In case the house is being sold before completion of three years of buying, the gains will be considered as short term gains and no income tax exemption is applicable on it. Whole gains will be added to your taxable income and taxed as per your tax slab.
In case its a long term gain, please read further.
If the interior work included some structural changes (modifications like creating a new floor, extending house) then the cost can be included in computation of long term gains.
Below is the indicative computations to calculate long term gains and income tax:
Purchase Year = A
Purchase Cost = 4500000
Cost Inflation Index (CII) for purchase year = X
Renovation/Construction Year = C
Purchase Cost = 400000
Cost Inflation Index (CII) for purchase year = Z
Sale Year = B
Selling price = 5000000
CII for sale year = Y
Indexed Purchase/Construction Cost = 4500000 x (Y/X) + 400000 x (Y/Z) = R
Long term capital gain = 5000000 - R = S
Income tax on capital gain = S x 20%
As you are selling it with not much gain (just 1 lakh), there won't be much income tax on it.
Income tax can be saved u/s 54 or 54EC.
Under 54, you have to buy another residential property from gains amount. Under 54EC, you will have to invest the gains into capital gain bonds.
