Can home loan interest reduce capital gains tax under India’s new tax regime?

COURTKUTCHEHRY SPECIAL ON HOME LOAN LINK TO CAPITAL GAIN TAX

Can home loan interest reduce capital gains tax under India’s new tax regime?

When interest can be part of your property’s cost—and when it cannot

Practical rules, court views, and filing tips to avoid tax trouble

By Our Legal Reporter

New Delhi: December 17, 2025:

Clarifying interest deductions under new regime

Okay, the new tax regime doesn’t allow deductions under section 24 for interest on a home loan for self-occupied properties. But for let-out properties, interest deductions are still allowed when calculating income from property. Some sources mention a standard 30% deduction is allowed, but interest on borrowed capital may be disallowed in the new regime

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What’s changing with home loan interest and property sales

Many homeowners are asking a tough question: If you paid home loan interest for years, can that interest be added to the cost of your house and reduce capital gains tax when you sell—especially under the new tax regime? The short answer is sometimes yes, sometimes no. It depends on the kind of property (self-occupied or let out), whether you have already taken an interest deduction, and how courts view capitalization of interest for capital gains. Under the old regime, Section 24(b) allowed interest deductions for self-occupied homes within limits; under the new regime, that path largely closes, raising the stakes for how you compute cost and gain.

A key tension is whether unpaid or unclaimed interest can be capitalized (added to cost) when you sell. Some tax experts argue that if you never claimed interest as a deduction, adding it to acquisition cost should not cause a “double benefit.” Others warn that tax officers may challenge this, and courts have given mixed rulings. This means documentation and a clear legal position are vital before you file.

The new tax regime vs old: what happens to interest

Under the old tax regime, Section 24(b) let taxpayers claim home loan interest on self-occupied property (up to ₹2 lakh per year), and standard rules applied for let-out property (interest fully deductible, subject to set-off limits). The new regime restricts such reliefs. Broadly, you cannot claim the self-occupied home loan interest deduction under Section 24(b) in the new regime; and set off of house property losses against other income is barred, tightening how interest interacts with total income.

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Even under the new regime, tax treatment varies by property type. Practical guides highlight that benefits under Sections 80C and 24 are the main levers in the old regime, while the new regime reduces or removes several deductions and set offs. This forces sellers to think carefully about whether interest was ever claimed and how that affects capital gains computation later.

Can you add interest to the “cost of acquisition” to cut capital gains?

The law on capital gains allows you to reduce taxable gain by deducting the indexed cost of acquisition and improvement. The debate is whether home loan interest counts as part of that cost. Many professionals say capitalization of interest is viable where the interest was incurred to acquire, construct, or improve a property and was never claimed as a deduction earlier—so there is no double benefit. However, judicial views are not uniform, and assessments can vary by facts and evidence.

Experts analysis notes two competing positions: one favouring inclusion of unclaimed interest as cost, and another warning that this may trigger disputes if the interest is not closely tied to acquisition/ construction, or if documentation is weak. If you adopt capitalization, keep bank certificates, loan sanction letters, interest certificates, and timelines proving that interest relates to acquisition or construction, not mere occupation.

Self-occupied vs let-out: the impact on your tax plan

• Self-occupied property: Under the new regime, the popular Section 24(b) deduction for interest is not available. If you never claimed interest in past years, some taxpayers try to add eligible interest (linked to acquisition/ construction) to the property’s cost when selling. This may help reduce capital gains but can be questioned by the tax department, so prepare for scrutiny.
• Let-out property: Interest remains central to computing income from house property, but the new regime restricts set-off of house property losses against other income, limiting the overall tax advantage. When selling, capitalization questions depend on whether the same interest has already reduced income earlier; double-dipping must be avoided to stay compliant.

ClearTax’s guidance underscores that benefits change with regime, ownership structure (individual vs joint), and property type, and that Sections 24 and 80C drive most relief in the old regime—less so in the new regime.

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Key rules to remember before you file

• No double benefit: If you claimed home loan interest as a deduction in any year, do not add that same interest to cost when computing capital gains. This is the main audit trigger.
• Tie interest to acquisition or construction: Interest during the period of acquisition/ construction is easier to justify as cost than interest during mere occupancy. Maintain a clear timeline and proofs.
• New regime set-offs are limited: Even if your house property shows a loss due to interest, under Section 115BAC rules the set-off against other heads is barred—plan cash flows accordingly.
• Use strong documentation: Preserve lender interest certificates, amortization schedules, sanction papers, possession letters, completion certificates, and invoices for improvements. These establish that interest was integral to getting or improving the asset.

Filing strategy: examples that avoid tax trouble

• Example A (self-occupied, new regime): You never claimed interest. The interest relates to a 24-month construction period before possession. With lender certificates and builder completion documents, you add that pre-possession interest to cost and apply indexation (if long-term). Expect questions but you have a defensible position.
• Example B (let-out, mixed claims): You claimed interest annually against house property income. At sale, you cannot add those claimed amounts to cost. Only distinct, unclaimed acquisition/ construction interest may be considered, if supported by evidence.
• Example C (joint owners): Split interest and cost in the same ratio as ownership/ repayment. Keep separate certificates for each owner from the bank to match the computation trail.

Common pitfalls and how to prevent them

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• Claiming interest twice: Do not both deduct interest in annual returns and capitalize it in sale computation.
• Weak paper trail: Missing completion/ possession timelines and interest period breakdowns invite disallowance.
• Wrong regime assumptions: Assuming old-regime benefits under the new regime is a frequent error; check Section 115BAC constraints before planning setoffs.
• Improvement vs repair confusion: Only capital improvements add to cost. Routine repairs do not.

How to build a compliant case if you capitalize interest

• Get annual interest certificates from the lender showing amounts paid year-wise, with loan purpose stated clearly.
• Map interest to acquisition/ construction period using builder agreements, possession letters, occupancy certificates, and bank disbursement schedules.
• Declare your position in computation notes attached to the return, stating that interest was never claimed as a deduction and is being capitalized to the extent tied to acquisition/ construction.
• Keep expert support ready: If selected for scrutiny, a CA’s note and case law references can help address objections on “double benefit” and nexus with acquisition.

Quick verdict

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• Under the new regime, self-occupied interest is largely non-deductible during ownership. Whether unclaimed interest can be added to cost at sale depends on nexus and documentation; be ready for questions.
• Set-off limits tighten the new regime. Loss from house property cannot be set off against other income, reducing the advantage of interest deductions during ownership.
• Plan early and keep evidence. With clean records, capitalization for acquisition/ construction-linked interest can be defensible, but facts matter.

Keywords for faster searches (Google + ChatGPT)

• Core topic: Home loan interest capital gains India; capitalize interest cost of acquisition; new tax regime Section 115BAC house property loss set off
• Rules: Section 24(b) interest deduction old vs new regime; self-occupied vs let-out interest tax; indexation of cost with interest
• Guidance: How to add interest to property cost; documentation for capital gains; CA advice on interest capitalization
• Risks: Double benefit interest claims; scrutiny on capital gains; income tax return computation notes India

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