Capital Gains – Housing Loan Interest as a Cost of Acquisition
While calculating capital gains tax on sale of a house property, can we consider the housing loan interest as a cost of acquisition?
This is a question we received recently from a reader of this blog. The argument is that one takes a housing loan and pays interest on the loan only for the purpose of acquiring the house property. Hence, when the property is sold, shouldn’t interest payment be considered as a cost of acquisition?
Section 24 of the Income Tax Act, explicitly allows us to consider interest on housing loan as a deduction while calculating income from house property. But what about while calculating capital gains tax? The law permits reduction of capital gains by adding certain expenses to the cost of acquisition of a house property. Can interest be considered for this?
Interest Expense as Cost of Acquisition – Legal Basis
Sections 48, 49 and 55 of the Income Tax Act specify issues related to the cost of acquisition of a capital asset while calculating capital gains. However, these sections do not explicitly state whether interest on housing loan can be considered as cost of acquisition for the purpose of calculating capital gains when a house property is sold.
We have a couple of case laws in which legal authorities have declared that interest can be considered as cost of acquisition in case of property acquisition.
a. CIT Vs. K. Raja Gopala Rao (2001 252 ITR 459 Mad)
This case concerns sale of a hotel property and the court declared that the interest on capital borrowed for the purpose of acquisition of the property shall be considered as cost of acquisition.
Payment of consideration for the sale indisputably having been made with the borrowed funds, the borrowing directly related to the acquisition and, interest paid thereon would form part of the cost of acquisition.
b. CIT Vs. Sri Hariram Hotels (P.) Ltd. (2010 229 CTR 455 Kar)
The Tribunal after hearing the parties and having considered the case of the assessee held that out of the borrowed loan from the directors, the property has been acquired and any interest paid thereon would also be accounted towards the cost of acquisition of the asset.
A Case of Double Benefit?
Let us say a person buys a house property on borrowed capital and uses the interest paid on capital as a deduction while calculating income from house property. When the person sells the house property, he uses interest as a cost of aquisition in order to reduce the capital gains tax liability. Is this not a case of double deduction?
A judgement delivered by a Chennai Tribunal (ACIT v C.Ramabrahmam) in 2012, states that a person can claim benefit under both Section 24 and Section 48.
After perusing the above said provisions, we are of the opinion that deduction under section 24(b) and computation of capital gains under section 48 of the “Act” are altogether covered by different heads of income i.e., income from ‘house property’ and ‘capital gains’. Further, a perusal of both the provisions makes it unambiguous that none of them excludes operative of the other. In other words, a deduction under section 24(b) is claimed when concerned assessee declares income from ‘house property’, whereas, the cost of the same asset is taken into consideration when it is sold and capital gains are computed under section 48. We do not have even a slightest doubt that the interest in question is indeed an expenditure in acquiring the asset. Since both provisions are altogether different, the assessee in the instant case is certainly entitled to include the interest amount at the time of computing capital gains under section 48 of the “Act”.
What About Indexation?
There is a small issue related to considering interest as a cost of acquisition while calculating capital gains. If the interest amount is paid across years on account of the loan schedule, how does one look at indexation? Should interest amounts paid across years be simply added up to arrive at the total cost of acquisition?
There does not seem to be any explicit reference to this in any of the judicial pronouncements on this issue.
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Sir,
A circular states that only Rs 12,000 towards tuition fee per child can be claimed as 80c rebate.Please advise.Thank you for replying to my doubts posted earlier.
Please let us know the circular number.
Sir,
A husband and wife takes housing loan jointly with equal share for their joint property.Is it necessary that the benefit of income tax exemption is to be divided equally among the two?
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The income tax benefit should be claimed as per the EMI share they are paying from their respective salaries and not on the basis of their ownership. For example, if the wife pays 100% of the EMI from her salary, she gets to claim 100% tax benefit on both interest payment and principal repayment.
I book an apartment in 2009 and paid 25 lacs from my bank and taken a loan of 90 lacs.In the last six year I paid 55 lacs interest and delay payment interest. I have yet not got the possation of flat. The apartment is likely to be completed by jan 2016. Now I am selling the house for 165 lacs.what is my capital gain on which I have to pay the capital gain tax
Can property tax paid over the years be included in the cost of acquisition of the property to calculate LT capital gains?
No, the property tax cannot said to be an expense incurred for the purpose of property acquisition and hence cannot be considered.
If the house was under construction during the year 14-15 then do we need to furnish its details in ITR form?
Not required.
Hi,
While calculating capital gain, according to the double deduction on interest,
is Indexation also applicable.
Say, if i bought a house in 2008 at 10lakhs and sold it on 2014 at 25lakhs. I have paid an interest of 6 lakhs during this period(say). What will be the capital gain. Is it 25-6 = 19. Do we have to apply indexation on this 19 lakhs to know the actual capital gain..Please let me know your answer
While judicial authorities have ruled that interest can be considered as cost of acquisition, the law is silent whether interest payments can be considered for indexation. You could consider getting in touch with the tax department to seek a clarification on this.
Sir, I have taken a Residential house last year. Me and my wife has taken a joint home loan for the same. property is registered under my name only and total instalment is deducted from my bank account, but my wife transfer equal share of the instalment amount every month to my Bank account. please suggest whether she is eligible to claim deduction of Interest and principle portion.
If the property is registered in your name, you alone can claim tax benefit on the housing loan.
Sir,
I am planning to sell under construction apartment (right of property). Since it is under construction, I did not claim any Housing Loan interest benefits. Should I take interest paid as ‘acquisition cost’ of the property while calculating capital gain?
FYI : I am selling this right after holding more than 36 months.
Regards
Priyo
Yes, you can.
Mr x took loan for acquiring land in 2000 . In 2006 he constructed a house on that land in this case can he availed deduction under sec 24(b) of income tax act 1961for interest paid on loan of land in case of self occupied house and up to which extend he can avail the deduction. Can he avail deduction of 200000
He can avail the benefit of up to Rs 2 lakh provided the construction was completed within 3 years from the year of taking the loan. The year of land acquisition has no bearing on this.
I was purchased a house 4 ago by borrowing money & I also claimed ded u/s 24(b) for the interest part.
Now I’m going to sale the property.
Whether Interest on borrowed money shall form part of Cost of acquisition or not( already claimed deduction u/s 24 b for last 4 years).?Whether double deduction allowed?
If yes,Whether indexation benefit is available on interest part?
If any recent notification /circular is available in this regard pls quote the no.
Yes, interest can be considered as cost of acquisition and indexation can be applied accordingly. There is no recent notification on this.