The Budget 2023 made multiple announcements that had a direct impact on the middle-class taxpayers. While the most prominent was about the fresh incentives for the New Tax regime, there were quite a few other small yet important takeaways from the budget.
One such takeaway was in the form of clarification about disallowing double deduction of interest on home loans.
What is the issue? You buy a house on a home loan. You pay interest on the housing loan and take tax benefit under Section 24. After a few years, you decide to sell the house. While calculating the cost of acquisition of the property, you add the home loan interest to the cost of the house. This increases the cost of property. And reduces the capital gains.
So, you took tax benefit for the home loan interest in the years when you paid the EMIs. And now, you are taking benefit again by adding the same interest to the cost of the house.
You paid the interest once. And took the tax benefit twice. The Government obviously does not like it.
Reproducing the extract from the Union Budget 2023 memo below:
This is quite fair. The rules were never envisaged to offer the tax benefit twice.
However, what’s the point of allowing you to add home loan interest to the cost of purchase (acquisition of house)? Wouldn’t you have taken the tax benefit in the year you paid the EMI?
Why Will You NOT Take Tax Benefit for Home Loan Interest Paid under Section 24?
There could be multiple reasons.
- Opting for The New Tax Regime: The New Tax regime disallows deduction of home loan interest under Section 24 for a self-occupied property. Hence, if you have opted for the new regime, you wouldn’t take the benefit for home loan interest paid. In such a case, you can add this unclaimed interest to the cost of acquisition and reduce tax liability.
- Cap of Rs 2 lacs on Tax Deduction: For a self-occupied property, you can claim tax deduction for only up to Rs 2 lacs per annum. And going by the property prices in bigger cities, you will likely pay much more interest, especially in the initial years. Let’s take an example.
| Loan | 10,000,000 | ||
| Interest | 8% | ||
| Tenure | 20 years | ||
| EMI | 83,644 | ||
| Year | Interest paid | Tax Benefit taken | Interest without tax benefit |
| 1 | 792,361 | 200,000 | 592,361 |
| 2 | 774,818 | 200,000 | 574,818 |
| 3 | 755,819 | 200,000 | 555,819 |
| 4 | 735,242 | 200,000 | 535,242 |
| 5 | 712,958 | 200,000 | 512,958 |
| 6 | 688,824 | 200,000 | 488,824 |
| 7 | 662,688 | 200,000 | 462,688 |
| 8 | 634,381 | 200,000 | 434,381 |
| 9 | 603,726 | 200,000 | 403,726 |
| 10 | 570,526 | 200,000 | 370,526 |
| 11 | 534,570 | 200,000 | 334,570 |
| 12 | 495,630 | 200,000 | 295,630 |
| 13 | 453,458 | 200,000 | 253,458 |
| 14 | 407,786 | 200,000 | 207,786 |
| 15 | 358,323 | 200,000 | 158,323 |
| 16 | 304,755 | 200,000 | 104,755 |
| 17 | 246,741 | 200,000 | 46,741 |
| 18 | 183,911 | 183,911 | – |
| 19 | 115,867 | 115,867 | – |
| 20 | 42,175 | 42,175 | – |
| Total Interest without Tax Benefit | 6,332,609 | ||
As you can see, in this illustration, there is home loan interest of Rs 63.32 lacs for which no tax deduction has been taken. Such interest can be added to the cost of acquisition of property. And this is if you opt for the old regime.
If you had the new tax regime since the beginning of your loan, the entire interest (tax-deductible + non-deductible) can be added to the cost of property. That’s 1.01 crores.
By the way, the tax deduction of Rs 2 lacs for self-occupied property is only if you acquire or construct the property within 5 years of the end of the financial year in which you took the loan. If there is delay beyond 5 years, the tax benefit drops to Rs 30,000 per annum. In that case, there will be an even bigger amount of non-deductible interest. All such interest can be added to the cost of the house.
Note: The New Tax regime does not allow you tax deduction for the home loan interest paid for self-occupied property. However, it does not put any such restriction for a let-out property. Thus, you can still claim tax deduction for home loan interest for a let-out property. For more on this, refer to this post.
You Get Tax Benefit for Home Loan Interest under Section 80EE and Section 80EEA
Section 80EE and Section 80EEA also offer tax benefit for home loan interest payment in specific cases.
Just as with Section 24, you cannot add that portion of home loan interest to the cost of acquisition for which you have taken tax benefit under any of these sections.
What Is the Benefit?
I was unsure if you could add the home loan interest cost to the cost of acquisition of the property. Section 48 does not clearly state if you can add the interest cost to the cost of acquisition. Or at least I could not figure that out.
While the Government blocked the dual incidence of tax benefit, it also clarified that you could add the portion of home loan interest (for which you did not take benefit under Section 24 or any other section) to the cost of acquisition and accordingly reduce the taxable capital gains.
To find the cost of acquisition, you will take the purchase cost. And add the interest paid without tax benefit to the cost. Since the interest will be paid across many years, you will have to apply the indexation benefit accordingly.
Disclaimer: I am not a tax expert. Please consult a Chartered Accountant before acting on the contents of this post.