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Knowing the Cost Inflation Index, now let us proceed to the steps to be followed for the computation of long-term capital gains. The first step is to see whether the asset has been acquired prior to 1-4-1981 or later by the assessee. If an asset has been acquired, whether by purchase or by gift or otherwise, prior to 1-4-1981, then the cost of acquisition can be substituted at the option of the assessee by the market value of the asset as on 1-4-1981 so that the taxpayer is not required to pay any income tax on the gains, having been made by him from the date of acquisition till 31-3-1981 due to inflation. Where the capital asset is acquired after 1-4-1981, then its cost of acquisition in the relevant financial year is to be considered. This cost has to be then substituted by the ?Indexed Cost of Acquisition?. The formula for calculating the ?Indexed Cost of Acquisition? can be laid down as under?
447
Indexed Cost of Acquisition = Market value as on 1-4-81 x 100
Where, 351 is the cost inflation index in F.Y. 2000-2001. The above formula would be useful for capital assets acquired prior to 1-4-1981 and sold during the financial year 2002-2003 relevant to the assessment year 2003-2004.
Where, however, a long-term capital asset is acquired after 1-4-1981, then the formula for calculating the ?Indexed Cost of Acquisition? would be as under?
Indexed Cost Inflation Index of F.Y.
Indexed Cost 2002-2003
of Acquisition =
Acquisition Value x ------------------------------------
Cost Inflation Index of the year of
Acquisition after 1981-82
Thus, the higher the acquisition of the capital asset, the lesser is the taxable amount of long-term capital gains, due to the higher Indexed Cost of Acquisition. The application of the indexation formula by Cost Inflation Index for calculating the long-term capital gain is explained by means of a few examples given below. |
