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Tax loophole plugged in realty deals

Buyers availing themselves of home loans are entitled to claim tax deductions under two heads
Representational file image
Representational file image

Sambit Saha   |   Calcutta   |   Published 06.02.23, 01:13 AM

The Union budget has sought to plug several leakages in the proposals for direct tax including two provisions that aim at limiting benefits linked to capital gains arising from house property.

While Union finance minister Nirmala Sitharaman’s move to cap the rollover benefit claimed under section 54 and 54F up to Rs 10 crore has piqued the attention of many high net worth individuals (HNIs), the budget proposal on the prevention of double deduction claimed on interest on borrowed capital (home loan) has gone largely unnoticed.


Buyers availing themselves of home loans are entitled to claim tax deductions under two heads. An individual can claim tax deductions on the amount paid as repayment of the principal component of the housing loan. Buyers are also entitled to claim a deduction on the amount paid as repayment of the interest component on the housing loan.

Under the principal component, an amount up to Rs 1.50 lakh can be claimed as a tax deduction under Section 80C, while under the interest component, up to a maximum deduction of Rs 2 lakh can be claimed under Section 24 in a year.

The budget this year has sought to tighten the screws on deductions linked to the interest payment.

Under the existing provisions of the Income Tax Act, the amount of any interest payable on borrowed capital for acquiring, renewing or reconstructing a property is allowed as a deduction under the head “Income from house property” under section 24 of the Act.

Simultaneously, section 48 of the Act, inter alia, provides the income chargeable under the head “capital gains” shall be computed by deducting the cost of acquisition of the asset and the cost of any improvement thereto from the full value of the consideration received or accruing as a result of the transfer of the capital asset.

“It has been observed that some assessees have been claiming double deduction of interest paid on borrowed capital for acquiring, renewing or reconstructing a property. Firstly, it is claimed in the form of a deduction from income from house property under section 24, and in some cases, the deduction is also being claimed under other provisions of Chapter VIA of the Act.”

“Second, while computing capital gains on the transfer of such property this same interest also forms a part of the cost of acquisition or cost of improvement under section 48 of the Act,” a memorandum to the Finance Bill read.

Dinesh Agarwal, a partner with Ernst & Young (EY), observed: “To plug this gap, an amendment has been proposed to limit the benefit of interest to either of the above, i.e. such interest can either be claimed as a deduction on a year-on-year basis or added to the cost of acquisition, but not both.”

According to him, the move is in line with the government’s intent to rationalise the tax mechanism. “Whether this amendment will have an impact on the home-buying behaviour – only time will tell,” Agarwal added.

Samantak Das, chief economist and executive director(research & REIS) at JLLIndia, concurred that this is an attempt to rationalise tax. However, he hoped that the amendment would not have a significant impact on a home purchase.

On other hand, limiting section 54 up to Rs 10 crore is more to do with the HNI transactions, Das added.

Provisions under sections 54 and 54F allow an individual to avoid paying net capital gain arising from the sale of residential property by reinvesting in a residential property within a specific period.

However, it has been observed that claims of huge deductions by high net worth assesses are being made under these provisions, by purchasing very expensive residential houses. It is defeating the very purpose of these sections.

To prevent this, the budget has proposed to impose a limit on the maximum deduction that can be claimed by an assessee under sections 54 and 54F to Rs 10 crore. 

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