Cost of Improvement

Cost of improvement is capital expenditure incurred by an assesses 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
when these assets are self-generated	NIL	NIL
when these assets are purchased and later on transferred	NIL	NIL
Cost of improvement in relation to any other asset acquired
before April 1, 1981	Cost of improvement incurred by the assesses and the previous owner (ignoring the expenditure incurred before April 1, 1981)	Cost of improvement incurred  by the assesses (ignoring the expenditure incurred before April 1, 1981)
on or after April 1, 1981	Cost of improvement incurred by the assesses and the previous owner	Cost of improvement incurred by the assesses

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.

This Article has been written by CMA Samir Biswal. He can be reached at cmasamirbiswal@gmail.com

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