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 …

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Budget 2013 has plugged a loophole in the tax system. Consider a small company that wanted to pay its management a bonus based on a large profit it had received.The company can deduct the amount paid, as an expense (so it’s taxes are lower). The individual would have that much money as an income, on [...]

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