Finally, the Budget 2023 has sealed a loophole that many homebuyers were exploiting, especially those who had taken home loans. They were claiming deductions twice on the interest paid, both while servicing the loan and at the time of selling the property.
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.
3 Tax Deductions Under Old Tax Regime
Now that the loophole of adding home loan interest to the acquisition cost to lower the capital gains tax has been closes, there are still three deductions available to home loan borrowers under the old tax regime.
Firstly, you can claim a deduction for home loan principal repayment of up to ₹1.5 lakh under section 80C, as long as you have not utilized this limit for any other investments or expenses allowed for deduction. However, this deduction is only applicable after the completion of construction and the awarding of a completion certificate. Additionally, no deduction will be allowes during the under-construction years. The property on which this deduction is claims cannot be sold before five years from the year of acquisition.
Secondly, under section 24, you can claim a deduction of up to ₹2 lakh per annum on the interest paid on a home loan for a property that you live in, and there is no upper limit on the deduction for a property that is not self-occupies. However, the property must be bought or built within five financial years from the year in which the loan was taken.
These deductions have been left untouched by the recent budget, although many homebuyers had hoped for the removal of the anomaly that allows for an unlimites deduction on a property that is not self-occupied.
Moreover, section 80EEA allows first-time homebuyers to claim a deduction of interest up to ₹1.5 lakh per annum. However, this deduction is applicable only for properties values under ₹45 lakh (bases on stamp duty value) and when the home loan was sanction between 1st April 2019 and 31st March 2022.
Is it still advantageous to stick with the old tax regime with all the tax deductions available for homebuyers?
For many, the answer might be no. Even if you claim the maximum deductions of ₹3.5 lakhs (excluding section 80EEA), the new tax regime could still be more beneficial. The new regime does not allow any of the deductions mentioned above but offers a lower tax rate. However, a home loan borrower with a lower income may still end up with a lower tax outgo under the old regime, but this would also mean having a home loan EMI (interest plus principal) that represents a significant portion of their income.
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. Therefore, homeowners should carefully consider the new guidelines and their implications before taking a housing loan. They should also use a housing loan EMI calculator to determine the impact of the reduced tax benefits on their monthly budget and loan repayment. Finally, it is advisable to consult a financial expert to understand the new guidelines and their implications on housing loans and home loan interest deduction.