Property Sales and Capital Gains

Most people who avail home loans do so as the purchase of properties is quite expensive, and home loans make them affordable for those who have no savings to finance the purchase of a home or a property. However, there are also people who avail home loans even if they have adequate savings to purchase a home or property. The reason for this is that the interest payments made towards home loans are eligible for tax deductions under Section 24 B of the Income Tax Act. The capital repayment amount is also eligible for tax benefits of Section 80 C of the Income Tax Act.  

Under Section 24 B of the Income Tax Act, the amount of money that can be claimed as deduction on home loans can go up to Rs.2 lakh per year. So far as the deduction of principal repayment is concerned, the amount of money that can be claimed as deductions can go up to Rs.1.5 lakh per year.  

Selling the property  

In case you wish to sell a property, you will have to pay tax on the capital gains you have made by selling the property. The calculation of capital gains is done by deducting the cost of the transfer from the gross sales proceeds. This gives you the net sales proceeds from which the expenses incurred on improving the property and the indexed cost of acquisition is subtracted to find the capital gain.  

In an effort to lower their tax liability, some people tend to include the interest payments made on home loans as part of the acquisition cost. Although tax rules and regulations do not say whether or not the interest payments towards a home loan can be added to the cost of acquisition when calculating capital gains on the sale of a property, it is said that a move like this could invite litigation because it results in double deduction of interest payments (when calculating “income from house property” and again when calculating “income from capital gains”).  

Contradictory decisions made by Income Tax Appellate Tribunals 

Income Tax Appellate Tribunals, or ITATs as they are known in their abbreviated form, have made contradictory decisions regarding the inclusion of interest payments on home loans as part of the cost of acquisition when calculating capital gains. Recently, the Delhi Income Tax Appellate Tribunals passed a ruling which favoured the assessee, thereby allowing for deduction on interest payments on home loans for acquiring a property when calculating capital gains at the time of selling said property. According to the tribunal, deducting the interest paid on home loans when calculating income from house property as well as at the time of calculating income from capital gains are separate and that it could be done by assessees. 

The Chennai Bench of the Income Tax Appellate Tribunal, in 2012, also passed a ruling favouring the assessee. An assessee had made a claim for the interest payment on his home loan as a deduction under Section 24 B of the Income Tax Act. When the property was sold, the interest payment on the home loan was considered as “cost of acquisition”. The assessee claimed also claimed a deduction under Section 48 of the Income Tax Act when calculating capital gains. According to the assessing officer at the time, the interest was allowed as a deduction under Section 24 B of the Income Tax Act due to which the assessee could not claim another deduction at the time of calculating capital gains. 

The assessees view was upheld by the Commissioner of Income Tax (Appeals). Calculation of capital gains under Section 48 of the Income Tax Act and the deduction under Section 24 B of the Income Tax Act were covered under separate heads of income i.e. ‘income from capital gains’ and ‘income from house property’. Considering the fact that both provisions are completely different from one another, the assessee could include the interest payment on the home loan for calculating capital gains under Section 48 of the Income Tax Act despite the fact that it was claimed under Section 24 B of the Income Tax Act when calculating income from house property. 

According to Balwant Jain, a tax expert, benefits under Section 24 B of the Income Tax Act can be claimed on home loan interest payments, and the interest paid can also be included in the cost of acquisition when calculating capital gains at the time of selling the property. In another similar case, however, the Bangalore Income Tax Appellate Tribunal Bench did not approve of the deduction on the interest payment on a home loan at the time of calculating short-term capital gains when selling the property. According to the bench, since the interest on home loan was allowed when calculating income under the head ‘income from house property’ regardless of whether it was actually allowed or claimed, it cannot lead to allowing addition in the cost of acquisition.