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Capital gains tax payout to go up on lower indexation benefit
June, 09th 2016

Taxpayers claiming indexation benefits while computing long-term capital gains will have to shell out more to the taxman following the decision by the Central Board of Direct Taxes to tweak the cost inflation index (CII) for 2016-17.

The higher tax outgo is, curiously, the downside of falling inflation rates in recent times.

The income-tax law allows long-term capital gains to be computed after adjusting for inflation. The cost of acquisition as well as the cost of improvement is adjusted for inflation between the date of purchase and date of sale (through the CII), and the long-term capital gains are then ascertained.

The CII, which is useful in computing tax on long-term capital gains (for indexation purposes), helps rationalise inflationary gains, thereby reducing the long-term capital gains tax payout for taxpayers, say tax experts. But when inflation rates fall, the indexation benefit gets trimmed.

The CBDT has increased the CII for 2016-17 by 4.07 per cent, which effectively narrows the window for taxpayers to enjoy adjustment benefits on long-term capital gains.

The income-tax law requires the CBDT to specify the CII for a financial year after factoring in 75 per cent of the average rise in consumer price index (CPI) for urban non-manual employees for the immediate preceding financial year.

The 4.07 per cent increase in the CII, under the influence of the the fall in CPI-based inflation in recent years, is lower than the 5.57 per cent increase seen in 2015-16 and 9.05 per cent increase in 2014-15. The CBDT, which specifies the CII every year, has now pegged it at ‘1125’ as against ‘1081’ for 2015-16.

Amit Maheshwari, Partner, Ashok Maheshwary & Associates, a CA firm, told BusinessLine said the CBDT move is “clearly an outcome of the falling inflation in India in recent years.”

Last year, the CBDT had specified the cost inflation index in end July, drawing some criticism for the delay.

This year, the CII has been specified in early June.

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