Property sale: what counts as the cost of improvement

Structural changes, major renovations can be deducted from capital gains on property sales

- Anil Poste

When you sell a residential property, the profit earned—known as capital gains—is taxable. However, this tax can be significantly reduced by claiming allowable deductions such as the cost of improvement. While this term is widely used, not every property-related expense qualifies, tax experts caution.

This Mint story outlines which costs qualify as improvements, with references to legal provisions as well as real-world examples.

What is cost of improvement?

Vijaykumar Puri, partner at VPRP & Co. LLP, Chartered Accountants, said: "Cost of improvement is defined under Section 55 of income tax law. It refers to costs of a capital nature related to additions or alterations to assets. Not all expenses qualify as capital expenses."

Capital expenses are essentially those that significantly enhance the value or extend the life of the property.

For instance, structural changes like converting a 3BHK into a 2BHK unit to expand the hall area, or major renovation work like flooring, tiling or painting as part of a refurbishment project qualify, said Puri. Regular maintenance like fixing a tap or paying property tax do not. "Key distinction is between capital expenses and routine expenses. Routine expenses like maintenance or statutory fees are not considered when calculating the cost of improvement."

Keep proof ready

Note that even valid expenses can be disallowed without proof. "To claim expenses, you must have proper documentation and bills," said Puri, recalling a case: "A taxpayer submitted bills using the Calibri font for expenses claimed before 2007—the year Calibri was introduced. AI technology quickly picked up on this discrepancy."

His warning is clear: "Trying to forge documents or be 'over-smart' with tax claims is no longer a viable strategy."

What does the law say?