Making a House Livable vs Making It Lovely: A Section 54 Reality Check
I recently sold my old house in May – 25 and invested the capital gains in a new residential house in July – 25 for claiming an exemption under Section 54. However, the house I bought was not up to the mark and was not fit for living. I had to spend a substantial amount on plumbing, repairs, electrical wiring, POP, fixing leakage issues, some basic fittings, Air-conditioners, furniture, etc before my family could move in. My tax consultant has told me that only the purchase price would be considered for capital gain exemption whereas my morning walk group confidently claims that ‘anything spent inside the house is allowed’. So, what exactly is allowed and what is not? Please advise. [jag********n@gmail.com]
Opinion:
This is one of those classic tax situations where your tax consultant is cautious, your morning walk group is confident, and the Income-tax Act is quietly smiling – because the truth lies somewhere in between.
Let’s first settle the basic principle. Section 54 allows exemption for investment in a residential house. But the law never said that every rupee spent inside the house automatically qualifies. It is also silent on whether the house has to be luxurious, furnished, or ready for a YouTube home tour. It only expects one thing: investment in a house property.
What qualifies for exemption:
The courts have repeatedly held that expenses necessary to make the house habitable are eligible, but expenses incurred merely to make it luxurious or comfortable are not. The key test is not where the money is spent, but why it is spent. Further, there is a crucial difference between making a house habitable and making a house comfortable.
This issue was examined by the Hyderabad Bench of the ITAT in Sudeep Chandra vs ITO [ITA No. 1118/Hyd/2019]. The assessee had claimed exemption not only on the purchase price of the house but also on amounts spent on plumbing, electrical works, leakage repairs, POP work, air-conditioners, furniture, beds, sofa sets, dining table, and other fittings. The Assessing Officer disallowed most of it, and the matter travelled to the Tribunal.
The Tribunal drew a very practical and sensible distinction. It held that investment in the new house property under section 54 includes the purchase price plus expenses incurred to make the house fit for occupation. Accordingly, expenses on electrical wiring, plumbing work, and fixing leakage problems were allowed because without them, the house was simply not livable. However, expenditure on furniture, air-conditioners, sofa sets, beds, dining tables, and similar items was disallowed because the house could be occupied even without them. In simple terms, the law allows you to convert a non-livable house into a livable one, but it does not fund your lifestyle upgrade. So, applying this to your case:
Expenses on plumbing repairs, electrical wiring, leakage fixing, essential civil work, and even basic POP if it is part of making the structure usable can be considered as part of the cost for exemption. However, air-conditioners, furniture, decorative fittings, modular kitchens, or aesthetic interiors generally fall in the “comfort zone” and not the “habitability zone”-and hence are not eligible.
So, whose advice should you finally trust—your consultant or your morning walk group?
On this issue, your consultant is closer to the law. The morning walk group is closer to optimism. The golden rule to remember is – Income-tax law supports habitability, not luxury. A leaking pipe qualifies. A leather recliner doesn’t.
Common mistakes taxpayers make in such cases:
In practice, many genuine exemption claims fail not because the law is against the taxpayer, but because of avoidable mistakes. One common error is clubbing all expenses under a single head like “interior work” without explaining the nature of each item. Another mistake is not maintaining proper invoices or paying contractors in cash, making it difficult to establish whether the expenses are actually incurred and whether it was essential or merely cosmetic. Some taxpayers also assume that once the Assessing Officer allows part of the claim, the balance is lost forever-whereas many such disallowances are routinely corrected at the appellate level. Lastly, taxpayers often rely on verbal assurances from builders or brokers without ensuring that the purchase agreement clearly reflects the true nature of the transaction. In capital gains matters, documentation often matters more.
Now let us extend the discussion to some other issues that may be faced by many readers in similar situations.
“What if the builder or any other person has sold the house as ‘fully furnished’?”
If the agreement clearly shows a composite purchase of house along with inseparable fixtures, the matter becomes factual and documentation-driven. Otherwise, movable items remain movable in the eyes of tax law—no matter how heavy the sofa is. In such a case, in my view, the entire investment may qualify for capital gain exemption, subject to facts and proper bifurcation being absent
“Is brokerage paid for purchasing the new house allowed?”
Yes. Brokerage and related purchase expenses are generally considered part of the cost.
“What about painting or minor renovation?”
If it is essential to make the house fit for living, it may be allowed. If it is done to match curtains with cushions, it won’t survive before income tax authorities.
“Does it matter that all these expenses were incurred before shifting into the house?”
Timing alone does not decide eligibility. The nature and necessity of the expense is what matters.
The Tax Talk Takeaways:
With the above concepts and principle of taxation, always keep proper bills, clear descriptions of work done, and a simple explanation ready-because in tax matters, clarity often saves more money than confidence.
[Views expressed are the personal view of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at nareshjakhotia@gmail.com. Other articles & response to queries are available at www.theTAXtalk.com]
The copy of the order is as under:
