Home loan interest benefit can only be taken once now

Budget 2023 has finally plugged a loophole that was exploited by homebuyers, particularly those who had availed of home loans. Many of them were claiming deduction twice on the interest paid—at the time of servicing the loan and while selling the property. Not anymore.

Under the Income Tax Act, taxpayers can claim deduction for the interest of up to Rs. 2 lakh per annum paid on a home loan under the old tax regime. But many buyers also added this interest expense to the acquisition cost (overall cost of buying the house) for calculating capital gains at the time of selling the house. This had, in turn, lowered their capital gains tax outgo. In effect, many were claiming deduction for home loan interest twice. In the absence of any tax laws forbidding one from doing this till now, many taxpayers have been using this as a route to save tax.

What’s changed

With the budget putting to rest all ambiguity on this matter, this will no longer be possible. Following the proposed change in the Income Tax Act, home loan interest claimed as deduction cannot be included as part of the acquisition cost or improvement cost of a house. This will take effect from 1 April 2024.

“This was open ended until now. But we were warning everybody that the courts may not accept this because it raised the question of how you can claim a deduction twice,” says Karan Batra, founder, charteredclub.com.

But what happens in the unlikely event that you don’t claim the interest as deduction under Section 24 or/ and Section 80EEA? Batra offers clarity on this. “Then, you can include it in the cost of acquisition for the purpose of computing capital gains from property.”

Interest on housing loan claimed as a tax deduction will no longer be permitted to be added to the cost of acquisition/ improvement of house property when computing capital gain on sale of the house property. Short-term capital gain from sale of property is taxed at 30% without indexation and long-term capital gain at 20% with indexation. The holding period must be over 24 months for long-term capital gains taxation to apply.

Deductions available

With the loophole on including interest cost in capital gains calculation plugged, here are three existing deductions that a home loan borrower can utilize under the old tax regime.

One, under section 80C, you can claim deduction for home loan principal repayment for an amount of up to Rs. 1.5 lakh. You can do this if you haven’t exhausted this limit on other investments and expenses permitted for deduction under this section. Batra points out that deduction for home loan principal repayment is allowed only after the construction is complete and the completion certificate has been awarded. No deduction will be allowed during the under-construction years. He says, “The property on which this deduction is claimed cannot be sold before five years from the year of acquisition.” For example, if you buy a house in January 2023 (FY 2023), then you can sell the property only after 1 April 2028 (that is five financial years after FY2023). “If sold before that, the deduction claimed will be treated as your income in the year of sale and will be taxed as such,” says Batra.

Two, under section 24 you can claim deduction for interest paid on home loan for up to Rs. 2 lakh per annum for a property that you live in. No upper limit applies on the deduction for a property that is not self-occupied. “For this, the house must be bought or built within five financial years from the year in which the loan was taken,” says Batra. The removal of this anomaly was on homebuyers’ budget wish-list but was left untouched.

Additionally, first-time home buyers are eligible for deduction of interest amount of up to Rs. 1.5 lakh per annum under section 80EEA. But this deduction applies only for properties worth under Rs. 45 lakh (stamp duty value), and where the home loan was sanctioned between 1 April 2019 and 31 March 2022.

Old is not gold

Given all the tax deductions for a home borrower, should you stay put with the old tax regime? The answer could be no for many people (see table). Even if one were to claim the maximum deduction of Rs. 3.5 lakhs (excludes section 80EEA which does not apply to everyone), you could be better off under the new tax regime. This regime does not allow any of the above-mentioned deductions but offers a lower tax rate. And while a home loan borrower with lower income can land up with lower tax outgo under the old regime, this will mean having a home loan EMI (interest plus principal) that forms a large proportion of his income.