It’s an interesting judgement that has caught the attention of tax experts and could lead to more headaches for the income-tax department. The Chennai tribunal recently allowed deduction of interest payments made from capital gains while selling a property.
In a nutshell, it means that if a person has bought a property and paid interest on it, there could be double taxation benefits – one under Section 24 (b) of the Income Tax Act, where one gets benefits for paying interest on a property loan – the limit of this benefit is Rs 1.5 lakh for the first property and unlimited for the second property, as it is considered to be given out on rent. So, a notional value of rent, in the case of a second property, is added to your income and taxed.
After the Chennai tribunal decision, there can be a second benefit. When you are selling the property, you can deduct the interest payments made from the capital gains on property under Section 48.
In the case before the tribunal, the assessing officer had disallowed a deduction under section 48, on the grounds that the assessee had already claimed deduction of such interest under section 24(b). Hence, the same could not be deducted under section 48 for computation of capital gains.
At present, capital gains on a property is calculated after deducting the purchase price, stamp duty, brokerage, etc – all related to the cost of acquisition. However, the ‘cost of improvement’ is not disallowed. So, if you are selling a Rs 50-lakh property for, Rs 80 lakh, the capital gains will be Rs 80 lakh minus the purchase price of property, stamp duty paid, and after this decision, interest payment on loan as well – quite a substantial gain, especially since the interest component is quite high in a home loan.
The tribunal has based its decision on the fact that sections 24 and 48 can be used exclusive of each other. In other words, a deduction under section 24(b) is claimed when the assessee declares income from ‘house property’, whereas, the cost of the same asset is taken into consideration when it is sold and capital gains are computed under section 48.
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While there is no doubt that interest cost is an expenditure in acquiring the asset, the question is whether a person can get two benefits for one transaction.
Tax experts such as Homi Mistry, partner, Deloitte, Haskins and Sells, say this judgement is likely to be challenged by the department in the higher courts because of the double benefit that accrues to the tax payer.
“Otherwise the government can make necessary changes in the Income-Tax Act, whereby the interest expense is not allowed to be set-off against capital gains,” said another tax expert. However, whatever be the final decision, many sellers of property will find it quite favourable for now. And, it could lead to more litigations.