Jigar M. Patel
International Tax Attorney
Today’s write up in Tax Clues has been inspired by Alexander Graham Bell’s celebrated quote, “when one door closes, another opens, but we so often look upon the closed door, that we do not see the one which opens for us!”
Amendment for No Double Deduction of Interest on Housing Loan
The Memorandum, explaining provisions of the Finance Bill 2023, noted that many taxpayers, relying on certain judicial interpretations were claiming double deduction of interest paid on borrowed capital for acquiring, renewing or reconstructing a property, by first claiming benefit under Section 24 under the head Income from House Property and then again on sale of such property, for computing taxable capital gains under Section 48 by including the same amount in the cost of acquisition or cost of improvement.
Aimed at curbing this practice of double deduction, a proviso has been inserted under Section 48, by providing that the cost of acquisition or cost of improvement shall not include any amount of interest claimed under Section 24 or other relevant provision of Section 80 family.
Strategic Planning where Interest Deduction not availed
Whether interest paid on housing loan for acquiring a house property can be capitalized and treated as part of cost of acquisition has remained a debated issue over the years. However, the aforesaid amendment while clarifying that double deduction for such interest is not eligible, by implication clearly affirms that if such interest on housing loan has not been claimed under any other provision, it can certainly form part of cost of acquisition of the property. This would entitle a taxpayer to the benefit of capital gains tax saving in future, as the case study below will highlight.
Case Study: Mr. HP has purchased a residential house for Rs. 80 lakhs in respect of which he has availed housing loan of Rs. 60 lakhs. At the rate of 10% per annum, though the annual interest payable is Rs. 6 lakhs, he is eligible for interest deduction of Rs. 2 lakhs, as per the ceiling prescribed under Section 24. In this case, Mr. HP would be well advised to maintain a record of the interest of Rs. 4 lakhs paid by him, but not claimed. He can treat the same as part of his cost of acquisition or cost of improvement for valuable tax saving in future.
Say after 8 years, if Mr. HP sells the house for Rs. 1.50 Crore, considering the original cost of Rs. 80 lakhs and the amount of unclaimed interest that can be treated as cost of improvement, along with the added benefit of indexation for both, the effective capital gains tax liability would work out to Zero.
Unforeseen Blessing for Taxpayers under the New Scheme
Taxpayers opting for the benefit of concessional tax rates under the New Tax Regime are deprived of the benefit of deduction of Rs. 2 lakhs for interest on housing loan in case of self-occupied house property. In such cases, they would be fortunate to avail capitalization of such interest and enjoy useful tax relief in future from their capital gains tax liability.
