If you are selling a house this financial year, you will pay less as capital gains than you would have had if you sold it last year.

This is because the Central Board of Direct Taxes CBDT has specified a new value for the cost inflation index for 2010-11. This benefit of indexation applies to residential properties held for more than 36 months.

The cost inflation index last year was 632, this year it is 711. There has been a larger increase in the index this year, primarily because consumer prices have risen faster. A higher index leads to a lower capital gains tax and the indexation benefit is given because the Government wants to neutralise inflation.

Simply put, the cost inflation index adjustment helps reduce the inflationary gains, thereby reducing the long-term capital gains tax payout for the taxpayer.

The indexation benefit specified for 2010-11 by the CBDT will also hold good for other investment assets, say tax experts. “Cost inflation index prescribed this year is a larger increase when compared to previous year. A higher index is beneficial to the taxpayer. It helps in more realistic determination of cost of acquisition of the asset. Cost inflation index is prescribed to negate the adverse impact of inflation,” Mr Vikas Vasal, Executive Director, KPMG, told Business Line.

Mr Prashant Khatore, Tax Partner, Ernst & Young, said that there has been a 12.5 per cent rise in the cost inflation index for financial year 2010-11.

“This is on account of rising inflation. Cost inflation index is based on the average rise in consumer price index for urban non-manual employees for the immediately preceding year. Perhaps the rise may be seen in the next year also on account of continuing inflationary condition,” he said.

The Government is looking to replace the current income tax law with a new direct taxes code from April 1 next year. The concept of indexation has been preserved in the proposed direct taxes code, Mr Vasal noted.

Currently, the holding period is different for different assets for deciding the applicability of long-term capital gains. Under the proposed code, the test for non-business assets will be a uniform holding period of one year.

Once the new direct taxes code comes into effect, you can apply cost inflation index if you own a house for more than one year. Now, it is three years for residential properties.