In Budget 2023, it is proposed that while computing capital gains from the sale of a residential property, the cost of acquisition of a property should not include any home loan interest claimed as income-tax deduction by the seller during the holding period.
Kuldip Kumar, Personal Tax Expert and Former National Leader, Global Mobility Practice, PwC India, said that the proposed amendment will bring to an end the ambiguity and also end the double tax benefits home owners were availing. “There are Income Tax Appellate Tribunal (ITAT) decisions, both in favour and against, on considering the interest forming part of cost of acquisition to compute capital gains. So, at least to that extent the amendment in Section 48 clarifies that it is not available,” said Kumar.
However, it will also raise a question on whether to avail the home loan interest deduction benefit and reduce the current tax liability, or not to avail of the deduction in order to claim it as cost of acquisition at the time of sale of the property. Let’s take a closer look.
Home loan deductions
Income tax deductions help bring down the tax liability. And, deduction on home loan is one of such major avenue available to taxpayers under the old income tax regime. The principal component of your equated monthly instalments (EMIs) qualifies for deduction under Section 80C of the Income Tax Act, 1961, while the interest portion (in respect of a self-occupied property) gets you a further deduction of Rs 2 lakh, under Section 24b of the Act.
In certain cases, depending on your eligibility, you can also claim additional deductions for interest payment on your existing home loan under Section 80EE and Section 80 EEA, of up to Rs 50,000 and up to Rs 1.5 lakh per annum respectively. To know the eligibility regarding sections 80EE and 80EEA, read here.
Thus, the total deduction for repayment of interest on housing loans (taken by first-time homebuyers between April 1, 2019, and March 31, 2020) can go up to Rs 3.5 lakh (Rs 2 lakh under Section 24, and Rs 1.5 lakh under the new Section 80EEA).
However, till now there is no problem in claiming any of the above deductions if you are eligible. But going forward, you may have to keep certain rules in mind and evaluate the benefits before claiming deductions against home loans. Because of the new proposal in the Finance Bill 2023, your capital gains may get enhanced at the time of selling the property, if you have claimed these deductions. As a result, your tax liability arising out of capital gains may also increase.
Capital gain calculation and tax
When you sell a residential property, you have to pay capital gains tax.
If the aggregate period of holding a residential property at the time of sale is less than 24 months, gains from the sale of such property is termed as short-term capital gains (STCG) and taxed as per the slab rates. Whereas, if the holding period is more than 24 months, it is termed as long-term capital gains (LTCG) and taxed at 20 percent with indexation, excluding surcharge and cess.
Tax is charged on the difference between the sale price and the cost of acquisition. According to income tax rules, the cost of acquisition of an asset is the amount for which it was originally acquired by the assessee (purchaser). This includes expenses of capital nature incurred in connection with such purchase, or for completing the title of the property.
Till now, the norm has been that “when the taxpayer sells the house, he can get a deduction of the costs related to the acquisition of the property, including the interest cost spent on loan taken for acquisition of the property. Only the net capital gain gets taxed,” said Vivek Jalan, Partner, Tax Connect Advisory, a tax consultancy. “In effect, the tax benefit on interest on home loan was eligible twice as a deduction in the absence of any tax laws forbidding one from doing this,” Jalan adds further.
However, once the Finance Bill 2023 is implemented you may not be able to include interest claimed as deduction in the cost of acquisition. Remember, “only to the extent deduction was earlier taken would the interest be not deductible from the consideration on sale of property. However, to the extent the interest was not availed as deduction earlier it can still be claimed as a deduction on sale of the property,” explained Jalan.
For instance, let's suppose you bought a residential property costing Rs 1 crore in financial year 2015-16, with the help of a housing loan amounting to Rs 80 lakh. Each year you paid Rs 6 lakh as interest on home loan, adding up to Rs 30 lakh in five years. However, given the maximum limit of Rs 2 lakh under Section 24b, you claimed a deduction of Rs 2 lakh each year against the interest paid on home loan for five years, adding up to a total of Rs 10 lakh.
Now, suppose you sell the said house for a consideration of Rs 2 crore. To calculate the capital gains under the existing rules, you can take Rs 2 crore as sale consideration and an indexed cost of Rs 1.30 crore (Rs 1 crore purchase value and Rs 30 lakh interest paid on home loan) as the cost of acquisition. To know how to calculate indexed cost read this.
However, once the new rule is implemented, you will have to reduce the cost of acquisition by the amount of deduction claimed against interest on home loan in the past, i.e. Rs 1.3 crore minus Rs 10 lakh (home loan interest). Accordingly, the indexation benefits will apply to the cost of Rs 1.20 crore only.
This means your capital gains will increase by Rs 10 lakh, plus indexation cost on the same and attract tax accordingly.
Moneycontrol take
The question is whether it makes sense to claim the deduction against interest or not. The answer can vary, but the old proverb “a bird in the hand is worth two in the bush,” can be very apt in such a situation. It means, it is better to claim the deduction than to risk losing it by trying to get something better at the time of the sale of property.
You need to understand that if you don’t claim the benefit of deduction, it will only help you when you sell the property, which is not the case always. Also, whether you will make a capital gain or not is also not sure.
Further, if you make higher capital gains you have other options to save tax, i.e., by reinvesting the gains in residential property or capital gains bonds. So, it is better to claim it now than to expect higher benefits in future.
