Double Deduction Is No Longer Allowed For Your Housing Loan Interest

Interest on a housing loan is a huge benefit claimed by taxpayers as a deduction, but doing it the right way is also important. Budget 2023 has now proposed to ensure that the deduction of housing loan interest is not misused and is claimed only once. The details of the change need to be known so that the benefit can be claimed properly and it does not lead to disallowance during the assessment process.

There are loans that are taken by individuals for the purpose of acquiring, renewing, or reconstructing a property. The interest that is paid on these housing loans is available as a deduction for the taxpayer, and many of them take full advantage of this benefit. The most common area where the deduction is claimed as a benefit is under Section 24, where up to Rs 2 lakh in a year is available as a deduction. On the other hand, some also claim benefits under Chapter VI A. One of the ways in which this was being misused was that at the time of sale, the interest cost was also considered a part of the cost of acquisition or improvement, which meant that the cost of the property went up and the capital gains figure was reduced. This, in effect, meant that the housing loan interest benefit was claimed twice by several taxpayers. 

The government has now plugged this loophole as far as the income tax benefit is concerned, and it has made a change in this year’s budget related to interest on housing loans. The change says that where the interest on a housing loan has been claimed as a deduction once, either under Section 24 or under Chapter VI A, then the same thing cannot be claimed as an expense for cost of acquisition or cost of improvement while calculating the capital gains on the sale of the property under Section 48. This in effect now means that the deduction can be claimed only once and not in increasing the cost of the property for capital gains calculation when it has already been claimed elsewhere.

The taxpayer has to consider the impact of this move because for all those who were thinking that the interest that they pay will reduce their capital gains burden then this is not going to be possible. However, the change says that only when the interest has been claimed as a deduction will the benefit not be allowed twice. This also seems to suggest that if the benefit has been claimed, it would be allowed in the capital gains calculation. The impact might also be limited because it would only impact those who were thinking of claiming the deduction in their capital gains calculations, and not everyone did that. The total interest paid over the life of the housing loan can add up to a significant figure, and for those thinking of taking advantage of this double benefit, plugging the loophole will lead to a higher tax outgo as far as the capital gains are concerned.

The author is the founder of Moneyeduschool.

The views expressed here are those of the author and do not necessarily represent the views of BQ Prime or its editorial team.