ITAT Bengaluru allows builder payments, permanent renovations as capital costs for NRIs. Here’s what you need to know

ITAT Bengaluru ruling clarifies that NRI capital gains computation, especially onbuilder payments and renovation costs can be treated as capital expenses

Rajiv Mehta, an NRI living abroad, owns a flat in India that he plans to sell in the future. The apartment was bought in an unfinished condition, requiring additional payments to the builder over time to complete the unit. A few years later, Mehta also incurred renovation expenses to make the flat fully liveable.

Income Tax Appellate Tribunal Bengaluru ruling clarifies NRI capital gains, allowing builder-related payments and renovation costs to be included in computation. (Representational Image) (Pixabay)

Keeping future tax scrutiny in mind, he ensured that all builder payment statements, possession letters, emails, and receipts were preserved. Renovation costs were carefully recorded, with only permanent works, such as flooring, electrical wiring, plumbing, and built-in storage, treated as capital improvements. Expenses for movable items, such as air conditioners and furniture, were kept separate and not included in capital cost calculations.

By maintaining a clear breakdown of acquisition and improvement costs with supporting documents, Rajiv positioned himself for a smoother capital gains assessment, reducing the risk of disputes when the property is eventually sold.

For many like Mehta, the recent Income Tax Appellate Tribunal (ITAT), Bengaluru, ruling in Vijay Lakhmichand Israni v. ITO (International Taxation) is significant.

What the ITAT ruling says

“The ruling of the ITAT, Bengaluru, in Vijay Lakhmichand Israni v. ITO (International Taxation) marks a significant and pragmatic development in the computation of capital gains for NRIs, particularly in relation to builder-related payments and renovation costs,” says Tushar Kumar, advocate, Supreme Court of India.

The Tribunal reaffirmed that payments made to builders for completing or making a property habitable form an integral part of the acquisition cost. “This is particularly relevant for NRIs who purchased unfinished or under-construction properties many years ago. Even where old banking records are unavailable, builder payment confirmations, receipts, or possession certificates were considered sufficient evidence of genuine acquisition cost,” says Aarjav Jain, Executive Director and NRI Tax Expert, Dinesh Aarjav and Associates, Chartered Accountants

On renovation expenses, the ruling draws a clear distinction between permanent structural or embedded improvements and movable personal assets. “Expenditure on items embedded into the earth or permanently affixed to the building, such as built-in wardrobes, marble flooring, bathroom fittings, or structural modifications, qualifies as the cost of improvement. Conversely, movable assets like air conditioners, refrigerators, beds, or standalone appliances do not,” says Jain.

This distinction significantly reduces ambiguity and provides NRIs with a defensible framework for claiming legitimate capital costs. Equally important is the Tribunal’s clear articulation of the evidentiary standard for claiming renovation expenditure as “cost of improvement” under Section 48 of the Income-tax Act.

“The decision draws a principled distinction between permanent improvements that become inseparably embedded in the structure, such as civil works, fixed flooring, concealed wiring, plumbing lines and built-in fixtures and movable or detachable items constituting personal effects,” says Kumar.

Permanent improvements face less scrutiny

From a dispute-avoidance perspective, the Israni judgment provides valuable guidance on how assessees should segregate capital improvements from personal expenditure.

“Claims that are narrowly tailored to permanent, structural additions that pass along with the property on transfer are far more likely to withstand scrutiny than broad, undifferentiated claims that include appliances or movable furnishings,” says Kumar.

A disciplined approach, by expressly excluding personal effects from the computation and presenting a transparent, evidence-backed schedule of acquisition and improvement costs, signals bona fides and materially reduces the scope for adversarial adjustments by the tax authorities.

Bank statements are not mandatory proof

The Tribunal has categorically held that production of contemporaneous bank statements, though corroborative, is not an essential or indispensable condition for allowance of capital improvement claims.

“An NRI assessee may discharge the evidentiary burden through builder-issued statements of account, receipts, revised final charge memoranda, possession certificates acknowledging full consideration, contractor invoices, work orders, sworn affidavits, contemporaneous correspondence, and photographic evidence,” says Yash B. Joglekar, Counsel, Bombay High Court.

Such material, when read cumulatively, must establish the genuineness, quantum, and capital character of the expenditure, demonstrating that the outlay resulted in permanent and enduring improvement to the immovable property.

Anagh Pal is a personal finance expert who writes on real estate, tax, insurance, mutual funds and other topics