Taxpayers will no longer be allowed to claim a deduction for the interest rate on a home loan twice. The government ultimately eliminated the loophole that homebuyers were exploiting. In fact, several persons claimed interest deductions twice: once while repaying the loan and once when selling the property. However, this will no longer be possible.
Under the earlier tax regime, taxpayers could claim a deduction for up to 2 lakh per annum in interest paid on a home loan under the Income Tax Act. However, many buyers add this interest payment to the acquisition cost (the total cost of purchasing the house) to calculate the capital gain when the house is sold. This decreased their taxable capital gains. Many people were doing this to save tax in the absence of sufficient legislation.
It will no longer be possible to do so with the introduction of Budget 2023 measures. Under the proposed modifications to the Income Tax Act, home loan interest cannot be deducted as part of the acquisition or improvement cost of a dwelling. It will go into effect on April 1.
According to Mint news, CharteredClub.com founder Karan Batra had been warning customers against this practice for quite some time and had been asking them how they claimed deduction twice. However, the absence of law allowed them to do so despite warnings.
The main difference will be that interest on a home loan claimed as a tax deduction will no longer be allowed to be included in the cost of acquisition/improvement of the property when calculating the capital gain on the sale of a house. Short-term capital gains on the sale of property are taxed at 30% without indexation and 20% with indexation.
With the loophole of including interest cost in capital gains calculation being done away with, here are three current deductions that a home loan borrower can avail of under the old tax regime.
Deductions for home loan principal repayment are allowed only once construction is completed and a completion certificate is issued; no deductions are allowed during the construction period. The property on which this deduction is claimed cannot be sold within five years of its acquisition. If you sell before this date, the deduction will be considered as income in the year of sale and will be taxed.
Section 24 allows you to deduct interest paid on a house loan up to Rs 2 lakh per year for the property you live in
First-time home purchasers are eligible for an interest deduction of up to 1.5 lakh per year under Section 80EEA, but only for residences worth less than 45 lakh. Assuming the loan was approved between April 1, 2019 and March 31, 2022.
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