Cost of house to include furniture for Income-Tax relief

In a recent order, the Income-Tax Appellate Tribunal (ITAT) has held that the cost of a new residential house will not be limited to the construction cost but also include the purchase price of furniture—if it is an integral part of the property deal. The order comes as a relief to the petitioner as it will reduce his I-T liability.

In this case, Rajat Mehta, an NRI based in New Zealand, sold a large house in Vadodara. To continue ties with his motherland, he bought another smaller house in the same city. He entered into two separate contracts though—one for the purchase of the new house for Rs 60 lakh and the other for furniture for Rs 18 lakh. As tax benefits are available for investment in a new house, ITAT had to decide whether the cost of furniture should also be included while determining the cost of the new house.

Here’s the tax nitty-gritty in a nutshell: If a tax payer makes a profit on sale of a residential house that has been held for at least two years, then such profit is treated as a long-term capital gain (LTCG). This gain is taxable at 20% with adjustment for inflation, referred to as indexation benefit. Section 54 of I-T Act provides for investment-linked benefits. If the LTCG component is invested in another house in India, within a stipulated period of time, then the cost of the new house, or, in other words, the investment made in a property, is deducted. Only the balance component of LTCGs is taxable, which results in a lower tax