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For a rented house, 30% deduction is allowed from rental income for repairs

If the repairs go beyond those for normal wear and tear for a self-occupied house, the expense is treated as 'cost of improvement' and reduces the taxable capital gains from sale of that property

We are planning to renovate our house. Please let us know if it is possible to claim expenses under any category.

—Brijendra Dwivedi

Generally, if the renovation is in the nature of repairs or maintenance, no specific deduction is allowed. If your property is rented, then a flat 30% deduction is allowed from the rental income each year for such repairs, irrespective of expenditure incurred.

However, if such renovation can be treated as capital in nature (i.e., renovation are not repair for normal wear and tear), any such renovation costs incurred by you in respect of your self-occupied house could be treated as a ‘cost of improvement’ and would then reduce the taxable capital gains arising at the sale of this property. If the house has been owned by you for more than 24 months, it is treated as a long-term capital asset and the indexed cost of the renovation can then be reduced from taxable capital gains. Indexation refers to using the Cost Inflation index (CII) notified by the tax authority in the years of renovation and sale, to determine the impact of inflation on the cost of renovation. It is suggested that you retain proof of incurring the renovation costs (such as invoices and bills), should you wish to claim this tax deduction. In case you take a loan to fund the renovation of your house, you can claim a deduction in respect of the interest paid on such a loan under section 24(b) of the Income-tax Act, 1961. For self-occupied property, this deduction is capped at actual interest costs or Rs30,000 per annum, whichever is lower. 

I had sold some non-agriculture land on 28 August 2015. The entire amount was deposited in Capital Gains Account Scheme (CGAS). On 12 August 2017, I signed an Agreement to Sale for purchasing a flat.

The registration got executed on 18 October 2017. Partial amount (the money in CGAS) was used to pay the seller on 18 September 2017. I want to know about the taxation (LTCG) status for this entire process. Will there be any LTCG tax applicable?

—Sachin Jain

It is assumed that the sale of the non-agricultural land in August 2015 resulted in a long-term capital gain (LTCG). 

The LTCG can be claimed exempt, under section 54F of the Act, if the net sale proceeds are re-invested to buy or construct a residential house in India (called ‘new asset’ for ease of reference). Where the new asset is bought, you are required to re-invest the moneys in the CGAS within 2 years from the date you sold the land, to claim the tax exemption from capital gains. You can also claim the exemption if the new asset is constructed by you within 3 years of the date you sold the land. 

Although you have signed the agreement to purchase the flat within 2 years from the sale of the land, partial payment to purchase the flat was made only after the timeline prescribed under the law to claim the tax exemption. Based on various judicial precedents, a view emerges that the date of acquisition of the property is when you assumed rights as an owner demonstrated by the time when majority payments made, possession taken, or other actions. As only an agreement to sell was entered into before 27 August 2017, it may be contended that the new asset was purchased by you only after 2 years from sale of the land. Hence, the LTCG not previously offered to tax in the tax year 2015-16 (the year you sold the land on account of investment in CAGS), is treated as taxable in the third year after the date the land was sold. In case you re-invest the capital gains from the land in the construction of a residential house within the 3-year time period prescribed, you may still be eligible to claim the tax exemption. 

My wife wants to gift me Rs2 lakh. Can I be considered as specified relative and get gift tax exemption?

—Prithwis Kumar Goswami

Gift tax is no longer applicable in India. However, income tax may be payable in respect of amounts received as a gift.

However, money gifted to you by your wife is not liable to income taxes in your hands, since any gift received by an individual from his or her spouse is not treated as taxable, as per the income tax laws. It would be advisable for you to document the gift in a legal document such as a gift deed and place it in your records. 

However, where the money is invested by you and an income is generated from such investment, the income that so arises shall be clubbed with the income of your spouse. However, if you reinvest the income earned which earns further income, then such additional income need not be clubbed with her taxable income.

Parizad Sirwalla is partner (tax), KPMG.

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