This article explains how home loan interest interacts with capital gains tax under India’s updated personal income tax laws — especially for taxpayers choosing the new tax regime (Section 115BAC). It focuses on whether you can reduce capital gains tax by including home loan interest in the cost of acquisition, how the law treats home loan interest under both tax regimes, and what practical implications this has when selling property.

Can Home Loan Interest Reduce Capital Gains Tax?

When you take a home loan to buy or build a house, you pay two main components each year: principal and interest. Traditionally, under India’s old tax regime, the interest component up to ₹2 lakh per year could be claimed as a deduction under Section 24(b) when computing your income from house property. This lowered your taxable income and reduced overall tax liability.

But in the new tax regime introduced under Section 115BAC, many popular deductions, including the home loan interest deduction for self-occupied property, have been removed. This means you cannot claim that deduction even if you paid significant interest.

At the same time, many taxpayers wonder: if I cannot deduct home loan interest while computing income, can I still add that interest expense to the “cost of acquisition” when selling property and thereby reduce capital gains tax? This article explores that question, explains how the law has changed, and what this means in practical terms for homeowners and sellers under the new tax regime.

Home Loan Interest & Capital Gains: What Law Says

Under the Income Tax Act, capital gains tax on property is usually calculated as:

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

In this structure, only certain costs can be added to the cost of acquisition. Interest on borrowed capital used to buy, construct, or improve a property can be included only if it has not already been claimed as a deduction under Section 24(b) for income tax purposes.

Prior to the amendments in Finance Act, 2023, some taxpayers tried to claim a deduction against income (reducing current tax) and then again include that same interest as part of the acquisition cost when computing capital gains (reducing future tax). To prevent this double benefit, the law was amended to clarify that any interest already claimed as a deduction cannot be added to the cost of acquisition or cost of improvement under Section 48.

However, the amendment does not explicitly prohibit including interest in the cost of acquisition if no deduction was claimed under Section 24 — for example, because the taxpayer chose the new tax regime, where that deduction is not available in the first place. Yet, tax authorities may challenge this practice, arguing that allowing capital gains reduction by interest in new regime cases undermines the purpose of Section 115BAC.

This legal nuance is the heart of current debates between practitioners and tax authorities.

Home Loan Interest: Old vs New Regime (Including Capital Gains Treatment)

Before we dig deeper into the capital gains implication, it helps to compare how home loan interest is treated under the old and new tax regimes.

Home Loan Interest Tax Treatment — Old vs New Regime

Feature	Old Tax Regime	New Tax Regime (Section 115BAC)
Interest deduction on self-occupied property under Section 24(b)	Yes — up to ₹2 lakh per year	No deduction for interest
Interest deduction on let-out/rented property	Yes — full deduction allowed; losses carried forward	Yes — but losses cannot be set off against other income or carried forward
Ability to include interest in cost of acquisition if interest was deducted	No — prohibited (double benefit)	Open legal question if interest not claimed as deduction
Principal repayment deduction under Section 80C	Up to ₹1.5 lakh (if old regime chosen)	Not available under new tax regime
Impact on Capital Gains (theoretical)	Interest not allowed if claimed as deduction	May be argued by taxpayer where no deduction claimed

Summary of Table / Impact:
The key takeaway is that under the new tax regime, home loan interest for self-occupied property does not reduce your annual tax liability at all, because the deduction is unavailable.

However, since you didn’t claim it as a deduction, you technically might be able to include it in your property’s cost basis for capital gains, though this remains a point of contention with tax authorities if they argue such inclusion effectively replicates a deduction the regime intends to eliminate.

This means taxpayers must be cautious, keep clear documentation, and possibly seek professional advice to avoid disputes.

Can Interest Paid Be Added to Cost of Acquisition?

As noted earlier, the Finance Act, 2023 amended Section 48 to clarify that home loan interest claimed as a deduction cannot be included in the cost of acquisition. That directly prevents double dipping.

But what if you never claimed the deduction because you were in the new tax regime where that deduction simply isn’t available? This is the grey area. Technically, if you didn’t claim the interest under Section 24(b), you haven’t received any tax benefit for that interest. Some tax professionals therefore argue that the interest could still be capitalised (i.e., added to the cost of acquisition) under Section 48.

Authorities, however, may counter that permitting such capitalisation, even if you didn’t claim a deduction, defeats the purpose of the new regime, which is to simplify tax and remove deductions to reduce complexity and overall tax liability. This legal debate is likely to be settled only by judicial interpretations or further clarifications from the tax department or the Ministry of Finance.

Practical Example: Impact on Capital Gains Tax

Suppose you bought a house in FY 2018 for ₹50 lakh, financed with a home loan on which you paid ₹10 lakh in interest over the holding period. Under the new regime, you did not claim the ₹2 lakh per year deduction available in the old regime. Now you sell the house in FY 2026 for ₹1 crore.

Under current law, you can compute indexed cost of acquisition on ₹50 lakh. The question is whether you can also include the ₹10 lakh in home loan interest to reduce your capital gains taxable amount (₹1 crore – indexed cost basis). If allowed, this reduces your capital gains tax significantly.

However, if the tax officer disallows it, the cost basis would remain ₹50 lakh (plus indexation), and your capital gains tax would be higher. Because this outcome depends on interpretation and authority stance, many taxpayers seek advance rulings or take professional guidance before filing returns in such situations.

Other Tax Planning Options With Capital Gains

While home loan interest may or may not be accepted as part of acquisition cost, there are other established ways to reduce capital gains tax on property sales:

Reinvest proceeds into another residential property under Section 54 to claim exemption on long-term capital gains.
Invest in specified capital gains bonds under Section 54EC to defer/exempt gains.

These options remain available if you meet the standard limits and timelines (e.g., investing within 1–2 years of sale).

How to Choose Between Old vs New Tax Regime

Since home loan interest deductions — and capitalising them — significantly affect tax outcomes, deciding whether to stick with old or new regime is important. Generally:

Old regime may be better if you have significant home loan interest and principal payments that qualify for deductions.
New regime offers lower rates but removes many deductions, meaning a higher taxable base even though thresholds and slabs are simpler.

Tax experts recommend running detailed tax projections under both regimes before finalising your option in your ITR. If most deductions (including home loan interest) are valuable, the old regime could still save more tax than the new regime’s lower slabs.

Conclusion

Under India’s new tax regime, home loan interest for a self-occupied property no longer reduces your annual income tax liability, because you cannot claim it as a deduction under Section 24(b).

Whether that unclaimed interest can be included in the cost of acquisition to reduce capital gains tax when selling a property is not explicitly settled law yet. The finance act amendments prohibit including interest already claimed as a deduction, but they don’t clearly rule out capitalising interest that wasn’t deductible because of the regime choice.

In practice, this area remains contentious, and taxpayers should proceed cautiously — ideally with professional tax advice, especially for high-value property transactions. Exploring other, well-established exemptions like Section 54 or Section 54EC bonds can still offer reliable ways to manage capital gains tax liabilities.