What is cost of improvement?
Cost of improvement is capital expenditure incurred by an assessee in making any additions/improvement to the capital asset. It also includes any expenditure incurred to protect or complete the title to the capital assets or to cure such title. To put it differently, any expenditure incurred to increase the value of the capital asset is treated as cost of improvement. Special provisions under the Income-tax Act in respect of cost of improvement should be noted as under:
- Expenditure incurred before April 1, 1981 not considered - Any cost of improvement incurred before April 1, 1981 is not taken into consideration for calculating capital gain chargeable to tax. This rule does not have any exception. In other words, cost of improvement includes only expenditure on improvement incurred on or after April 1, 1981. Expenditure incurred on improvement of a capital asset before April 1, 1981 is always taken as equal to zero.
- Double deduction not permitted - Cost of improvement does not include any expenditure which is deductible in computing the income chargeable under the heads “Interest on securities”, “Income from house property”, “Profits and gains of business or profession” and “Income from other sources”.
COST OF IMPROVEMENT IN DIFFERENT SITUATIONS - Keeping in view the above provisions, cost of improvement shall be determined in the different situations as follows:
|Different Situations||When the capital asset was acquired by gift, will, etc., under the provisions of section 49(1)||In any other case|
|Cost of improvement in relation to good-will of a business or a right to manufacture, produce or process any article/thing or right to carry on any business|
|Cost of improvement in relation to any other asset acquired|
|Cost of improvement incurred by the assessee and the previous owner (ignoring the expenditure incurred before April 1, 1981)||Cost of improvement incurred by the assessee (ignoring the expenditure incurred before April 1, 1981)|
|Cost of improvement incurred by the assessee and the previous owner||Cost of improvement incurred by the assessee|
INDEXED COST OF IMPROVEMENT
Indexed cost of improvement is defined as an amount which bears to the cost of improvement, the same proportion as the cost inflation index for the year in which the asset is transferred bears to the cost inflation index for the year in which the improvement to the asset took place.