LTCG tax on sale of house: Can you add home loan interest to property purchase price to cut capital gains tax? However, what if you opt for a new tax regime and claim no deduction of Rs 2 lakh? Can you still add interest cost to the purchase price to lower the LTCG and tax on it?
Budget 2024 has changed various provisions of the Income Tax Act, 1961. It has made the income tax slabs under the new tax regime more attractive vis-à-vis the old tax regime; increased standard deduction in the new tax regime and rationalised the capital gains taxation regime.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} Though the new tax regime has become more attractive, many people would be hesitant to opt for it as they cannot claim interest and principal paid on a home loan as a deduction from gross total income before the levy of tax. They can do this only under the old tax regime.
However, not many taxpayers are aware that the income tax rules allow adding the interest paid on a home loan to the cost of purchasing the house for which the loan is taken. This reduces the capital gains earned at the time of selling the house. Further, indexation benefit (if available as per tax laws depending on the date of acquisition of the property) can be availed on a higher cost of acquisition (i.e., the actual cost of buying the house and the interest paid on the home loan).
However, this benefit of adding home loan interest to the acquisition cost comes with certain conditions.
Home loan interest can be added to the cost of property subject to following conditions
The Income Tax Act gives an individual two ways to claim a deduction on the interest paid on a home loan.The first option is to use Section 24, which allows a deduction from house property income for the interest paid on the home loan. This deduction can be claimed in the financial year in which the home loan interest is actually paid to the lender. Such interest can be claimed as a deduction up to a maximum of Rs 2 lakh in a financial year.
The second option is under Section 48, provided the individual has not claimed deduction through Section 24. Section 48 allows the addition of interest paid on a home loan to the purchase price of the house. The addition of home loan interest to the purchase price is done to calculate acquisition cost of the house when it is sold. This acquisition cost is used to calculate the capital gains/loss incurred on the sale. Section 48 does not set a limit on the amount of home loan interest that can be added to the purchase price.
Until March 31, 2023, the deduction on the same home loan interest could be claimed under both the sections. However, the Budget 2023 plugged this loophole. From April 1, 2023, a taxpayer can claim deduction either under Section 24 or under Section 48. The new tax regime does not allow deduction under Section 24 of the Income Tax Act.
The question now arises whether a taxpayer can claim a deduction through Section 48 under the new tax regime when a deduction under Section 24 cannot be claimed. In simpler terms, as a deduction on home loan interest cannot be claimed in the new tax regime, can a taxpayer add it to the purchase price to lower the capital gains when selling a house?
What tax experts say about reducing capital gains via section 48
There is no consensus among tax experts on whether home loan interest can be added to the purchase cost to calculate capital gains under the new tax regime.Naveen Wadhwa, chartered accountant and Vice President-Research & Advisory, Taxmann.com, says, "The income tax laws do not mention any restriction on claiming Section 48 deduction if an individual taxpayer has opted for the new tax regime during the financial years in which home loan interest was paid and Section 24 deduction of up to Rs 2 lakh could not be claimed. Hence, a taxpayer may claim Section 48 deduction for the financial years when home loan interest deduction under Section 24 could not be claimed due to the new tax regime."
Saraswathi Kasturirangan, Partner, Deloitte India, has a similar view. "The Budget 2023 amended the provisions to ensure that any interest on a housing loan previously claimed as a deduction against house property income cannot be included in the cost of acquisition to calculate capital gains at the time of transfer/sale of the house property. Clearly, this is to avoid double deduction of the same amount. From a practical perspective, individuals (not having business income) have the flexibility to switch between tax regimes every year, provided income tax returns are filed within the due date. If an individual has opted for the new tax regime in certain years and has not claimed the interest paid on housing loan as a deduction against house property income, such interest can be added to the purchase price of the property while calculating capital gain upon transfer. In other words, it is important for taxpayers to track the information relating to interest cost as this will affect the calculation of capital gains."
However, Suresh Surana, a practising chartered accountant, has a different view. "There is no explicit restriction on a taxpayer, who has not claimed home loan interest deduction under Section 24 (on account of opting for the new tax regime), claiming the same interest as part of the acquisition cost when selling the property. As a general principle, for computing capital gains, one can deduct 'cost of acquisition' and 'cost of improvement' and hence, the key question is whether interest on housing loan can be considered to be in the nature of 'cost of acquisition' or 'cost of improvement'. Typically, the interest on a housing loan for property is not considered part of the acquisition cost as it was claimed under Section 24, though in some exceptional judgements it was permitted. It would be advisable to claim interest on housing loan for capital gains computation purposes only to the extent it can be termed as "cost of acquisition or improvement" and has not been claimed as deduction under section 24. This would generally be the case for interest incurred during construction period or prior to acquisition of the property and not the interest cost incurred post-acquisition of the property."
What if full home loan interest amount is not claimed as a deduction under Section 24?
During the initial years of a home loan tenure, the interest component in the home loan EMI is higher. As time goes by, the interest paid on the home loan goes down in the total EMI paid and the principal amount goes up. Many taxpayers are unable to claim the full benefit of the interest paid in some (generally initial) financial years because Section 24 limits the deduction to Rs 2 lakh in a financial year.If the taxpayer has a self-occupied property, home loan interest of more than Rs 2 lakh is a loss which cannot be carried forward as per income tax rules. If the taxpayer has let out or deemed let-out property, home loan interest of more than Rs 2 lakh can be carried forward. The carried forward losses can be adjusted against future incomes from house property.
The question arises whether a taxpayer can add the unclaimed interest paid on a home loan to the purchase cost under Section 48. Simply put, if a taxpayer has paid home loan interest of Rs 3.5 lakh in a single financial year and claimed deduction of Rs 2 lakh under Section 24, is the balance interest of Rs 1.5 lakh eligible to be claimed under Section 48 and added to the purchase cost at the time of selling the property?
Here, too, tax experts are divided. Wadhwa says, "There is no bar in the income tax laws on taxpayers adding unused home loan interest to the purchase price under Section 48."
Saraswathi from Deloitte says, "The amended provision provides that any deduction claimed on the amount of interest on housing loan shall not be included in the cost of acquisition or improvement. Accordingly, any amount of interest not claimed as deduction in the year of payment can be added to the cost of acquisition or improvement while calculating capital gains."
However, Surana says, "It would be advisable to claim interest on housing loan for capital gains computation purposes only to the extent it can be termed as "cost of acquisition or improvement" and has not been claimed as deduction under section 24. This would generally be the case for interest incurred during construction period or prior to acquisition of the property and not the interest cost incurred post-acquisition of the property."
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This story originally appeared on: India Times - Author:Faqs of Insurances
