Property price calculation: Existing rule to calculate the base price of the property with stamp duty, home loan
At present, stamp duty and registration charges are usually included in the property’s cost while calculating capital gains. Similarly, home loan interest payment above the annual Rs 2 lakh deduction is often added to the property’s cost, based on judicial precedents for computing capital gains, says Deep Chandan, Executive Director, Katalyst Advisors.
Will home loan interest be included in the base price while selling property?
Will the interest on a home loan be a part of the base price when you sell your property? Answering this, Manmeet Kaur, Partner, Karanjawala & Co, says, “The Finance Act, 2023, has introduced a significant amendment to Section 48 of the Income-tax Act, 1961, effective from April 1, 2024. This amendment marks a departure from the previous interpretation of law established by various tribunals and high courts regarding the treatment of interest on capital borrowed for property acquisition.
Historically, judicial precedents had held that interest on loans obtained for acquiring property could be considered as part of the cost of acquisition. However, the recent amendment explicitly excludes such interest from the computation of acquisition cost or improvement cost for capital gains purposes.”
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The amended clause (ii) of Section 48 now includes the following proviso: “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 the provisions of Chapter VIA.”
This amendment effectively disallows the inclusion of interest, for which deductions have been claimed, when calculating capital gains, he says.
Clarifying it further, Abbas Jaorawala, Senior Director and Head of Direct Tax at Khaitan Legal Associates, says, “In the context of immovable property, the law was amended in 2023 to clarify that the amounts paid towards interest on loan taken for property acquisition and claimed as a deduction from taxable income in the earlier years (i.e. when incurred) under other provisions cannot be again deducted from the sale consideration as a part of cost of acquisition or improvement. This is to prevent a double deduction of the same amount from taxable income.”
What happens when you have not claimed a deduction for paying the home loan interest rate under Section 24(b) while filing ITR earlier, or have paid higher interest than the Rs 2 lakh limit prescribed under Section 24(b)?
Deepa Dalal, Partner, Deloitte India, says, “Deduction for interest paid on housing loan has been specifically allowed as a deduction under Section 48 of the act, to the extent such interest has not been claimed as deduction while computing income from house property (i.e. under Section 24(b) of the act).”
So homebuyers who have claimed a deduction for the loan’s interest payment under Section 24(b) of the Income-tax Act, 1961, can’t claim it again as the cost of acquisition or improvement for the property. For homebuyers, it is clear that if you have already claimed a deduction under Section 24(b) of the Income-tax Act, 1961, for the interest amount while repaying your home loan while filing income tax returns in the earlier years, you can’t claim it again as the cost of acquisition or improvement for the property. However, if there is a portion of the interest amount that you have not claimed under Section 24(b) earlier, you can show it as a “cost of acquisition or improvement” while selling the property.
Homebuyers, take note: Can you add stamp duty to the base price while selling property?
The next question is whether stamp duty can be claimed as a cost of acquisition and added to the base price while selling a property. A maximum deduction of Rs 1.5 lakh on payments towards stamp duty, registration fee, etc., is allowed under Section 80C of the Income-tax Act, 1961. If you have already claimed stamp duty under Section 80C during the financial year you bought the house, you can’t claim it later by adjusting it to the base price of the house. However, stamp duty is typically above 5% of the transaction value and registration charges are 1% of the transaction value in many states. So, if your property value is more than Rs 30 lakh and if the stamp duty is 5%, you are likely to pay more than Rs 1.5 lakh as stamp duty. So, if you have not claimed stamp duty charges under Section 80C or partially claimed it under Section 80C as your stamp duty cost is more than the prescribed limit under Section 80C, can you add it to the base price while selling the property?
Dalal of Deloitte India says, “Section 48 of the Income-tax Act, 1961, states that the income chargeable under the head capital gains must be computed after deducting certain specified amounts from the sale consideration. The items allowed as a deduction are the cost of acquisition, the cost of improvements to the said asset, if any, and the expenses incurred wholly and exclusively in connection with the transfer of such asset.”
Though the term cost of acquisition has not been defined for the purposes of Section 48 of the act, reference can be made to other provisions of the act wherein actual cost means the actual cost of the asset to the assessee, says Dalal. “Even Ind AS 10, dealing with property plant and equipment, states that the cost of the asset shall be the purchase price including non-refundable purchase taxes. Accordingly, for the purposes of Section 48 of the act, all costs (including stamp duty and interest paid on housing loans, if any) incurred by the taxpayer to bring the capital asset to its use shall be treated as cost of acquisition of such asset.”
Further, if the property is held by the taxpayer for more than two years, it would be treated as a long-term capital asset and the cost of the acquisition (actual cost of the asset + stamp-duty charges + registration charges + interest cost on housing loan, remaining unclaimed under 24(b)) incurred by the taxpayer was allowed to be indexed for the purposes of computing income chargeable under the head capital gains till Budget 2024, says Deepa.
Did Budget 2024 change norms of how to calculate the base price of the property while selling it?
Did Budget 2024 amend the previous rules to calculate the base price of the property while selling it? Jaorawala of Khaitan Legal says, “These existing provisions have not been changed by Budget 2024. The only change is that the cost inflation index will no longer apply for long-term capital assets transferred on or after July 23, 2024.”
He points out that the statement of the revenue secretary seems to stem from the above-mentioned position of law (under Section 48 of the Income-tax Act, 1961). “However, there is no explicit provision denying the claim of including stamp duty, registration fee, or any other charges paid for acquiring the property, including unclaimed interest expenditure, to the base cost of acquisition or improvement.”
New LTCG rule on property in Budget 2024: If you don’t include stamp duty and interest amount, how will it impact capital gains tax?
If you don’t include interest on the home loan and stamp duty while computing the capital gains on the property, how will it impact your tax while selling the property? The capital gains computation method for sale of property is the same under both the tax regimes, say experts.
Jaorawala of Kaitan Legal explains it with an example: Assume A bought a home for himself for Rs 50 lakh from a builder and paid a separate stamp duty of Rs 3.5 lakh. He claimed a deduction of Rs 1.5 lakh for stamp duty under Section 80C, and the balance of Rs 2 lakh stamp duty was not claimed as a deduction. He also paid a total interest of Rs 10 lakh on the home loan out of which only Rs 4 lakh was claimed as a deduction under income from house property. The balance amount of interest paid of Rs 6 lakh was unclaimed interest expenditure. After a few years, A sold the property for Rs 75 lakh.
It is possible for A to take a stand that the cost of acquisition of the property is Rs 50 lakh plus Rs 2 lakh unclaimed stamp duty and Rs 6 lakh unclaimed expenditure (total of Rs 58 lakh). Based on that, the taxable long-term capital gain is Rs 17 lakh (Rs 75 lakh minus Rs 58 lakh).
If the revenue secretary’s statement is taken literally, the capital gains would be Rs 25 lakh (Rs 75 lakh minus Rs 50 lakh).
“Given the confusion arising from the statement, and the possibility of unnecessary litigation on the amount of tax payable, it would be desirable that a follow-on statement/circular is issued clarifying the position as per law. In my view, the taxpayer should ensure that none of such expenses have been claimed earlier as a deduction from taxable income. Depending on facts, case laws have supported this position,” Jaorawala adds.
In the new tax regime, you cannot claim a loss on self-occupied property. That becomes unclaimed expenditure which can be added to cost of acquisition, he adds.