When selling land, the Income Tax Act, 1961 allows you to reduce your taxable capital gains by deducting not only the original acquisition cost but also certain eligible expenses incurred for improving the property or executing its transfer. These deductions can significantly lower your tax liability, provided they meet legal criteria and are supported by proper documentation. This checklist outlines all permissible expenses—beyond the purchase cost—along with the specific proofs required, ensuring your claims are both accurate and defensible during income tax assessments.
While calculating capital gains on the sale of land under Section 48 of the Income Tax Act, you can deduct certain expenses other than the acquisition cost. These broadly fall under two categories: Cost of Improvement and Expenses on Transfer.
1. Cost of Improvement
These are capital expenses incurred to enhance the value of the land or make it better for use. They must be of a capital nature, not routine maintenance. Examples:
- Land leveling, filling, or grading work.
- Construction of boundary wall, fencing, or retaining wall.
- Installation of utilities (borewell, irrigation system, drainage, etc.).
- Plantation of permanent trees (if meant for long-term value, not seasonal crops).
- Approach roads or pathways to the plot.
- Permanent drainage/sewer lines or water storage tanks.
- Legal and registration fees for rights enhancement (like converting agricultural land to non-agricultural).
- Demolition costs for old structures (if done to improve usability or value).
💡 Note: Only improvements made after acquisition and before sale are allowed. Any expense incurred before acquisition or after sale is not eligible.
2. Expenses on Transfer
These are expenses directly related to the sale transaction, such as:
- Brokerage or commission paid to agents.
- Legal fees for drafting the sale deed.
- Stamp duty and registration charges borne by the seller (rare but possible in negotiation).
- Travel and conveyance costs incurred specifically for the sale deal (needs strong proof).
- Advertising costs to find buyers (newspaper, online listings).
- Valuation charges if a professional valuation report was prepared for the sale.
✅ Key Conditions for Deduction:
- Must be actually incurred and related to the specific land.
- Must be supported by proper documentation (invoices, payment proofs, agreements).
- Must not have been claimed earlier as a deduction under any other section (to avoid double deduction).
Capital Gains Deduction Checklist
(Excluding Acquisition Cost)
A. Cost of Improvement
Improvements made after acquisition and before sale that enhance the value of the land.
| Expense Type | Examples | Supporting Proof Required |
|---|---|---|
| Land leveling / filling / grading | Excavation, soil filling, contour leveling | Work contract/invoice, payment proof, before-after photos |
| Boundary / retaining wall construction | Brick wall, barbed wire fencing, concrete retaining wall | Contractor bill, material purchase invoices, photos |
| Permanent drainage / irrigation systems | Borewell, water tank, underground pipes | Bills from contractor/supplier, payment receipts, photos |
| Permanent plantation | Long-term trees for landscaping or value enhancement | Nursery bills, plantation photos, proof of permanency |
| Approach road / pathway construction | Gravel road, paved pathway | Contractor invoice, site photos |
| Land conversion charges | Agricultural to non-agricultural use fee | Government order, payment challan |
| Demolition of old structures (to improve usability) | Removal of old shed/building | Demolition contractor bill, before-after photos |
| Legal/Survey/Architect fees for improvement | Land survey for development, design for site improvement | Professional’s bill, payment proof |
B. Expenses on Transfer
Directly related to executing the sale transaction.
| Expense Type | Examples | Supporting Proof Required |
|---|---|---|
| Brokerage/commission | Fee paid to property agent | Commission agreement, payment receipt, bank proof |
| Legal fees for sale deed | Drafting, vetting, title clearance | Advocate’s invoice, payment proof |
| Stamp duty & registration paid by seller | If seller bears it as per agreement | Receipt from sub-registrar, sale deed clause |
| Advertising costs | Newspaper/online ads for selling land | Ad invoice, copy of published ad |
| Valuation fees | Professional valuation before sale | Registered valuer’s bill, payment proof |
| Travel expenses for sale deal | Visits to registrar, buyer meetings | Tickets, fuel bills, trip log (only if directly related) |
C. General Proof Practices
- Keep original invoices/bills with supplier/contractor name, address, and signature/stamp.
- Prefer bank/cheque/UPI payments over cash.
- If paying cash, keep signed receipts and ensure ₹10,000/day/person cash limit is not breached (Sec. 40A(3)).
- Keep photos, contracts, and government approvals where applicable.
- Store all records for at least 6 years from end of relevant AY.