Inflation is an economic term and referred to the continuous rise in the price of goods and services, thereby reducing the purchasing power of the money. The pinch of inflation is felt by all sections of the economy, be it, the consumers, investors, and the government. And, even though it increases the cost of living, inflation is a necessary evil and desirable for the growth and development of the economy.
For the reason of inflation, it is only fair to pay more for your goods like comb and brush over the years due to an increase in the price. For the same reason, it is unfair to pay capital gains tax on your assets without taking into account the impact of inflation on the value of the asset. Cost Inflation Index(CII) is the index to calculate the increase in the price of assets year-on-year due to the impact of inflation.
What is the Cost Inflation Index?
Cost Inflation Index or CII is an essential tool for determining the increase in the price of an asset on account of inflation and is useful at the time of calculating the long-term capital gains on the sale of capital assets. It is fixed by the central government and released in its gazetted offices by the Ministry of Finance every year.
Capital gains are the profits arising from the sale of assets like real estate, financial investment, jewellery, etc. The cost price of the asset is adjusted taking into account the Cost Inflation Index of the year of purchase and the year in which the asset is sold, and the entire process is known as Indexation.
Cost Inflation Index Calculation
The cost inflation index calculation is done by the government to match the inflation rate for the year and calculated using the Consumer Price Index (CPI).
Cost Inflation Index India for the financial year 2019-20 has been set at 289.
Change of the base year for the Cost Inflation Index
The cost inflation index base year was changed in the Union Budget 2017 from 1881 to 2001. The base year was changed by the government to enable accurate and faster calculations of the properties purchased before April 1, 1981, as taxpayers started to face problems with valuations of older properties.
The base year has an index value of 100, and the index of the following years is compared to the index value in the base year to determine the increase in inflation.
With the change in the base year, the capital gains and tax burden has reduced significantly for the taxpayers as it now reflects the inflated price of the asset realistically.
The current Cost Inflation Index Chart for each year is as under-
How is the Cost Inflation Index (CII) used in calculating capital gains
To calculate the capital gains on your assets the purchase price of the asset is indexed by the cost Inflation Index using the formula below-
Indexed cost of the asset at the time of acquisition =
(CII for the year of sale/ CII for the year of purchase or base year (whichever is later))*actual cost of acquisition
If suppose you purchased a flat in December 2010 for Rs 42 lacs and sold in Jan 2019 for Rs 85 lacs. Your capital gain from the sale of the flat is Rs 43 lacs.
The CII in the year in which the flat was purchased is 148, and the CII in the year the flat was sold in is 280.
The purchase price of the flat after taking into account the Cost Inflation Index is =
(280/148)*Rs42 lacs= Rs 79. 46 lacs
This is the indexed cost of acquisition.
Your long-term capital gain after taking indexation into account is Rs 85,00,000- Rs 79,45,946 = Rs.5,54,054.
Long-term capital gains on the sale of property are taxed at 20% with indexation benefit. So, your tax liability, in this case, would be-
20% of Rs 5, 54, 054= Rs 1,10,810
Without indexation benefit, the capital gains are taxed at 10%. In this case, the capital gains would be-
Sale price of the flat - purchase price of the flat = Rs 85,00,000 – Rs42,00,000 = Rs.43,00,000.
The capital gains tax without indexation benefit will be 10% X Rs 43,00,000 = Rs.4,30,000.
Thus, indexation helps reduce the long-term capital gains and reduce the overall tax burden for the taxpayer considerably.
Indexation benefit can be used for investments in mutual funds, real estate, gold, FMPs, etc. but is not applied for fixed income instruments like FDs, recurring deposits, NSC, etc.
Few important tips to remember about the Cost Inflation Index-
- If you receive an asset as a part of the will, then in such the CCI for the year in which it was transferred will be considered and not the CCI of the purchase of the asset
- Indexation benefit for the cost of improvement of the asset is the same as the cost of improvement of the asset.
- Cost of improvement incurred before 1981 to be ignored.
Cost Inflation Index is an important parameter to be considered at the time of selling long-term assets as it is beneficial for the investors. Reach out to our experts at IndiaNivesh for any queries about capital gains arising from the sale of assets for correct guidance.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
After the end of each financial year, any income that you earn is subject to income tax. You have to club the income received from different sources and then pay a tax on such income at a prescribed rate. However, in some cases, tax is deducted from your income before it is credited to you. For instance, if you are a salaried employee, tax is deducted by your employer from your salary income, and then you get the net salary income in your bank account. Similarly, if you earn any interest income, rent, etc., tax might have been deducted on the income by the individual or the entity that is paying the income. This deduction of tax is called Tax Deducted at Source (TDS) because the tax is being deducted at the source from where the income is being generated. TDS is deducted by the deductor and submitted to the Government on your behalf. When you file your income tax return, you are required to record the actual income that you have earned, i.e. income before the deduction of tax. Thereafter, you have to calculate your gross taxable income and tax liability on the income. If your tax liability is lower than the TDS already deducted from your income, you are eligible for a TDS refund. What is TDS refund? A TDS refund is the process of getting a refund of the extra income tax that you have paid. TDS refund is applicable if the TDS deducted and deposited is higher than the tax liability that you incur. For instance, banks deduct a TDS of 10% from the interest that you earn from your fixed deposit account. However, if you are in a lower tax bracket of 5%, an extra 5% has been deducted from your interest income. This additional 5% can be, therefore, claimed by you as TDS refund. Claiming a TDS refund The process of claiming a TDS refund depends on the source of your income. The different instances of TDS refund and the process of claiming them are as follows – When a higher TDS is deducted from your salary income If the TDS deducted from your salary income is higher than the actual tax liability that you incur, you can file your income tax return and claim a refund of the excess TDS deducted. When filing your income tax return, mention the details of your bank account so that the TDS refund can be credited to your account at the earliest. Alternatively, if your taxable income falls below the threshold taxable limit, you can apply for a low or a Nil TDS Certificate and submit the certificate to your employer. The employer would then deduct TDS at a lower rate or not deduct it at all (if you have availed of a Nil TDS Certificate). The certificate can be applied with the Income Tax Officer of your jurisdiction in Form 13 as specified under Section 197 of the Income Tax Act. When you are eligible for TDS refund on your fixed deposit interest earnings If your income is below the taxable limit, you should submit Form 15G to the financial institution with which you maintain the fixed deposit account. The form should be submitted before the completion of the financial year. Once the form is submitted, TDS would not be deducted from your fixed deposit interest income. If, however, TDS is deducted even after the submission of the form, you can claim a TDS refund by filing an income tax return. If you are a senior citizen and want to claim TDS refund on your fixed deposits Section 80 TTB of the Income Tax Act, 1961 allows senior citizens to enjoy a deduction of up to INR 50,000 on the interest income earned from fixed deposit and post office deposit accounts. So, if your taxable income after claiming the deduction is below the threshold limit, you can submit Form 15H to the financial institution where the deposit account is maintained. The financial institution would, then, not deduct any TDS from your deposit interest income. However, if the TDS is deducted, you can claim a refund by filing an income tax return. Claiming a TDS refund online You can claim a refund of your TDS online by registering on the website of the Income Tax Department. After you are registered, download the refund form and fill it by providing the required information. You would have to submit your documents along with the form to verify the details entered. Once the form is submitted to the income tax department, an acknowledgement of the filed return and a number would be issued by the department. This number should be verified either through your digital signature or by generating an OTP on the number which is registered with your Aadhaar card. How to check TDS refund status? Once you submit the TDS refund form, the excess tax amount is refunded within 3 to 6 months depending on the time taken by the income tax department to verify your income tax returns. In the meanwhile, you can check TDS refund status to find out whether the TDS has been refunded or not. The different modes to check income tax TDS refund status are as follows – You can check online TDS refund status through the e-filing website of the income tax department. Visit https://www.incometaxindiaefiling.gov.in/home and log into your online account. Under 'My Account', you would find the option of 'Refund/Demand Status.' Click on the option, provide your PAN Card number and check online TDS refund status for the chosen assessment year The Government also sends you an email on your registered email ID stating the TDS refund status. You can, therefore, access your email for TDS refund status check. You can even call the helpline number of the Central Processing Centre of the income tax department at Bangalore for checking your TDS refund status. The number is 1800 4250 0025 Usually, the TDS refund is credited at the earliest. In case of a delay, however, the income tax department would be liable to pay interest on the delayed amount of refund @ 0.5% for every month (6% per annum) from the first day of April of the assessment year to the date on which the refund is granted as per the rules contained under Section 244A of the Income Tax Act, 1961. TDS is a mandatory deduction from your income but you can claim a refund if your tax liability is lower than the TDS already deducted. So, find out if you are eligible for a refund and file for it at the earliest. If you need some advice, you can always reach out to IndiaNivesh, and our team will help in understanding the applicable taxes as per your income and investments. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
What is Financial Market? A market is defined as a place where goods and services are bought and sold. Along similar lines, a financial market is one where financial products and services are bought and sold regularly. Financial markets deal in the purchase and sale of different types of investments, loans, financial services, etc. The demand and supply of financial instruments determine their price, and the price is, therefore, quite dynamic. Financial markets form a bridge between investors and borrowers. It brings together individuals and entities that have surplus funds and those who are in a deficit of funds so that funds can be transferred between them. This transfer of funds is done through different types of financial instruments that operate in the financial markets. Structure of the Indian financial market The Indian financial market is divided into two main types – the money market and capital market. The capital market is further sub-divided into different types of financial markets. Let's understand – Let’s understand each type of financial market in details – Money market The money market is a marketplace for short-term borrowing and lending. Securities that have a maturity period of less than a year are traded on money markets. The assets traded in money markets are usually risk-free and are very liquid. Since the maturity period is low, the risk of volatility is low, and the returns are also low. Money market instruments are debt oriented instruments with fixed returns. Some common examples of money market instruments include Treasury Bills, Certificates of Deposits, Commercial Papers, etc. Capital market Contrary to the money market is the capital market, which deals in long-term securities. Securities whose maturity period is more than a year are traded on the capital market. Capital market trades in both debt and equity-oriented securities. Individuals, companies, financial institutions, NRIs, foreign institutional investors, etc. are participants of the capital market. The capital market is divided into two sub-categories which are as follows – Primary market Also called the New Issue Market, the primary market is that part of the capital market, which is engaged in the issuance of new securities. The newly issued securities are then purchased from the issuer of such securities directly. For instance, if a company offers an IPO (Initial Public Offering) and sells its shares to the public, it forms a part of the primary capital market. Investors directly buy the shares from the company, and no middlemen are involved. Similarly, if an already listed company issues more shares, called Follow-on Public Offerings (FPO), such shares can be bought by investors directly from the company. Secondary market The secondary capital market is where the securities bought in the primary capital market are traded between buyers and sellers. Stock trading is a very common example of a secondary capital market wherein investors sell their owned stocks to interested buyers for a profit. A secondary market is characterised by an intermediary and the trading of securities takes place with the help of such intermediary. While securities in the primary market can be traded only once, securities in the secondary market can be traded any number of times. The stock exchange is a part of the secondary market wherein you can trade in stocks of different companies that have already been offered by the company at an earlier date. Other types of financial markets Besides the above-mentioned types of financial markets, there are other types of financial markets operating in India. These include the following – Commodity market This market deals in the trading of a commodity like gold, silver, metals, grains, pulses, oil, etc. Derivatives market Derivative markets are those where futures and options are traded. Foreign exchange market Under a foreign exchange market, currencies of different countries are traded. This is the most liquid financial market since currencies can be easily sold and bought. The rate fluctuations of currencies make them favourable for traders who look to book profits by buying at a lower rate and selling at a higher one. Bond market Bond market deals in trading of Government and corporate bonds, which are offered by Governments and companies to raise capital. Bonds are debt instruments that have a fixed rate of return. Moreover, bonds also have a specific tenure, and the bond market is, thus, not very liquid. Banking market The banking market consists of banks and non-banking financial companies which provide banking services to individuals like the collection of deposits, the opening of bank accounts, offering loans, etc. Financial market and services The services offered by financial markets today are as follows – They provide a platform for buyers and sellers to trade on financial products The financial market determines the price of financial instruments traded on it. This price is based on the demand and supply mechanism of the instrument and can move up and down frequently The market provides liquidity to investors when they need to sell off their investments for funds The market provides funds to borrowers when they need financial assistance The Indian financial market is influential in the economic growth of India as a whole The financial market helps in mobilization of funds from investors to borrowers Thus, the financial market and its services are varied, and that makes the financial market an important component of the Indian economy. Regulators of financial markets Financial markets and services offered by them should be regulated so that the participants of the market follow the laws of trading. As such, there are different regulators of the market that ensure that all participants trade fairly. These regulators are as follows – Reserve Bank of India RBI is the regulator for banks and non-banking financial companies. It is the central bank of India entrusted with the formulation of monetary policies, credit policies, and foreign exchange policies, among others. Banks and financial institutions have to abide by RBI's rules and regulations to work in the financial market. Securities and Exchange Board of India SEBI is the primary regulator of the capital market, which consists of both the primary as well as the secondary capital market. Trading done in the capital market is governed under SEBI's rules and laws. Insurance Regulatory and Development Authority IRDA governs the rules and regulations which are to be followed by insurance companies and their intermediaries. Thus, IRDA is a regulator of the insurance market, both life, and general insurance market. Financial markets today have evolved and have become quite competitive with the participation of multiple players. They directly play a part in the growth of India's economy and allows investors and borrowers to trade in financial products and services in an easy and smooth manner. To take advantage of the Financial markets and varied investing opportunities, consider the team at IndiaNivesh, which is well-versed with types of markets and regulatory bodies. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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