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What is Indexed Cost of Improvement

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Hey! Are you wondering about the meaning behind indexed cost of acquisition and improvement? If your answer is a yes, I can give you a helping hand. I was looking for the same and gained clarity after reading the above detailed answers. However, I dug in some more and would like to present my take on the same. 

What is the indexed cost of improvement?

The term Cost of Improvement (COI) can be understood as the spending done to increase the value or improve any capital asset. A thing to be taken care of is that the expenditure deductible in computing the income levied from profits and gains from business or profession, house property or from sources like interest on securities would not be considered as COI.

What is the indexed cost of acquisition?

The term Cost of Acquisition (COA) is defined as the total capital expenditure done during the time of capital asset acquisition under transfer. This covers factors such as the buying cost alongside the expenses beared till the date of acquiring the asset. Examples include storage, registration, and more.

I tried to keep the answer simple and straightforward to eliminate confusion. I hope this gives you a good understanding about the indexed cost of improvement as well as acquisition. 

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Read More What is Indexed Cost of Acquisition in Income Tax in 2023? How to Calculate Indexed Cost of Acquisition?
0 2023-02-17T07:28:57+00:00

The above-mentioned answers clarified my understanding of the Indexed Cost of Improvement. I’d just like to reiterate that the computation of the cost of acquisition using the indexation benefit to determine long-term capital gains is known as the "Indexed Cost of Acquisition." Indexed Cost of Acquisition = Cost of Acquisition * (CII for the year of sale / CII for the year of purchase). The computation of the cost of improvement using the indexation benefit to determine long-term capital gains is known as the "Indexed Cost of Improvement." The indexed cost of improvement formula is, Indexed Cost of Improvement = Cost of Improvement * (CII for the year of sale / CII for the year of improvement).

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The indexed cost of improvement examples are as follows, Mr. A spent INR 50,000 on an apartment in the fiscal year 2018–19. In FY 2021–2022, he sells the apartment for INR 80,000. 

Calculate the Capital Gain;

The apartment is a long-term capital asset because it is sold after 24 months of purchase. According to Section 112 of the Income Tax Act, the benefit of indexation is thus accessible for the computation of long-term capital gains.

CII for 2018-19 = 280

CII for 2021-22 = 317

Indexed Cost of Acquisition = 50,00,000 * (317/280) = INR 56,60,714

LTCG = 80,00,000 – 56,60,714 = INR 23,39,286

The cost of improvement in capital gain refers to the capital expense made by an assessee to augment or improve a capital asset. It also includes any expenses incurred for maintaining or fixing the title.

What is the benefit of the indexed house improvement cost?

If a capital asset meets the criteria for being a long-term capital asset based on the amount of time it has been kept, an advantage of the indexed cost of acquisition will be given for calculating capital gain. This indexed cost helps to raise the costs that can be subtracted from the sale price, reducing the capital gain and the corresponding capital gains tax.

I’d like to conclude here about the indexed cost of improvement examples, and the indexed house improvement cost. I hope this helps:)

Read More:

How is indexed cost of acquisition calculation? How to Calculate Indexed Cost of Acquisition?  
1 2022-08-22T20:37:06+00:00

It is not uncommon to not be aware of index cost of improvement. Not everyone uses it on a daily basis. So, it may happen that we do not know about it. I too came to know about it very recently. I believe you are also curious to know about it so I am going to help you understand it. Cost of improvement is the amount of money an assessor spends on improvements or additions to a capital asset when calculating capital gains. It also covers any costs necessary to safeguard, finish, or correct the ownership of the capital assets. To put it another way, any expense made to raise the capital asset's worth is considered a cost of improvement. 

Learn more about index cost of improvement from the legal experts of NoBroker by consulting them for free. Cost of improvement with indexation:

The following are special provisions underneath the Income-tax Act regarding cost of improvement:

  • Expenses incurred before April 1, 1981, are not taken into account - Any cost of improvement incurred prior to April 1, 1981, is not taken into account when determining the capital gain subject to tax. There is no exception to this rule.

  • Before April 1, 1981, every expenditure made to upgrade a capital asset was always considered to be zero.

  • Double deductions are not allowed. The cost of an improvement does not include any costs that are deducted when calculating the income that is taxable under the headings Interest on Securities, Income from Real Estate, Profits and Gains from Business or Profession, and Income from Other Sources.

Cost of improvement indexation

With the aforementioned provisions in mind, the cost of improvement will be determined in each circumstance as follows:

Different Situations When The capital asset was acquired by gift, will, etc., under the provisions of section 49(1) In any other case
Cost of enhancing a company's goodwill, a right to produce, create, or otherwise process any good or service, or a right to operate any business
  • when these assets areself-generated

NIL

NIL

  • when these assets are purchased and later on transferred

NIL

NIL

Cost of improvement in relation to any other asset acquired
  • before April 1, 1981

Improvement expenses incurred by the previous owner and the assessments (ignoring the expenditure incurred beforeApril 1, 1981)

Improvement expenses paid by the assessments (ignoring the expenditure incurred before April 1, 1981)

  • on or after April 1, 1981

Improvement expenses paid for by the assessments and the previous owner

Improvement expenses paid by the assessments

A sum that bears to the cost of improvement in the same proportion that the cost inflation index for the same year that the asset is moved exhibits to the cost inflation index for the year that the improvement to the asset was made is referred to as the "indexed cost of improvement."

If improvements are made to real estate property and are incidental capital expenses that you pay to change or add to the property, the Indexed Cost of Improvement is computed as follows:

𝐶𝑜𝑠𝑡 𝑜𝑓 𝐼𝑚𝑝𝑟𝑜𝑣𝑒𝑚𝑒𝑛𝑡 × 𝐶𝐼𝐼 𝑖𝑛 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 𝑜𝑓 𝑇𝑟𝑎𝑛𝑠𝑓𝑒𝑟/𝐶𝐼𝐼 𝑖𝑛 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 𝑜𝑓 𝐼𝑚𝑝𝑟𝑜𝑣𝑒𝑚𝑒𝑛𝑡

However, in accordance with the current tax laws, if you paid for the upgrade before April 1, 2001, you must disregard that expense.

I hope now you understand about

index cost of improvement.

Read More: How is the indexed cost of acquisition calculated? 
0 2022-03-28T19:14:00+00:00

Hi, Buddy,

Do you want to know what is indexed cost of improvement? Let me give you a brief about it.

The capital expenditure incurred by an assessee for any addition or upgrade to a capital asset is known as the cost of improvement. It also includes any costs associated with safeguarding or curing the title. To put it another way, cost of improvement refers to all expenses paid to increase the value of a capital asset. However, any cost of improvement that is deductible in computing income under the headings Income from House Property, Profits, and Gains from Business or Profession, or Income from Other Sources (Interest on Securities) will not be included.

The indexed cost of improvement in relation to the items listed below will be assumed to be zero:

  • Generosity

  • The ability to make, produce, or process any item or thing

  • The right to engage in any type of enterprise

Cost Inflation Index (CII)

is used to index the cost of acquisition and improvement. It is done to account for inflation over the years that the asset has been held. This diminishes capital profits by increasing one's cost base.

Improvement cost index

=

Cost of Improvement * CII of the year the asset is transferred or acquired / CII of the year in which the asset is improved

I hope I am able to explain to you what is indexed cost of improvement.

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Read More:

What Is Indexed Cost Of Acquisition? How To Calculate Indexed Cost Of Acquisition?
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