Cost inflation index notified for FY 2020-21 for calculation of LTCG

The CBDT recently notified the cost inflation index at 301 for the financial year 2020-21 vide notification dated 12 June 2020. The cost inflation index for the financial year 2019-20 notified last year is 289.

The cost inflation index is a factor used to adjust the cost or purchase price of an asset for inflation. It enables the calculation of the long-term capital gains arising from the sale of a capital asset. 

A sale of a capital asset such as land, building, gold, stocks, bonds and so on gives rise to capital gains or losses. A taxpayer making a sale needs to calculate the capital gains and pay the taxes due on it. The capital gains may be short-term or long-term based on the holding period prescribed for different assets. While calculating the long-term capital gains, a taxpayer can benefit from indexing the cost or purchase price using the cost inflation index.

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For example:

Mr X sells land which he acquired for Rs 20 lakh on 10 April 2002. The date of sale is 10 May 2020 and sale value is Rs 2 crore. Mr X also incurs Rs 2 lakh as brokerage towards the sale of the land. Land held for more than two years is a long-term capital asset. The calculation of long-term capital gain is as follows:

Long-term capital gains on the sale of land:
Sale consideration Rs 20,000,000.00
Less: Expenses on transfer Rs 200,000.00
Net consideration Rs 19,800,000.00
Less: Indexed cost of acquisition Rs 5,733,333.00
Taxable long-term capital gain Rs 14,066,667.00

The taxpayer should disclose the long-term capital gains while filing the income tax return due for FY 2020-21 in July 2021. A taxpayer should pay the taxes on the capital gains in the ongoing financial year except where there is a claim for a capital gains exemption.

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