By CA Keval Sonecha
Do you have a housing loan? If yes, then you can claim the Interest expense on the housing loan under section 24 and a deduction of principal repayment of the housing loan under section 80C while calculating your Income Tax liability. These tax benefits are available only if you opt for the old tax regime.
But if you think that claiming these tax benefits will reduce your overall tax outflows without considering the impact of future tax outflows, then you must re-assess your calculation. This is because Union Budget 2023 has issued certain clarifications and amended Section 48 of the Income Tax Act. These clarifications and amendments may save your tax outflows in the current year but they will increase your tax outflows for future years. Let’s look into the details of such changes introduced by the Finance Bill, 2023.
Section 48 of the Income Tax Act 1961, provides that the income chargeable under the head “Capital gains” shall be computed by deducting the cost of acquisition of the asset and the cost of any improvement thereto from the consideration received for transfer of such capital asset. Union Budget 2023 has proposed to insert a proviso in clause (ii) of Section 48 to provide that the cost of acquisition of the asset or the cost of improvement thereto shall not include the deductions claimed on the amount of interest under clause (b) of section 24 or under the provisions of Chapter VIA of the Act.
It means that at the time of calculating the Long term Capital Gain tax on the sale of a residential house, a taxpayer should reduce the amount of interest claimed under section 24 or under Chapter VIA from the cost of acquisition or cost of improvement. The indexation benefits will apply to the remaining cost of acquisition/improvement after reducing the deduction of Interest already claimed by a taxpayer.
For instance, in Year 1 a taxpayer purchases a residential house property costing Rs 85 Lacs by availing the housing loan of Rs 75 Lacs. The taxpayer claims the interest paid on house property amounting to Rs 10 Lacs (each year Rs 2 Lacs) from year 1 to year 5. Now in year 8, the taxpayer sells the said house property for a consideration of Rs 1.75 Crores. In year 8, to calculate the capital gain under section 48, the taxpayer will take Rs 1.75 Crores as a sale consideration and Rs 75 Lacs as
the cost of acquisition. The cost of acquisition is derived after reducing the benefit of Rs 10 Lacs as interest claimed under section 24 from the total cost of Rs 85 Lacs. The indexation benefits will apply to the cost of Rs 75 Lacs.
Considering the above example, the taxpayer is saving the tax outflows by claiming the deductions from year 1 to year 5. But at the same time, the tax outflows of future years are increasing i.e. in year 8. Further, the taxpayer is also foregoing the benefit of indexation on the deduction claimed from year 1 to year 5. Also, these benefits are available only if the taxpayer opts for the old tax regime. Therefore, the taxpayer is also foregoing the benefit of reduced tax rates offered by the new tax regime from Year 1 to year 5.
It is also to be noted that the maximum limit under section 24 is Rs 2 Lacs. Therefore, if the amount of interest in an assessment year is exceeding the maximum limit, then the component of such interest remaining unclaimed can be considered as the cost of acquisition/improvement to calculate the LTCG Tax.
Prior to the amendment of Section 48 through Union Budget, 2023, the taxpayers were not restricted to claim the interest cost as the cost of acquisition/improvement even if it was claimed earlier under section 24 under “Income from House Property”. This principle was upheld in the year 2012 by Chennai Tribunal in the case of Assistant Commissioner of Income-tax v. C. Ramabrahmam
(*The article has been revised and incorrect mention of Section 80C has been removed)
(The author is a Chartered Accountant and Partner at Sonecha & Amlani, Chartered Accountants.)
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