TaxTMI 
TaxTMI 
TaxTMI 
Author’s note
A client came to me, he wanted to sell his first residential building which he brought five years back, to reallocate in new city, His tax filer made to pay him around Rs. 15 lakhs of tax, hence he came to me asking for advisory and tax saving techniques, as he failed to made any investment of proceeds as well. I gave him advisory and saved approx. his Rs. 5 lakhs in taxes, how? Let’s discuss in the article with few case laws and research that I made.
Introduction
Most of the people are confused that while computing capital gains on sale of immovable property, whether interest paid on a home loan can be added to the cost of acquisition so as to reduce the taxable capital gain or it is disallowed, the issue arises as the Income-tax Act allows deduction of home-loan interest under section 24(b) on one hand, and permits reduction of cost of acquisition and improvement under section 48 while computing capital gains on the other.
In this article I have briefly explained the same, before that, Let’s discuss the sections which I will be using in this article
Section 48 deals with mode of computation:
“The income chargeable under the head ‘Capital gains’ shall be computed by deducting from the full value of the consideration … (ii) the cost of acquisition of the asset and the cost of any improvement thereto … Provided 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.”(Inserted proviso effective AY 2024-25)
This means that section 48 lays down how the capital gains are computed, i.e. by reducing from sale proceeds the cost of acquisition and cost of improvement. This new proviso stops taxpayer from claiming double benefit, that means if the assessee have already taken a deduction for interest as per section 24(b) or Chapter VI-A, then he cannot again add that interest to cost of acquisition/improvement to reduce capital gains, I think it’s fair enough, but what is this section 24(b) of income tax act?
Section 24(b) deals with interest on borrowed capital by permitting the deduction from income from house property for interest payable on borrowed capital used for acquisition or construction or repair or renewal which is subject to the statutory limits, that means in the case of a self-occupied property, the maximum deduction is Rs. 2,00,000 per annum, provided the loan is taken for acquisition or construction and the construction is completed within 5 years from the end of the financial year in which the loan is taken, otherwise, the deduction is restricted to Rs. 30,000.
In the case of property which is given on rent, there is no ceiling on the amount of interest deductible, though set-off of loss under the head house property, while it is restricted to Rs. 2,00,000 per year in case of other heads and the balance loss can be carried forward.
Readers also note that I will use chapter VI-A in article by which I mean that two sections of this chapter i.e. Section 80EE and 80EEA, whereas section 80EE allows an additional deduction of up to Rs. 50,000 per annum in respect of interest paid on a home loan taken by a first-time home buyer, subject to conditions relating to loan amount and value of the residential property. This deduction is over and above section 24(b) and is available for loans sanctioned within the specified period under the Act, while section 80EEA provides an additional deduction of up to Rs. 1,50,000 per annum for interest on home loans taken for affordable residential houses, subject to conditions such as stamp duty value limit and loan sanction dates. This deduction is also in addition to section 24(b) and is available only where section 80EE is not claimed.
Opinion of courts before amendment
There are many judicial decisions of high courts and ITATs which allowed interest paid on borrowed capital mainly the interest which was paid up-to the date of acquisition or during construction and directed that it is to be added to cost of acquisition or cost of improvement for capital gains computation.
Notable tribunal decisions in recent years allowed taxpayers to include unclaimed interest in cost of acquisition even where the interest had not been claimed earlier under section 24. The Kolkata ITAT in Bani Broto Banerjee v. CIT allowed inclusion of interest for the years prior to the amendment.
Citations: ITAT Kolkata (‘C’ Bench) order dated 18 November 2024 with ITA No.: 520/KOL/2023 [Bani Broto Banerjee Versus Commissioner of Income Tax (Appeals), Kolkata - 2025 (1) TMI 755 - ITAT KOLKATA]
However, where the AO finds that the interest claim had been treated elsewhere, or something else then he may disallow.
Now, before proviso, the taxpayers had an option to include certain interest amounts in cost of acquisition especially pre-construction interest and interest paid till acquisition/possession, but outcomes varied by facts and case to case.
Practical analysis
In case the interest not claimed earlier anywhere that means if you did not claim the interest as a deduction under section 24(b) or anywhere under chapter VI-A (section 80EE or 80EEA) in the previous assessment year(s) when the interest arose, several courts have permitted adding that unclaimed interest to cost of acquisition/improvement, particularly pre-construction interest or interest paid up to date of acquisition/possession.
Secondly, where interest on a home loan has already been claimed and allowed as a deduction under section 24(b) or under Chapter VI-A, the amended proviso to section 48 that is applicable from assessment Year 2024-25 onwards, prohibits adding such interest to the cost of acquisition or cost of improvement while computing capital gains, as this would result in a double tax benefit to the assessee. However, for assessment years prior to AY 2024-25, this restriction did not exist in the statute, and therefore taxpayers may still contest such disallowance based on facts and judicial precedents.
Now what is the pre-construction interest which is generally capitalised and the post-acquisition interest which is decreased from revenue?
Here the courts have recognised that pre-construction interest (interest during construction / before completion/possession) can be capitalised and treated as part of cost, but once interest has been claimed and allowed as an annual deduction under section 24, prospectively the benefit is barred from being added again to cost.
My advice to client
First of all, I checked that whether the interest was claimed in any prior ITR under section 24(b) or Chapter VI-A for the previous years, though I din’t found it but in case found then post-AY 2024-25 statutory bar applies, but for pre-2024-25 he could litigate but risk profile differs from case to case.
Then I assessed the nature & period of interest where the pre-construction interest has stronger case for capitalisation, then I took bank statements, loan account statements, interest certificates from bank, construction invoices, payment vouchers etc to collect the proofs, and completed my documentation for stamp duty, registration charges, GST etc.
In my case client hadn’t claimed any interest earlier, so I prepared a detailed working showing sale consideration, indexed cost of acquisition, interest amounts proposed to be capitalised and I indexed it as well. To explain client the legal basis about his savings also I prepared alternative computations with and without including interest.
Documentation
I advised client to maintain certain documentation as well like loan sanction letter and loan account statement showing breakup of principal & interest, interest certificates from lender, construction invoices, contractor receipts, possession certificate, builder receipts, stamp duty & registration receipts, copies of ITRs for years where interest was claimed (to show whether deduction was claimed), etc.
Let’s understand it with illustration
Suppose, STS Ventures with is proprietorship consulting firm purchases a property of Rs. 50,00,000, Pre-construction interest (not claimed under section 24) is Rs. 3,00,000 and the sale price after 8 years is suppose Rs. 80,00,000.
Now, the cost base without interest shall be Rs. 50,00,000 i.e. LTCG will be 80,00,000 - 50,00,000 i.e. Rs. 30,00,000 (before indexation / exemptions), If interest of Rs. 3,00,000 is added to cost, then cost shall be Rs. 53,00,000 and the LTCG shall be 80,00,000 - 53,00,000 i.e. Rs. 27,00,000. Resulting in reducing taxable gain by Rs. 3,00,000, but if interest already claimed and allowed under section 24 then post-AY 2024-25 proviso prevents adding ?3,00,000 again.
Thoughts
The amendment is aimed to prevent double benefit i.e., claiming interest once under house property and again as cost of acquisition. The precise outcome in any case still depends on the timing of interest, whether claimed, assessment orders. Tribunal and HC’s judgements remain relevant for years prior to the statutory change.
Conclusion
If you ask me that whether the interest paid on home loan can be added in cost of acquisition of immovable property while selling it and calculating capital gain tax, I will affirm to it, reason being historically, the tribunals and some high courts have allowed interest paid on a loan used to acquire an immovable property to be included in the cost of acquisition (thereby reducing capital gains) unless that interest was already claimed and allowed as a deduction under section 24 or Chapter VI-A, with effect from AY 2024-25 Parliament has inserted a proviso in section 48 which expressly disallows inclusion of the amount of interest already claimed under clause (b) of section 24 or Chapter VIA in the cost of acquisition or improvement.
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