Capital gains: Including home loan interest in cost of acquisition?

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Published: November 26, 2019 12:12:03 AM

In a bid to reduce the burden of tax payments, one may consider it lawful to claim interest expense incurred on acquisition of residential property as a part of cost of acquisition while computing capital gains.

tax, income taxWhen selling the acquired house, tax planning has to be done carefully to avoid hefty taxes.

As the amount of money required to buy a house is huge, most people take home loans and pay interest on the loan amount. The individual gets tax deduction on the home loan on the interest expense while computing income under the head “income from house property” and benefit under Section 80C for the principal repayment.

When selling the acquired house, tax planning has to be done carefully to avoid hefty taxes. Computation of capital gains arising on the concerned sale can be challenging as to what are the permissible expenses to be included in cost of acquisition of the house.

Capital gains & interest expense

In a bid to reduce the burden of tax payments, one may consider it lawful to claim interest expense incurred on acquisition of residential property as a part of cost of acquisition while computing capital gains. Such a move may invite litigation on account of double deduction of interest payment, i.e., one at the time of computing “income from house property” and second at the time of computing “income from capital gains”.

The courts have delivered contradictory decisions with respect to inclusion of interest on borrowed funds as a part of cost of acquisition while computing capital gains. In a recent judgement, Delhi ITAT ruled in favour of the assessee, allowing deduction for interest on capital borrowed for acquisition of house property, while computing capital gains on sale of such house property. It opined that deduction of home-loan interest while computing income from house property and while computing income from capital gains are exclusive of each other and none of them excludes the operation of the other. The assessee was entitled to include the interest amount at the time of computing capital gains. Likewise, Chennai ITAT ruled in favour of the assessee, granting him the benefit of interest deduction from income from house property as well as capital gains.

Conflicting judicial views

However, conflicting judicial views have been expressed by several courts with respect to allowability of home-loan interest as a permissible expense for the purpose of computation of capital gains. One such judgement by the Bangalore ITAT denied deduction for home loan interest while computing short-term capital gains on transfer of house property. It said that since interest on housing loan was allowed while computing income under the head ‘house property’, even if the same is not actually claimed or allowed, it cannot result into allowing addition in the cost of acquisition.

No restriction has been explicitly imposed in the Act with respect to the claim of dual deduction of home loan interest. Drawing inference from several rulings delivered by the courts, the position is that it is a controversial issue wherein claiming deduction of home loan interest under, both “income from house property” as well as “income from capital gains” would certainly invite litigation as the matter would be disputed by the tax authorities on account of double deduction claim of the individual.

You have to check the litigation cost vis-a-vis the projected tax savings accruing from dual-deduction benefit. The assessee’s stance in the litigated case could be stronger when he could not claim entire interest deduction while computing “income from house property” owing to monetary limit prescribed under the Act wherein excess interest has not been claimed as a deduction earlier, thereby not resulting in double deduction of the same expense.

The writer is director, Nangia Andersen LLP. With inputs from Shruti Gupta

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