Realization of profits from property sale after a holding period of over three years attracts long term capital gains tax (LTCG) which is taxed @ 20%. You can also invest in LTCG Bonds to avoid payment of tax.Know about other ways to avoid capital gains tax.
So, among other provisions renovation cost i.e. the cost of improvement of a property is allowed to be deducted from sale proceeds during the computation of capital gains (LTCG) other than cost of acquisition of the property and cost of transfer of the property.
Further in the case, when the held property is disposed off after a period of 3 years, for computing the applicable LTCG, renovation cost can be claimed by accounting for indexation.
Indexed cost of improvement or renovation cost is computed as though:
(Actual cost of improvement incurred * Cost Inflation Index or CII of the year in which the property is to be sold)/ CII of the year in which cost in lieu of renovation was incurred.
Proofs required to claim the deduction
In case of expenditure for renovation from one's own pocket, expense bills or invoices can be maintained and likewise produced as proof or evidence in support of effecting renovation and its associated cost.
In the other case, when bank loan has been taken to finance renovation of the property, interest certificate is required. Note: Tax deduction on interest amount paid on this loan can be claimed to a maximum of Rs. 30,000 in a financial year if the property is occupied by self else in case the property has been let out full interest can be claimed for deduction.