Understanding implications of new Cost Inflation Index

Arnav PandyaThe new Cost Inflation Index (CII) number has been announced by the Central Board of Direct Taxes and the initial impact of this has been that investors are going to find that the rate of growth has slowed on this front. With the inflation rate slowing in the economy the impact of this has been directly seen on the Cost Inflation Index number which for 2015-16 has come in at 1089 while the figure in the previous year was 1024. This implies that the rise in the value is just around 5.7 per cent and what this means is that there is some work that needs to be undertaken on the front of using this number effectively by investors. Here is a closer look at the issue and how this would work for investors.ImpactThe impact of the new CII for this year itself will have to be seen in a different light because of the changes in the tax structure that has been announced in recent times. Earlier the debt mutual funds were one of the big areas where the CII was used because once the time period of investment in these instruments crossed the one year mark the long term capital gains calculation was activated and hence the rise in the index number over the previous year became important. This enabled an investor to know how much of their returns would become tax free. Now with the time period for the long term capital gains calculation shifting to the three year time period the single number for the financial year 2015-16 has little meaning by itself but this would have to be seen in the light of what has happened over the past two years also.UsageThe usage of the CII for the current financial year thus will be applicable for all the assets that have a long term capital gains arising to them and this would mean that there has to be a minimum holding period of three years for them. This would include assets like a house property or a debt oriented mutual fund and even gold as all these assets would witness the implications of the working that would be determined by the changes in the CII over their holding period.Lower numberThe basic meaning of a lower CII is that a lower amount would be present for the investor to raise their cost of the asset and hence when the comparison of the cost inflated asset is made with the sale price then a larger portion would be available as a gain that has capital gains tax applicable on it. This clearly means that the investor should be ready to ensure that they have to shell out more as a capital gains tax and hence this would lead to a larger burden on them. However when one considers the long term rate at which the cost would rise for an asset then the rise this year would be subsumed within the working especially of the last few years when the rate was galloping. Overall as a means of seeing the rise the growth rate over the longer term which is the important figure since this is the appropriate number to be used for the capital gains calculation, then this would not fall significantly. Also the other factor is that one should not just look at the rise in the cost inflation index in isolation but this has to be seen in the light of the change in the asset prices over the last year too. There could be some relief for the individual on this front as the rise in the values especially of property and gold has come down and this could still mean that while the returns are low there is still a large part of this is available tax free.