COST OF IMPROVEMENT-ALL YOU NEED TO KNOW
Cost of improvement is the capital expenditure incurred by an assessee for making any addition or improvement in the capital asset
It also includes any expenditure incurred in protecting or curing the title
Proving cost improvement
You need a civil engineer a certificate stating the cost incurred on the house at the different intervals and based on the same you need to establish the cost incurred for construction
And based on the settlement deed you need to provide for bifurcation of the total cost incurred
Indexing of cost improvement
The formula for computing indexed cost is
(Index for the year of sale/index in the year of acquisition) X Cost
Cost of Improvement without indexation
According to the new reform, all the capital gains that are more than Rs 1 Lakh in amount will be charged at 10% tax rate without any inflation benefit
Can furniture be included in the cost of improvement
Both, CIT (appeals) and the income tax appellate tribunal rejected the contentions of the assessee
On appeal, the Delhi High Court also upheld the disallowance for the deduction of the amount paid for furniture and fixture as the cost of acquisition/improvement
CII cost inflation
Cost inflation index (CII) is used to estimate the increase in the prices of goods and assets year-by-year due to inflation
Things which are not considered as the cost of improvement
1) income from house property
2) profits and gains from business or profession
3) income from other sources (interest on securities)
4) goodwill
5) right to manufacture, produce or process any article or thing
6) right to carry on any business
Mortgage & Interest expenses form part of the cost of acquisition
Where assessee purchased a property and on the same day mortgage it to raise a loan to pay part consideration of property, mortgage expenses incurred in connection with the acquisition of the property, and the interest payable on the mortgage amounts, which had been utilized as a part of the consideration, would form part of COA of the property for the purpose of computation of capital gains
[CITV K Raja Gopala Rao 252 ITR 459 (MAD) (2001) ]
Compensation paid for eviction
Compensation paid for eviction of hutment dwellers from land which is sold would be allowable as cost of improvement
[CIT V Miss Piroja C Patel 242 ITR 582 (BOM) (2000) ]
Cost of improvement
Any cost of improvement before 01/04/2001 shall be ignored
Property taxes, repairs and maintenance expenses, or any estate duty paid in case of inherited property can not be considered as the cost of improvement
HVAC cost
HVAC cost means the costs in the fiscal year for the operation, repair, and maintenance of the systems for heating, ventilating, and air conditioning of the building
Can HVAC cost be considered as the cost of improvement?
Where the HVAC costs incurred as part of the conversion of an existing building space into a new or different use
If so, the HVAC costs can be considered as the cost of improvement and can be capitalized
For example
If the amount was paid to convert an office building into a restaurant, the entire amount, including HVAC cost can be considered as cost of improvement
Meaning of Renovation
Renovation typically refers to restoring something to a good condition or state of repair
Meaning of Refurbishment
Refurbishment implies the process of improvement by cleaning, equipping, or decorating
Are refurbishment costs tax-deductible?
Repairs and maintenance costs come under expenses in the accounts, and a full corporation tax deduction can be obtained
This will cover general decoration and any repairs to existing assets – but not the cost of replacing items such as furniture
Can Carpet replacement be considered as the cost of improvement
Under the new 2018 tax rule, carpeting is eligible for the 100% bonus depreciation rule that allows it to be deducted in one year
If the carpeting is in a room used 100% for your business, it can be considered as the cost of improvement
Qualified improvement property
Qualified improvement property is an improvement made by the taxpayer to an interior portion of a nonresidential building if the improvement is placed in service after the building was first placed in service
New additions to your home are the most obvious capital improvements
Adding a new bedroom, bathroom, garage, porch or even a satellite dish to your home are all valid improvements, according to IRS publication 523
claiming of Cost of renovations on rental property as the cost of improvement
No
You cannot claim allowances for the time you spend on DIY jobs on your property
But you can claim for other expenses, such as the material used, if you pay for them yourself
Conditions to satisfy the cost of improvement
1) it substantially adds to the value of the real property or appreciably prolongs the useful life of the real property
2) it becomes part of the real property or is permanently affixed to the real property so that removal would cause material damage to the property or article itself
3) it is intended to become a permanent installation
For example
building a deck, installing a hot water heater, or installing kitchen cabinets are all capital improvement projects
Repairing broken steps, replacing a thermostat on a hot water heater or painting existing cabinets are all examples of taxable repair and maintenance work
Leasehold improvements
Additions and alterations to real property made by or for a tenant, rather than the owner of the property, may be considered to be temporary in nature, rather than permanent
So such type of work done by the tenant can not be considered as the cost of improvement
Proof of cost improvement
You need a civil engineer certificate stating the cost incurred on the house at the different intervals and based on the same you need to establish the cost incurred for construction
And based on the settlement deed you need to provide for bifurcation of the total cost incurred
You need to have the records showing the cost of acquisition and cost of improvement
Determining the cost of improvement in case of sale of old or inherited land/building in the absence of any material ie evidence or documents
The disallowance of the cost of the improvement is directed to be fixed at 45% of the cost claimed, ie the assessee is eligible for 55% of the improvement cost claimed
This will take care of defects pointed out by AO including the opening cash in hand
In the absence of documentary evidence, the court and the tribunal are allowing the same on the basis of probability theory and on reasonable certainty
Can Stamp duty be considered as the cost of acquisition
Yes
Stamp duty and registration charges shall form part of the cost of acquisition
Cost inflation index
The cost inflation index (CII) means to measure inflation, which is used in the computation of long-term capital gains concerning the sale of assets
Cost inflation takes into account the consumer price index (CPI) for a given year for urban non-manual employees for a preceding year
Compiled by
Avinash Kulkarni
Chartered Engineer, Govt Regd Valuer, IBBI Regd Valuer