As per the Income Tax Act, taxpayers can claim deductions for the interest of up to ₹2 lakh per annum paid on a home loan under the old tax regime. However, some buyers were adding this interest expense to the acquisition cost (overall cost of buying the house) to calculate capital gains at the time of selling the house. This had reduced their capital gains tax burden, allowing them to claim deductions twice for home loan interest. Until now, there were no tax laws prohibiting this practice, and many taxpayers were exploiting it as a means to save tax.
What are the New Rules for Tax Deduction?
Homebuyers who have been taking advantage of a loophole in the Income Tax Act to claim home loan interest deduction twice are in for a disappointment. The 2023 budget has clarified that this practice is no longer acceptable. The change will be implements from 1 April 2024 and home loan interest claimed as a deduction cannot be includes in the acquisition or improvement cost of a house.
The new rule means that interest on a housing loan claimed as a tax deduction cannot be added to the cost of acquisition or improvement of the house property when calculating the capital gain on the sale of the property. Short-term capital gains from the sale of property are taxed at 30% without indexation, while long-term capital gains are taxed at 20% with indexation, provided the holding period is over 24 months.
Conclusion
The new guidelines on home loan interest deduction have several implications for housing loans and homeowners. The limited tax benefits can result in a higher tax liability for homeowners, which can impact their monthly budget and repayment of the housing loan. Additionally, the new guidelines can also impact home loan interest rates and EMI.
