ascertain the cost with reference to the inflation rate. The cost of acquisition is ascertained based on the Cost Inflation Index or CII. 

When you sell a property you either gain from it or bear losses. In case of property being a long term capital asset, you can index it’s cost for the selling year.

Indexation is the process of readjusting purchase cost of assets for inflation. Indexation helps in determining the taxable capital gains. To calculate indexed cost of acquisition you will need to determine the CII. 

CII is available on the Income Tax India Government website. 

The indexation cost of acquisition in income tax benefits home buyers in a way that the purchase price gets readjusted according to the inflation. This in return reduces capital gain, therefore, the tax applicable on capital gain reduces. 

I hope what is indexed cost of acquisition is clear now.

Let me help you with what is indexed cost of acquisition. The Indexed Cost of Acquisition in India simply refers to the adjusted purchase price of a capital asset after considering inflation. This is used when calculating long-term capital gains (LTCG) on assets held for more than 24 or 36 months (depending on the asset type).

What is Indexed Cost of Acquisition Meaning?

The purpose of indexation is to reflect the rise in prices over time, which allows the taxpayer to adjust the original cost of acquisition, thereby reducing the overall taxable gains. The Indian government provides a Cost Inflation Index (CII) each year, which reflects the rate of inflation.

The indexed cost of acquisition is calculated by using the CII of both the year of sale and the year of purchase.

Indexed Cost of Acquisition=(Cost of Acquisition x CII of Year of Sale)/CII of Year of Purchase ​

As everyone mentioned, the cost of acquisition is the original price paid for acquiring the asset. However, the Cost Inflation Index is a measure provided by the government that reflects inflation for a given year. It is used to adjust the cost based on inflation.

Let me explain it with an example:

Let’s say:

• Purchase Year: 2010

• Cost of Acquisition: ₹5,00,000

• Sale Year: 2023

• CII in 2010: 167

• CII in 2023: 348

Using the formula: Indexed Cost of Acquisition = (5,00,000×348)/167 = ₹10,42,514

In this case, the cost of acquisition has been adjusted from ₹5,00,000 to ₹10,42,514 due to inflation. Your query for what is indexed cost of acquisition in income tax should be solved.

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When computing capital gains tax on long-term capital assets, the indexed cost of acquisition or upgrade is crucial. So if you are wondering what is cost of acquisition in income tax, I would say it is a very good question and I can help you out with it. Indexed cost of acquisition or improvement for the purpose of hassle-free calculation using a calculator.

Inflationary cost is another term for index cost. The term "indexed cost of acquisition" refers to the cost inflation index numbers that will be added to the cost of acquisition.

What is the cost of acquisition meaning in income tax calculator?

A useful tool to determine the increased cost of acquisition for the purpose of calculating the long-term capital gain tax is the indexed cost of acquisition or improvement calculator. When computing capital gains tax on long-term capital assets, the indexed cost of acquisition or upgrade is crucial.

How to Calculate cost of acquisition with indexation?

The year of purchase and the actual cost of acquisition must be known in order to compute the indexed cost of acquisition, which can be done as follows: -

Cost of acquisition X (CII of the year of transfer / CII of the year of acquisition or FY 2001-02, whichever is later) is the indexed cost of acquisition.

The indexed cost of improvement is equal to the cost of improvement times (CII of the year of transfer / ClI of the year of improvement, or FY 2001–2002, whichever comes later). Each financial year, the Income Tax Department notifies CII.

Benefits of Using Indexed Cost of Acquisition or Improvement Calculator

After tax payments on long-term earnings, as determined by the calculator's calculation, may be left over for assessees to invest in other financial assets that meet the criteria for using an indexed cost of acquisition or improvement calculator.

Now you know

what is cost of acquisition in income tax.

The Indexed Cost is the cost after considering the effect of inflation in each financial year. As a result, the Cost Inflation Index, or CII, helps in estimating the annual increase in costs brought on by the impact of inflation. The Income Tax Department informs CII every financial year. So let’s determine the indexed acquisition cost meaning in Income tax.

What is the index cost of acquisition meaning?

The Inflated cost is another term for index cost. The term "indexed cost of acquisition" refers to the cost inflation index numbers that will be added to the cost of acquisition. This is the index cost meaning in income tax.

What is the index cost of acquisition formula?

The year of purchase and the actual cost of acquisition is required to compute the indexed cost of acquisition, which can be done as follows: -

Indexed cost of acquisition = Cost of acquisition x (CII of the year of transfer / CII of the year of acquisition) 

Here's an example: 

On March 15, 2016, Mr Pathan paid Rs. 15 lakhs for a capital asset, which he later sold for Rs. 22 lakhs in 2022. Let's now determine the capital asset's indexed cost.

Indexed cost of acquisition = Cost of acquisition X (CII of the year of transfer / CII of the year of acquisition)

= Rs. 15,00,000 X 317 / 264

= Rs. 18,01,136.36

You are now aware of indexed acquisition cost and its formula.

Due to inflation the purchasing power of a customer reduces. Therefore, it is important to calculate the cost of goods and services rising every year because of the effect of inflation. As such a taxpayer can benefit from indexation to compute the cost of acquisition to calculate the Capital Gains tax. So, what is index cost of acquisition?

As pointed out by Mr Farhan the method to calculate the inflation to check the long-term capital gains when selling an asset is known as the Index cost of acquisition. 

When the cost of acquisition of an asset cannot be indexed it is known as the cost of acquisition without indexation. 

The Cost Inflation Index that is CII helps to determine the effect of inflation each financial year. CII helps to understand the increase in prices each year. The formula of CII is:

CII = 75% of the average rise in the Consumer Price Index (CPI) for the immediately preceding year.

Let me share with you the Cost Inflation Index chart so that you can understand the concept better.

You can refer to Mr Farhan and Ms Kritika’s answer to know more about index cost of acquisition. I hope I was able to add more information to clear your doubt.

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The process to measure inflation which helps to determine the long-term capital gains when selling an asset Cost inflation index. While selling a property we need to pay a huge amount of taxes to the Government. By following the cost inflation index we can avoid paying hefty taxes since the current value of the property will also decrease due to inflation. This in turn will help buyers because the capital gains will be reduced. There is a formula for Cost Inflation Index. The Indexed cost of acquisition formula is

Cost Inflation Index (CII) = CII for the year the asset was transferred or sold / CII for the year the asset was acquired or bought.

I will share an example for a better understanding.

Let's say you purchased a property worth Rs. 20 lakh in the month of Jan 2000. In 2009 you sold it for Rs. 35 lakhs. After selling you will earn a profit of Rs.15 lakhs.

The CII for the year 2000 would be  389 and the CII for 2009 would be 582.

Here the cost inflation index would be 582/389 = 1.49.

The actual cost of the assets would be when CII is multiplied by the purchase price which in turn arrives at the indexed cost of acquisition.

The indexed cost of acquisition would be= 20,00,000 X 1.49 = Rs.29,92,288

The long term capital gain= Value at which the property is sold- indexed cost of acquisition i.e., 35,00,00- 29,92,288 = Rs.5,07,712

The tax liability will be 20%. So, the tax liability would be: 20% X 5,07,712 = Rs.1,01,542

The tax liability would be 10% on the capital if we do not follow the indexation method. Sale price of the plot- cost of acquisition=  35,00,000 – 20,00,000 = Rs.15,00,000. Capital gains would be= Rs.1,50,000.

So, the index helps to save on taxes. I hope you are able to understand the indexed cost of acquisition meaning.

Since I am explaining about Indexed Cost of Acquisition, I will share with you indexed cost of acquisition for fy 2022 23.

The cost inflation index for the financial year 2020-21 is 301. See other financial year's CII Value below.

I have briefly shared about indexed cost of acquisition formula. I hope you find this informative.

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