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I plan to sell my 48-year-old house and have obtained a valuation, as of 1 April 2001, for long-term capital gain (LTCG) calculation. Over the years, I’ve spent a significant amount on repairs and renovations, but have no receipts or payment proof. As a result, the valuer hasn’t included these in the property cost. However, while filing income tax return (ITR) after the sale, I want to add and index these major expenses (incurred at three different times), along with the valuation-based cost. Is this permitted under the income tax rules, or should I stick to the valuer’s report? Please advise.
Umesh Kumar Jethani Founder, ApkiReturn: According to the income tax rules, while calculating long-term capital gain on the sale of property, the cost of acquisition can include the original purchase price and cost of improvement, both adjusted for indexation. However, expenses claimed as cost of improvement must be supported by evidence, such as receipts or payment records, for these to be admissible. Since you lack documentation for the renovation expenses, claiming these costs in your income tax return without proof may be risky and lead to disallowance during scrutiny, if your case is picked up by the tax authorities. The valuer’s report, based on fair market value as of 1 April 2001, provides a legitimate basis for the cost of acquisition, but excludes undocumented improvements. You are not legally bound to stick to the valuer’s report; it’s just one of the methods to determine the cost of acquisition as on 1 April 2001. Improvements after this date can be separately indexed and added to the cost base. It is advisable to mention these expenses clearly under ‘cost of improvement’ while filing the ITR, and keep a note explaining the nature, year, and justification for each, in case it’s questioned.
I own an ancestral property worth about Rs 2 crore in my native village. I have held this property for nearly 20 years. I now plan to sell it and purchase two residential properties jointly with my wife in different towns for the same amount. Can I claim capital gains exemption for both the properties that I buy?
Umesh Kumar Jethani Founder, ApkiReturn: Yes, under Section 54 of the Income Tax Act, 1961, you can claim capital gains tax exemption by reinvesting the long-term capital gains from the sale of your ancestral property in residential properties. As per the 2019 amendment, the exemption applies to investment in up to two residential properties if the capital gains do not exceed `2 crore. Since you are purchasing two properties jointly with your wife, you can claim the exemption, provided all other conditions under Section 54 are met. These include reinvestment within two years or construction within three years. If you do not reinvest immediately, the amount must be deposited in the Capital Gains Account Scheme (CGAS). Note that this exemption is applicable once in a lifetime. So, ensure compliance with all the requirements.
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