TaxTMI 
TaxTMI 
TaxTMI 
Capitalization of Interest paid for Capital Gain purpose
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....apitalization of Interest paid for Capital Gain purpose<br> Query (Issue) Started By: - Ethirajan Parthasarathy Dated:- 19-9-2025 Last Reply Date:- 19-12-2025 Income Tax<br>Got 1 Reply<br>Income Tax<br>Zuhari Investments Ltd., ITAT Delhi, Maithreyi Pai, Karnataka HC, Trishul Investments, Madras HC allowed capitalization of interest on borrowed funds for acquiring shares etc., while calculating cap....
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....ital gain provided such interest was not claimed as deduction elsewhere. Can such interest incurred post-acquisition be claimed as deduction for calculating capital gain on Market Linked Debentures (MLDs) u/s 50AA which is specifically introduced to tax all capital gain on MLDs as "Short Term" as a measure to curb tax arbitrage Reply By Ryan Vaz: The Reply: Applicable Law / Case Law *....
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.... Section 50AA, Income-tax Act, 1961 (inserted by FA 2023, w.e.f. AY 2024-25) * Deems any gain on transfer/redemption of MLDs as Short-Term Capital Gain (STCG), irrespective of holding period. * Computation mechanism refers back to section 48 (full value minus cost of acquisition & cost of improvement). * Section 48 (Computation of Capital Gains) * Allows deduction of: * Cost of acquisiti....
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....on * Cost of improvement * Transfer expenses * Judicial precedents on capitalization of interest * Zuhari Investments Ltd. - 2022 (1) TMI 240 - ITAT DELHI (ITAT Delhi) * CIT v. Maithreyi Pai - 1983 (11) TMI 43 - KARNATAKA HIGH COURT (Karnataka HC) * CIT v. Trishul Investments Ltd. - 2007 (7) TMI 252 - MADRAS HIGH COURT (Madras HC) Ratio: Interest on borrowed funds used to acquire a c....
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....apital asset can form part of cost of acquisition, provided it is not claimed as revenue deduction elsewhere. * CBDT Circular No. 2/2024 (Explanatory Memorandum to FA 2023) * Objective of s.50AA: Curtail tax arbitrage arising from LTCG treatment of MLDs. * No restriction placed on components of "cost" under section 48. Short Practical Answer Yes - interest incurred post-acquisition of MLDs....
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.... can be capitalised and deducted while computing STCG under section 50AA, provided: * Borrowed funds were used to acquire the MLDs, and * Such interest has not been claimed as deduction under any other head (e.g., s.36(1)(iii) or s.57). Section 50AA changes only the character of gain (always STCG); it does not override section 48 nor disallow capitalization of interest.<br> Discussion Forum -....
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