Cost inflation index is used for computing capital gain.
Cost inflation Index” for any year means such index as the central government may, having regard to 75% of average rise in consumer price index for urban non manual employees for the immediately preceding previous year to such previous year by notification in the official gazette specify in this behalf.
Indexed cost means an amount which bears to the cost of acquisition, the same proportion as CII for the year in which the asset is transferred bears to the CII for the first year in which the asset was held by the assessee or for the year beginning on 1st April, 1981, whichever is later.
In order to calculate an accurate value of capital gain on sale of an asset, price incurred in purchase of the said asset and cost of improvement is to be increased to arrive at a reasonable value that the asset may have in the year in which the asset is sold. Such increased value of cost is called indexed cost of acquisition or improvement; as the case may be .it is used for computing long term capital gain.
Capital gain is computed by deducting indexed cost from net sale proceeds.
