Can Home Loan Interest Cut Capital Gains Tax Under New Tax Regime?

Borrowers who pay interest on home loans for self-occupied houses cannot claim this interest as a deduction when they file income tax returns under the new tax regime. Under the old tax regime, Section 24(b) of the Income Tax Act had allowed such deductions. But Section 115BAC, which governs the new regime, does not permit this benefit.

As the deduction is not available under income tax act, many taxpayers wonder if they can add the interest amount to the cost of buying the property, so that they could reduce the taxable capital gains when the property is sold. The question however is whether this practice is legally acceptable.

What the Law Says

According to a report by Upstox, in earlier years, some taxpayers claimed a double benefit. They deducted the interest under Section 24(b) and later added the same interest to the cost of acquisition under Section 48 to cut the capital gains.

To stop this, the Finance Act of 2023 changed Section 48. It now clearly states that the cost of acquisition or cost of improvement of a capital asset cannot include any interest that has already been claimed as a deduction under Section 24(b) or under Chapter VI-A of the Income Tax Act.

The government explained that the purpose of this amendment was to prevent taxpayers from claiming the same benefit twice. However, the law does not directly say what happens if the taxpayer has not claimed any deduction at all, as is the case under the new regime.

Conflicting Opinions

One interpretation is that if no deduction has been claimed, then adding the interest to the cost of acquisition should be allowed, the report said. This view argues that it does not amount to a double benefit and therefore does not go against the amendment.

Others argue that although the deduction is not claimed, the interest cannot be added to capital gains calculation as it goes against the spirit of the new concessional regime. Tax authorities may argue that this goes against the purpose of Section 115BAC.

Court Orders

The courts have also made different views on this matter. In the case of Rajesh Saluja v. DCIT on February 15, 2024, the Delhi Income Tax Appellate Tribunal (ITAT) said that only costs directly related to buying the property can be counted as the cost of acquisition. Interest on borrowed money does not meet this requirement. So, it can't be added. In Gayatri Maheshwari v. ITO on May 5, 2017, the Jodhpur ITAT ruled that the interest paid on a loan to buy a property is related to the purchase amount. Therefore, the interest can be treated as the cost of acquisition for capital gains purposes.

Advice for Taxpayers

Given the amendment to Section 48 and the different court orders, experts call for caution while claiming interest payment as deductionalbe in capital gains. Adding unclaimed home loan interest to the cost of acquisition may lead to disputes with tax authorities. It could result in disallowance, penalties, and long legal battles.

The safer approach is not to capitalise the interest as part of the property cost when filing under the new tax rule.

Disclaimer

The recommendations made above are by market analysts and are not advised by either the author, nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.