Capital gains arise when you sell capital asset for an amount that is more than what you paid for it. Capital assets are any investment products like mutual funds, stocks or any real estate product like land, house etc. An increase in the value of any of these when you sell them is termed as capital gain. Similarly, a capital loss is suffered in case there is a decrease in the value of an asset with respect to its purchase price.
How to Calculate Capital Gains Tax using CII
CII or Cost Inflation Index is used in the computation of long-term capital gains tax. The CII is notified through a notification issued by the Income Tax Department each financial year. The CII for the financial year 2016-16 is 1125. Individuals who are calculating their capital gains will have to use the CII in order to ascertain the indexed cost of acquisition, which is to be deducted from the full value in consideration.
Thus, the CII is applied to the cost of acquisition, following which the figure becomes the indexed cost of acquisition. Following this, the formula for computation of long-term or short-term capital gains is calculated.
When calculating the capital gains from the transfer of a long-term capital gains asset, a deduction can be claimed by indexing the cost of acquisition and the cost of improvement.