There are some numbers that hold meaning when it comes to the taxation system like 200,220, 240, or 264.

These are the numbers which save you from not paying higher tax on the sale of any capital asset like gold or real estate. It is the value of the cost inflation index in a particular financial year. 

For example, you brought a house for yourself for Rs 2 crores in the year 2015 and thought of selling it for Rs 3 crores in the year 2018.

Cost inflation index
Source : businessnewsdaily

So the capital gain in this situation is Rs 1 crores and can you imagine the amount of tax you might have to pay on this. A big chunk of your profit might go in paying tax.

The cost inflation index introduced by the government saves you from paying the higher amount of tax. It helps in calculating the increase in goods and assets year by year due to inflation.

In simple words, the amount will be revalued, which will result in you paying the lesser tax amount.

Why is the cost inflation index used in income tax?

Cost inflation index
Source: Articledirectorynews

CII is used for a lot of capital assets like mutual funds, gold, debentures, and much more. The price of the asset class increases due to the country’s inflation.

The record of capitals exists at their cost price and cannot be simply revalued.

When the assets are sold, then the profit amount on these assets stays high because of the higher sale price as compared to the purchase price, which further results in paying a higher tax.

Source : afinoz

In the example given above, we all know that the house that was purchased in Rs 2 crores in the year 2015 will have a much higher value in the year 2018, and the reason for this is inflation.

The cost inflation index is calculated so that it becomes easy to match the inflation rate whenever the asset is being sold.

To put it all in simple words, it means that the increase in the inflation rate in the time period will also increase the prices of the capital assets, which will result in the lesser capital gain and tax.

How is CII calculated? 

Cost inflation index
Source : financialexpress

Every person has different views on inflation, and for that, the central board of direct taxes helps in giving out some numbers on the calculation of the CII.

The consumer price index helps in comparing the price of the goods and assets now as compared to the amount in the previous year. So there are different rates for the calculation of CII.

There are different rates based on different financial years to calculate the CII, and though it is not so important to understand the calculation of the cost inflation index, it is essential to understand the value of the assets during the years.

It will save a person from paying a heavy tax amount on the assets that they are thinking of selling after a few years of purchase.