Can Home Loan Interest Be Included While Computing Capital Gains?

Mumbai, June 23, 2020

Buying a house using only savings is challenging for most people. As a result, prospective homebuyers avail of easy home loans given by banks, NBFCs, and other financial institutions to purchase their dream house. In India, home loans come with plenty of tax benefits. Both principal amount and home loan interest paid is eligible for tax deductions under the Income Tax Act.

However, if you sell your house, you must carefully plan to avoid paying exorbitantly high taxes on capital gains.

Capital Gains and Cost of Acquisition

While selling your house, you have to calculate capital gains and subtract from it the cost of acquisition of your home. Simply put, capital gains are the profits you make when you sell your house or any other capital asset. Since capital gains refer only to the profit and not the sale price, they are computed by subtracting the amount spent on acquiring a house from its sale price. Capital gains are eligible for taxes.

The amount spent on acquiring the property, which includes your home loan is called the cost of acquisition. Since home loan payments include interest payments as well, some people consider including home loan interest in the cost of acquisition.

But is this move legally justified? Read on to know more.

Home Loan Interest and Capital Gains

Whenever you avail of a housing loan, the home loan interest rate that the lender imposes on your principal amount is paid by you in the form of initial EMIs. This interest is tax-deductible while you acquire the property. However, if you include this interest in the cost of acquisition while computing capital gains, you will be claiming tax deductions on the same interest amount twice – once during taking the loan and the second time while selling your house.

While nothing about including interest while computing capital gains is mentioned in the Income Tax Act, several different litigations concerning the issue have been filed in the past. On two occasions, the Delhi ITAT and the Chennai ITAT have ruled the litigation in favour of the assessee. The recent judgment by the Delhi ITAT declared that the deductions claimed while calculating income from housing property and those claimed while computing income from capital gains are not related, i.e., the operation of one is independent of the other.

However, these litigations were just two examples. A ruling by the Bangalore ITAT clearly states that including interest as the cost of acquisition while computing capital gains is not allowed if the tax deductions had already been claimed on the interest amount as income from housing property while the loan was availed.

Keeping in mind both these judgements, homeowners must be ready to face litigation if they include interest while computing capital gains. The ruling of the ITAT might be in your favour, but you will have to pay the required fees and bear the hassle.

Be extra careful of tax obligation and financial commitments even when you apply for a home loan.

After checking your home loan eligibility, use a home loan EMI calculator to check the amount you have to pay as interest. 

Home loan calculators are readily available on most lenders’ websites and help you with efficient monetary planning. To reduce the amount of hassle and paperwork involved in the loan process, apply for home loans online.

With a vigilant attitude towards tax-related and other financial aspects of a home loan, you can avoid expensive lawsuits and fines and get the maximum benefit of your loan.

(Disclaimer: This is branded content. Readers are advised to exercise due discretion before entering into any correspondence or business dealings on the basis of this content.)


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