Eligible Improvement Expenses for Calculating Long-Term Capital Gains on Residential Property in India (Long-term capital gains on residential property)
When a residential property in India is sold after being held for more than 24 months, the profit from the sale is treated as long-term capital gains (LTCG). To determine the taxable gain, the Income Tax Act, 1961 allows deductions for specific costs—such as the purchase price, capital improvements, and expenses directly related to the sale.
These deductions are outlined under Section 48 and Section 55 of the Act. However, it’s important to clearly understand what qualifies as a cost of improvement, since not all expenditures are eligible. This guide provides a structured overview of deductible and non-deductible expenses, backed by relevant legal provisions and practical examples.
Capital Gains Rules – Sections 48 and 55 of the Income Tax Act (Long-term capital gains on residential property)
The Income Tax Act lays out the process for calculating capital gains through two key provisions:
Section 48
This section governs how capital gains are computed and allows the deduction of:
Expenses incurred wholly and exclusively in connection with the transfer of the property
The indexed cost of acquisition and the indexed cost of improvement (for eligible taxpayers)
Section 55
This section defines the cost of improvement as capital expenditure incurred on additions or alterations made to the property after acquisition, or after 1st April 2001 for properties bought earlier.
Routine repairs, regular maintenance, or expenses already claimed under other tax heads (like “Income from House Property”) are not allowed as improvements.
Indexation
Indexation adjusts the cost of acquisition and improvement for inflation using the Cost Inflation Index (CII), helping to reduce taxable gains.
Recent Update for NRIs
Effective 23rd July 2024, non-resident individuals are no longer eligible for indexation benefits on the sale of immovable property in India. This amendment has a direct impact on how long-term capital gains are calculated for NRIs and should be carefully considered when planning a property sale.
What Counts as Allowable Cost of Improvement for Capital Gains? (Long-term capital gains on residential property)
When selling a residential property in India, certain costs can be deducted to reduce your long-term capital gains. Here’s a breakdown of what’s allowed:
1. Brokerage or Commission on Sale
Allowed as a transfer-related expense under Section 48.
If you paid a broker or agent to help sell the property, that amount can be deducted.
It must be directly related to the sale.
📝 Note: Brokerage paid when you bought the property is not an improvement. It becomes part of your purchase cost instead.
2. Major Renovations or Structural Changes
Allowed under Section 55 as cost of improvement.
These are upgrades that increase the property’s value or extend its life, such as:
Adding a new room or floor
Remodeling bathrooms or the kitchen
Upgrading plumbing or electrical systems
Installing premium flooring or tiles
🔔 For NRIs: These costs can still be claimed, but indexation (adjusting for inflation) won’t apply if the property is sold on or after 23rd July 2024.
3. Painting and Minor Repairs – Only If Significant
Usually not allowed if it’s just regular maintenance.
Basic tasks like whitewashing or minor tile fixes don’t qualify.
However, if painting and repairs are part of a larger renovation or make the property livable, they might be accepted.
4. Compensation Paid to Remove Tenants or Occupants
Allowed either as improvement cost or transfer-related expense.
If you pay tenants or unauthorised occupants to vacate the property before sale, the amount is deductible.
This makes the property easier to sell and can raise its value.
📌 Keep proper records: written agreements, payment proofs, and receipts are important.
5. Legal and Transfer Costs at the Time of Sale
Allowed under Section 48 as sale-related expenses.
You can deduct:
Legal fees for drafting sale documents
Advertising costs to promote the sale
Charges paid to the housing society for property transfer
📝 Note: Similar costs paid during purchase go into the purchase cost, not as an improvement.
What Expenses Are Not Allowed as Cost of Improvement?
Not every cost related to your property can be claimed to reduce your capital gains. Here’s a list of common expenses that do not qualify:
1. Regular Maintenance and Society Charges
Not Allowed
Monthly maintenance fees, society charges, and general upkeep costs are considered routine expenses.
These do not add lasting value to the property and are not accepted as capital improvements under tax rules.
2. Property Taxes and Utility Levies
Not Allowed
Payments like property tax, water tax, and electricity infrastructure fees are compulsory dues, not improvements.
Even if you’ve paid them regularly, they don’t enhance the property’s value and cannot be claimed.
💡 Note: If you’ve already claimed these under “Income from House Property,” they can’t be claimed again during capital gains calculation.
3. Furniture and Household Appliances
Not Allowed
Items like sofas, beds, modular kitchens, air conditioners, TVs, and refrigerators are considered personal belongings.
Since they are not permanently attached to the property, they do not qualify as part of its improvement.
📌 Example: In Komal Sangatani v. ITO, expenses on movable items like fridges and TVs were disallowed.
✔️ Only fixtures that are permanently fixed to the property may be considered.
4. Interest on Home Loan
Not Allowed
The interest paid on a housing loan is a financing cost, not an improvement.
Even if you didn’t claim it under other sections, it cannot be added to the cost of improvement.
5. Loan or Mortgage Repayment
Not Allowed
Paying off a loan or mortgage is your personal financial responsibility.
It does not change or upgrade the property, so it cannot be claimed as an expense.
6. Transfer Fees and Betterment Charges
Partially Allowed — Depends on Purpose
Transfer fees paid to a housing society at the time of sale may be allowed as sale-related expenses.
Betterment charges paid to local authorities may be allowed only if they directly increase the property’s value.
In most cases, these are seen as part of ownership responsibilities and not improvements.
Conclusion
When selling a residential property in India, it’s important to know which costs can be claimed as part of long-term capital gains. Only those expenses that actually improve the property or increase its lifespan are allowed — and you must have proper proof for each.
If you’re a non-resident, be aware that from 23rd July 2024, you can no longer claim indexation benefits on property sales. Because of this change, it’s even more important to carefully check and claim only those improvement costs that are clearly allowed and backed by documents. For any queries, contact us!
Disclaimer: The content on this website is for informational purposes only and does not constitute legal, financial, or professional advice. Please consult qualified experts before acting on any information. K M GATECHA & CO LLP accepts no liability for errors, omissions, or outcomes from the use of this content. This site is not an advertisement or solicitation.
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FAQs
1. What are 'improvement expenses' in the context of long-term capital gains (LTCG)?
Improvement expenses refer to capital expenditures incurred to enhance the value of the residential property after acquisition. These are allowed as deductions when calculating LTCG. (Long-term capital gains on residential property)
2. Are renovation costs considered valid improvement expenses?
Yes. Major renovations like modular kitchen installation, flooring upgrades, bathroom remodeling, or adding new rooms qualify as improvement expenses. Routine repairs or maintenance do not qualify.
3. Is painting or whitewashing treated as an improvement expense?
No. Routine maintenance such as painting, whitewashing, or minor repairs are considered revenue expenses, not capital improvements, and hence not allowed for LTCG deductions.
4. Can expenses on interior décor and furnishings be claimed?
Only if the additions are permanent and increase the property’s value (e.g., built-in wardrobes, false ceiling with lighting, etc.). Movable furnishings like curtains or sofas are not eligible. (Long-term capital gains on residential property)
5. Is the cost of constructing an additional floor or extension deductible?
Yes. Constructing a new floor, extending rooms, or building a boundary wall or garage is treated as a capital improvement expense, and can be deducted when computing LTCG. (Long-term capital gains on residential property)
6. What documents are required to claim improvement expenses?
To claim deductions, keep invoices, contractor bills, bank statements, architectural plans, and completion certificates. Ensure the date of expense is post-acquisition of the property. (Long-term capital gains on residential property)
7. Is indexation benefit available on improvement expenses?
Yes. Improvement expenses are eligible for indexation based on the year of improvement, not the acquisition year. This increases the cost base and reduces LTCG. (Long-term capital gains on residential property)
8. Can digital payment records be used as proof of improvement expenses?
Yes. Digital transactions, UPI, NEFT, or credit card payments with supporting invoices are acceptable proofs. Cash payments without bills are usually not accepted by the tax department. (Long-term capital gains on residential property)
9. What if I improve the property but don’t have bills?
In the absence of valid proof, the Income Tax Department may disallow the expense. Always collect and preserve documentation related to capital improvements. (Long-term capital gains on residential property)
