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

Tax Element	Old Tax Regime	New Tax Regime (115BAC)
Home Loan Interest on Self-Occupied Property	Deduction up to ₹2 lakh/year under Section 24(b)	Not allowed
Principal Repayment Deduction (Section 80C)	Up to ₹1.5 lakh (shared with other 80C items)	Not available
Deduction for Let-Out Property (Interest)	Fully deductible, subject to loss limits	Still available but with restrictions
Capital Gains Tax Reduction via Cost of Acquisition	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.
Under the new regime, you are not allowed to claim that deduction at all.
Some practitioners argue that unclaimed interest (because the new regime disallows deduction) could be included as part of the cost of acquisition.
However, income-tax tribunals and many tax advisers caution that this may be risky: interest on borrowed capital is not normally treated as a cost of acquisition unless specific legal provisions allow it.

In simple terms:

No clear legal provision now allows home-loan interest to be added to the cost of acquisition for capital gains tax simply because it could not be deducted under the new regime.

This means that paying interest on your mortgage today does not directly reduce the capital gains tax you will owe when you sell your house, regardless of regime. The tax benefits come only from what the law explicitly allows.

Other Tax-Saving Strategies With Home Loans

While home loan interest may not reduce your capital gains tax, you can still plan tax-efficiently:

Choose the Right Tax Regime: For people with significant home loan interest, the old tax regime may still be lower in tax liability overall.
Claim Section 80C Benefits: Principal repayments and other eligible payments (like stamp duty/registration) can be claimed under Section 80C if you choose the old regime.
Rental Income Deductions: If the property is rented, interest is still a deduction subject to limits on net loss under house property.
Capital Gains Exemptions for Reinvestment: Under Section 54, using capital gains from selling one house to purchase another can offer relief — but this is unrelated to home loan interest.

Conclusion

Under India’s new tax regime (115BAC), the tax landscape for home loan interest and capital gains has changed:

Home loan interest deduction is no longer available for self-occupied properties.
Legal amendments prevent double benefits; interest claimed cannot be added to cost of acquisition.
While some interpretations suggest unclaimed interest might be added to acquisition cost under specific circumstances, the safe and widely accepted practice is that it cannot be.

As a result, homeowners considering selling a property should not rely on home loan interest to reduce capital gains tax under the new tax regime. Instead, planning around exemptions for reinvestment, choosing the most suitable tax regime each year, and consulting a qualified tax professional remain the best strategies for managing tax liability on property transactions.

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