So while we rejoice about inflation having come down and all that, the income tax department quietly issues a notification that the inflation it allows you to “index” your investments by gives us a 10.21% inflation for the last year. The Cost Inflation Index (CII) is used for long term capital gains calculations, and a number is released every year, which indicates inflation for the last year.
(Read: How to calculate long term capital gains tax)
I plotted the average change in the Wholesale Price Index (WPI) per year and change in the Cost Inflation Index (CII) since 1983. The notified CII for 2013-14 is actually the inflation for 2012-13, so I had to offset it one year back.
The CII change has diverged from the WPI change – where the WPI tells us inflation has come down, CII tells us costs have gone up!
The last time this happened was in 2009-10, when the CII showed a 12.5% increase in costs while the WPI average moved only 3.81%!
The Income tax department is part of the ministry of finance, which at one end has the Finance Minister Mr. Chidambaram talking about inflation coming down, while the tax department admits that the last year was the second worst year in the last decade in terms of rising costs.
The CII index has risen by more than 10% only in five years. Three of them have been in the last four years.
