As inflation rises, so do commodity prices. Because of this, the purchasing power of silver is declining. For example, if you can buy ten units of a product for Rs,1000 you may not be able to buy eight units for two years today due to rising inflation.
But how is this increase in the price of goods due to inflation measured? With the help of the cost inflation index (CII).
In terms of taxes, the IIC could help investors reduce their capital gains from the sale of property, plant, and equipment in the long term. As capital gains decrease, so does the income tax applicable to the gains.
As mentioned above, IIC calculates the year-on-year increase in goods prices due to inflation. Suppose you buy 10 g of gold today for 42,000 rupees. Sell the same after two years for 50,000 rupees. The capital gains here are 8,000 rupees. Then pay the applicable taxes on this amount.
But assets like gold, real estate, debt securities, and even debt securities become more expensive over time as inflation rises. Referring to the same example, the IIC would allow you to increase the purchase price of gold (previously Rs 42,000) to compensate for the price increase due to inflation.
This will help you reduce your capital gains when you sell it for Rs 50,000. As capital gains decline, so will the income tax you pay on earnings.
If the investor were left up to the investor, he would have a different view of inflation. Rather than allowing investors to calculate the IICs themselves, the Central Council for Direct Taxes (CBDT) is responsible for notifying the IIC in the Official Gazette every year.
The CBDT calculates the CII and provides a unique three-digit number that is then taken into account when calculating the indexed cost of assets.
If you are looking to sell assets such as gold, real estate, or debt-equity funds, take advantage of this indexation to increase the cost of acquisition and reduce your tax liability.
If this is your first time at IIC, you should consider professional help so that your tax obligations can be properly reduced by law.