Can Home Loan Interest Reduce Capital Gains Tax Under the New Tax Regime?

Buying a home remains one of the largest financial decisions most Indians make, often requiring a home loan. Historically, home loan interest could be used to lower your income tax under the old tax regime, and some taxpayers even attempted to add that interest to the cost of acquisition to reduce capital gains tax when selling the property later.

However, with India’s introduction of the new tax regime under Section 115BAC, the tax treatment of home loan interest has changed significantly. The question now on many homeowners’ minds is: Can paying home loan interest still help reduce your capital gains tax liability under the new regime? This article explains the rules, the legal context, and how taxation works when you sell a property financed with a home loan.

Understanding the New Tax Regime and Home Loan Interest

Under the new tax regime (Section 115BAC), individuals can enjoy lower tax slabs but lose many popular deductions that were available under the old regime. One of the most significant changes is that interest paid on a home loan for a self-occupied property is not deductible when filing income tax returns under the new regime.

Previously, under Section 24(b) of the Income Tax Act, homeowners could claim a deduction of up to ₹2 lakh per year on the interest paid for a self-occupied house. This benefit is not available if you choose the new regime.

This change means that many homeowners now pay more tax each year because the interest on their home loan no longer reduces their taxable income.

At the same time, some taxpayers have asked whether this unpaid home loan interest — which they cannot deduct from income now, could instead be added to the cost of acquisition when calculating capital gains on selling the property. This has historically driven disputes between taxpayers and tax authorities.

Home Loan Interest & Capital Gains: What the Law Says

When you sell a property, the capital gains tax you owe is computed as:

Capital Gains = Sale Price – (Cost of Acquisition + Improvement + Expenses)

Taxpayers have tried to include home loan interest in the cost of acquisition, arguing that borrowing costs should be part of the investment cost. However, a legal change in 2023 amended Section 48, the rule that defines how capital gains are calculated. Under the amendment, interest already claimed as a deduction under Section 24(b) or under Chapter VI-A cannot be included in the cost of acquisition or improvement.

Here’s the key point: that amendment prevents double benefits, you cannot claim a deduction on home loan interest and add it to capital gains cost. But under the new tax regime, since interest cannot be claimed as a deduction in the first place, some experts have theorised whether adding it to the cost of acquisition might be allowed.

There are conflicting interpretations:

• Some argue that because you never claimed the deduction under the new regime, you didn’t get a double benefit — so it should be included in cost of acquisition.  GoodReturns report.
• Others — including tax professionals and authorities — contend that even if not claimed, interest cannot be added, as this would go against the spirit of the law and general tax principles.
• Tribunal cases (e.g., Rajesh Saluja v. DCIT) have held that only costs directly related to buying the property may qualify, and home loan interest may not qualify if it is not treated as part of actual acquisition cost.

Thus, the safer professional advice is not to include home loan interest in the cost of acquisition unless a clear legal precedent favours it, especially under the new tax regime.

Tax Benefits on Home Loans: Old vs New Regime

Before diving further into capital gains, it helps to compare the allowed deductions on home loans in each regime:

Home Loan Tax Benefits: Old vs New Regime
 

Interest cannot be added if it was deducted

Generally not allowed

This comparison shows that under the new tax regime, most of the classic deductions related to home loan interest and principal are unavailable. Even letting property (renting it out) doesn’t restore those benefits fully, though some interest deduction for rental income may still be allowed (with limits).

Can You Add Interest to Cost of Acquisition Under New Regime?

This is the heart of the confusion many taxpayers have:

• The Income Tax Act amendment in 2023 clarified that interest already claimed as a deduction cannot be included in acquisition cost.