When selling a residential property in India, understanding what qualifies as a “cost of improvement” can make a big difference to your capital gains tax liability. The title Capital Gains: Claiming Property Improvements Right isn’t just a tax tip, it’s a necessary strategy for anyone looking to legally reduce taxes and avoid surprises from the income tax department.
What is the cost of improvement in capital gain proof?
Not all money spent on a property qualifies as a deductible expense. According to Section 55 of the Income Tax Act, the cost of improvement includes capital expenditure incurred after the acquisition of the property to add value or extend its life. This can include changes like adding a room, replacing old flooring, or major renovations but excludes routine maintenance or minor repairs.
In one case highlighted by the Financial Express, the Income Tax Department used AI to flag fake bills generated using the Calibri font for a year when it didn’t even exist. It’s a reminder that any claims under cost of improvement must be backed by real documentation.
What expenses are deductible from capital gains?
If you’re wondering what expenses are deductible from capital gains, it’s helpful to split them into two categories: what qualifies and what doesn’t. Here’s a breakdown:
| Allowed as Cost of Improvement | Not Allowed |
| Adding new rooms or extensions | Property tax |
| Full home renovation (tiling, wiring, flooring, painting) | Society maintenance charges |
| Replacing roof, plumbing, or electrical upgrades | Fixing a tap or routine maintenance |
| Paying tenants to vacate | Municipal levies and electricity connection fees |
| Legal fees for transfer-related processes | Stamp duty already claimed elsewhere |
| Brokerage or commission for sale | Minor touch-ups |
So if you’re asking how to adjust capital gain against property, the answer lies in planning your improvements well, keeping every bill, and claiming only those that qualify under capital rules.
How to save capital gain tax on sale of residential property
Many people mistakenly include ineligible expenses in their capital gains calculations. For example, society charges or electricity meter installation costs are not part of capital improvements.
Instead, focus on areas that truly enhance the asset. In cases where the house was financed through a home loan, interest paid on the loan (if not already claimed under Section 24) can be capitalized and added to the cost of acquisition. This is especially useful under the new tax regime, where interest on home loans for self-occupied properties is no longer deductible.
For those selling land, there’s a separate set of rules. If you’re looking for a capital gain on sale of land exemption, investing the gains in notified bonds or residential property (under Section 54F) may help.
Section 54 of Income Tax Act and reinvestment options
Under Section 54 of the Income Tax Act, individuals can avoid paying capital gains tax by reinvesting the gains from selling a residential property into another residential property within the specified timeline. This is a key provision used by many to legally reduce tax liability.
For example, someone can claim exemption if they sell a house and use the gains to buy another home within two years, provided they meet all the conditions under the section. Similarly, reinvestment in capital gains bonds under Section 54EC is another common route to exemption.
In Bar & Bench’s post-budget analysis, experts note the increasing digitization and scrutiny around real estate transactions, meaning compliance and record-keeping are now more important than ever.
What is the big loophole in capital gains tax?
Many believe there’s a big loophole in capital gains tax, claiming inflated costs under improvement. But tax authorities are now more equipped than ever to detect inconsistencies. The use of data analytics, cross-verification, and even AI has made it nearly impossible to get away with false claims.
Instead of looking for shortcuts, the smarter move is to understand what capital gains claiming property improvements right in India actually means, and to structure your claims with proper documentation.
Final thoughts
If you’re planning to sell your property, knowing the difference between a qualifying capital improvement and an ineligible expense can save you significant tax. Whether it’s a full-scale renovation or paying tenants to vacate, each valid cost can reduce your taxable capital gain, if done right.
Just remember: Capital Gains: Claiming Property Improvements Right isn’t about finding loopholes, it’s about applying the law as it stands, backed by records, and planned ahead.
