Introduction

In an economy, with time, the value of money keeps decreasing, which leads to a notional increase in the cost/prices of all the commodities in that economy. The increase in price decreases the purchasing power of a person. In other words, with one unit of money, a person will be able to buy less and less of a commodity with time. This decline in the power of money, which ultimately increases the cost of living, is known as inflation. For instance, let’s suppose Ramesh was able to buy 10 mangoes with Rs. 100 in the year 2000; however, in 2020, he could only buy 2 mangoes with the same amount of money. This reduction in the power of Rs 100 to buy the same number of mangoes over time is due to inflation.

In case of long-term capital assets, it is very important to take into account the effects of inflation while calculating the capital gains tax under the Income Tax Act. Inflation not only increases the selling price of a capital asset but also makes the capital gains look large thus accounting for a large tax. This article intends to guide the readers about the impacts of inflation on long-term capital assets and how Cost Inflation Index saves the taxpayers from a huge capital gains tax. It also answers questions like: How to calculate capital gains with Cost Inflation Index? And How can one benefit from Cost Inflation Index from while calculating long-term capital gain tax on sale of property in India?