Home loans: Claim deduction now or while selling your house?

The budget had some terrible news for taxpayers servicing home loans. Until now, they could get tax benefit on the interest portion of the loan twice. First, by claiming deduction up to 2 lakh (for self-occupied property) every year under section 24 (available only under the old tax regime). Second, after selling off the property, they were allowed to add the interest part of the loan to the total cost of acquisition (purchase price) that is used to arrive at the capital gains.

The budget has inserted an either-or condition to this, starting with assessment year (AY) 2024-25. To be sure, the IT laws did not have a provision allowing taxpayers to avail double tax benefit on home loan interest. It was a loophole that taxpayers were taking advantage of.

Graphic: Mint

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Graphic: Mint

For properties sold after 31 March, sellers cannot include the interest portion of the home loan in cost of acquisition while calculating capital gains if they have already claimed deduction on it. Adding the interest amount increases the cost of acquisition and thereby reduces the tax on capital gains. This essentially means that the taxpayer were getting double tax benefit on the same interest amount.

The question that arises now is whether homeowners should claim deduction every year or forego it to use the interest amount later to lower the capital gains tax?

A back-of-the-envelope calculation shows that choosing the latter is more beneficial. Long-term capital gains (LTCG) made on a house property enjoy indexation, which means the interest amount will also increase to adjust for inflation during the holding period and considerably bring down the tax on capital gains.

A word of caution here though. “The assumption here is that when the homebuyer sells the property in the future, current tax rules would not have changed by then. The probability of that happening is low, especially when the government is moving towards a simpler tax system that may see a lot of changes in the income tax rules over the next few years,” said Jigar Mansatta, a Jamnagar-based chartered accountant.

“I will suggest that taxpayers claim deduction under section 24 while it is available,” he added.

Since the deduction is limited to 2 lakh (for self-occupied property), interest in excess of this threshold can be included in the cost of acquisition at the time of selling the property. For properties let out on rent, full interest is deductible under section 24.

Though this change will be applicable from 1 April, it is advised that taxpayers who sell a property in FY2022-23 do not include interest component in the cost of acquisition while filing their tax return if they have claimed deductions on it. “In case of a dispute, the court will consider the rule announced by the government even if it is not in effect at the time of filing income tax return (ITR),” said Mansatta.

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