At the time of calculating capital gains, expenses incurred towards renovation or cost of improvements is allowed to be deducted from the sale price. These renovation expenses which are deductible are incurred by a taxpayer, in making additions or improvements to the capital asset. For example, when you add another room to your existing house property – these are the renovation expenses you can claim as a deduction. These expenses usually increase the value of the capital asset.
This deduction for improvements is allowed both at the time of calculating short term and long term capital gains. In case of long term capital gains, where asset has been held for more than 36 months – renovation expenses can be indexed by applying the cost inflation index or CII. This can be calculated by applying the CII (Cost Inflation index) of the year in which the asset is transferred and dividing it by the CII of the year in which the renovation is done.
Indexed cost of renovation = Cost of renovation X CII of the year in which asset is sold/CII of the year of renovation
Do note however, the renovation cost should not include any expenses which are deductible in calculating income from other heads such as Profits & Gains of Business & Profession, Income from other sources or income from house property.
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