From kitchen makeovers to balcony extensions: How home renovations can reduce capital gains tax for property sellers

When calculating her capital gains tax, she included these expenses to her cost of acquisition as ‘cost of improvement.’ She kept detailed, itemised GST-compliant invoices and made all payments via bank transfer. The Income Tax Department flagged her return for review due to the sizable deduction, but the claim was accepted in full. Neha’s case shows that well-documented, value-enhancing renovations can successfully reduce capital gains tax even under scrutiny.

Capital upgrades, not routine repairs

For the purposes of computing capital gains taxes, home renovation expenses or expenses of capital nature shall be regarded as cost of improvement of the asset and can be added to cost of acquisition. Such renovation expenses may include expenses relating to structural additions, alterations, and upgrades, further constructions and fixtures that increase the value of the asset. Such expenses should not be in the nature of routine repair, maintenance or cleaning.

In essence, only capital expenditure improving or adding to the property’s value can be added to the cost of acquisition/improvement as eligible expenses.

“Routine maintenance, repairs, whitewashing, painting (unless as part of a major renovation), property tax, utility bills, and expenses claimed under other tax heads are not eligible for offsetting capital gains,” says Alay Razvi, managing partner, Accord Juris, a law firm.

Generally, the current owner cannot claim renovation expenses incurred by the previous owner as the same would already be claimed as cost of improvement while computing capital gains taxes for the previous owner.

“However, in case of inherited property, where the cost of acquisition of the previous owner is deemed to be the cost of acquisition of the current owner, then any renovation expenses incurred by the previous owner can be claimed as cost of improvement by the current owner, says SR Patnaik, Partner (head – taxation), Cyril Amarchand Mangaldas, a law firm.

GST bills must be clear

Since ‘renovation’ is deemed as ‘construction’ under GST, vague or generic invoice descriptions can lead to denial of eligible credit. “Composite invoices should be avoided, as they hinder segregation of eligible items. Clear, itemized documentation is crucial to substantiate ITC claims during GST assessments,” says Karan Sarawagi, Advocate, Bombay High court.

GST Invoices with details may be helpful in proving the authenticity of capital nature of expenses helps identify and justify costs. “Date of purchase justifying the indexation claim when it was purchased and proper documentation avoids disallowances of claims,” says Jain.

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Further, obtain municipal permissions, completion certificates. Take before-and-after photos if possible. “Avoid claiming personal/lifestyle expenses as property improvement. Keep all banking/payment records,” says Razvi.

Big claims draw scrutiny

There may be a likelihood of tax scrutiny if the renovation expenses are very high without any proportionate improvement of property and there are no adequate invoices or documentation to show such expenses.

“Claiming renovation expenses, especially large or unusual ones, can increase the likelihood of tax scrutiny, particularly when used to reduce capital gains on property sales. However, with proper documentation and strategy, taxpayers can safeguard themselves effectively,” says Vivek Jalan, Partner Tax Connect Advisory Services, a professional services firm.

Anagh Pal is a personal finance expert who writes on real estate, tax, insurance, mutual funds and other topics