Budget 2023: When calculating capital gains, home loan interest deductions cannot be included in acquisition costs.

 Budget 2023: When calculating capital gains, home loan interest deductions cannot be included in acquisition costs.

Based on your eligibility, you may be able to deduct interest paid on your current house loan up to Rs 50,000 and Rs 1.5 lakh annually, respectively, under Sections 80EE and 80EEA.

It has been suggested in Budget 2023 that any home loan interest claimed as an income tax deduction by the seller during the holding term should not be included in the cost of acquisition of a residential property when calculating capital gain from sale of the property.

According to Kuldeep Kumar, a personal tax expert and former national leader of PwC India's Global Mobility Practice, the proposed amendment would clear up any confusion and abolish the double tax breaks that homeowners were already receiving. The Income Tax Appellate Tribunal (ITAT) has made judgements both in favour of and against using interest as part of the cost of acquisition for computing capital gains. Therefore, the modification to Section 48 clarifies that it is not available, at least to that extent, said Kumar.

This would also bring up the question of whether one should take advantage of the home loan interest deduction benefit to lower their current tax obligation or not take advantage of the deduction to write it off as an acquisition cost when they sell their property. Let's examine a closer look.

mortgage deduction

Deduction for income taxes aids in lowering tax obligations. And one of these significant routes open to taxpayers under the previous income tax system is the deduction on home loan. Section 80C of the Income Tax Act of 1961 allows you to deduct the main portion of your Equated Monthly Installments (EMI), and the interest portion (in relation to self-occupied property) entitles you to an additional deduction of Rs 2 lakh. The Act's Section 24B.

Depending on your eligibility, you may be able to deduct additional amounts for interest paid on your current house loan up to Rs 50,000 and Rs 1.5 lakh per year, respectively, under Sections 80EE and 80 EEA. Read on to learn more about section 80EE and 80EEA eligibility.

As a result, first-time homebuyers can deduct a total of Rs 3.5 lakh in interest from their housing loan payments between April 1, 2019, and March 31, 2020. (Rs 2 lakh and Rs 1.5 lakh under section 24). reaches under the revised section 80EEA).

However, as of right moment, if you qualify, there are no issues with claiming any of the above deductions. However, going forward, you must follow a few guidelines and consider the advantages before claiming the house loan deduction. If you have claimed these deductions, the new provision in the Finance Bill 2023 may result in an increase in your capital gain at the time of the property's sale. Your tax obligation resulting from capital gains may therefore rise as a result.



taxation and calculation of capital gains

The capital gains tax is due when you sell a residential property.
The profit from the sale of a residential property is referred to as a short-term capital gain (STCG) and is taxed at slab rates if the total time the property has been owned at the time of sale is less than 24 months. The tax rate for long-term capital gains (LTCG), on the other hand, is 20% with indexation and is exempt from surcharge and cess if the holding period exceeds 24 months.

Taxes are levied on the discrepancy between the sale price and the purchase cost. According to income tax regulations, the cost of acquiring an asset is the sum for which the assessee initially purchased it (buyer). It also covers any capital expenses incurred in connection with the purchase, or in completion of title to there property.


According to the current law, "the taxpayer can claim a deduction for the costs linked to the acquisition of the property, including the interest cost spent on the loan taken for the acquisition of the property, when the taxpayer sells the house." Only net capital gains are subject to tax, according to Tax Connect Advisory partner Vivek Jalan. Jalan continues, "Actually, the tax profit on home loan was qualified for deduction on two occasions, therefore in the lack of any tax rule prohibiting them from doing so."

However, you won't be able to deduct the interest you've claimed until the Finance Bill 2023 goes into effect from the cost of the transaction. Keep in mind that interest is only deductible from the asset's selling proceeds to the amount of the previous deduction. However, to the extent that the interest was not previously used as a deduction, it is still permitted as a deduction on the asset's sale, according to Jalan.

Consider the following scenario: You borrow Rs 80 lakh to purchase a residential property worth Rs 1 crore in the 2015–16 fiscal year. You repaid the home loan's interest of Rs 6 lakh annually, totaling Rs 30 lakh in five years.


However, taking into account the maximum allowance of Rs 2 lakh under section 24B, you may deduct Rs 2 lakh from the interest paid on the home loan for each of the five years, for a total of Rs 10 lakh.

Consider selling the aforementioned home for Rs 2 crore. The current regulations require that you use Rs 2 crore as the sale consideration and Rs 1.30 crore as the acquisition cost (which includes Rs 1 crore for the buying price and Rs 30 lakh for interest on the mortgage). Learn how to calculate indexed cost by reading this.

However, once the new rule is in effect, you will need to subtract the amount of the deduction you previously made for the interest on your home loan, or Rs. 1.3 crore less Rs. 10 lakh, from the cost of acquisition (home loan interest). Therefore, only the cost of Rs. 1.20 crore will be eligible for the indexation benefit.

Your capital gain will therefore grow by Rs. 10 lakh, plus the indexation cost associated with it, and you will be subject to the corresponding tax.


The issue at hand is whether or not the deduction for interest can be made. The proverb "a bird in the hand is worth two in a bush" can be quite applicable in this case, albeit the answer may differ. As a result, it is preferable to claim the deduction when the asset is sold rather than taking a chance on losing it in an effort to acquire something better.

You must realise that if you do not use the deduction, which is not usually the case, then this will only benefit you when you sell the property. Additionally, it is uncertain whether you will realise capital gains.

Additionally, if you make more capital gains, you have other options for reducing your tax burden, such as reinvested the earnings in real estate or capital gains bonds. Therefore, claiming it now is preferable to waiting to receive further advantages.