I am deciding to include my "housing loan interest expense" to the "cost of purchase", as it is a significant amount of nearly 5 lacs. There are various judgements which point out to the fact that interest expense can be claimed if it has not been claimed earlier under sec 24 of income tax (loss from house property). My question is whether this total interest expense can be indexed, just like the cost of improvement.
Example: Interest expense: INR 1 Lacs , year 2005, Interest expense, INR 1 Lacs, year 2006 Interest expense, INR 1 Lacs, year 2007 Interest expense, INR 1 Lacs, year 2008 Interest expense, INR 1 lacs, year 2009
If say property is sold on 29th March 2020, than can take interest expense of 1 lac in 2005, as 1 lac x CII = 1 x (389/117) = 1 x (2.47) = 2.47 lacs.
And similarly for other interest expenses after considering CII.
09 July 2024
Under the Income Tax Act, 1961, the indexing of cost is applicable to the cost of acquisition and cost of improvement of a property for the purpose of computing capital gains. However, interest expenses incurred on a housing loan are treated differently under the provisions of Section 24 of the Income Tax Act, which deals with income from house property. Here are the key points regarding claiming housing loan interest expenses and their treatment:
1. **Deductibility of Interest Expense:** Interest paid on a housing loan is allowed as a deduction under Section 24(b) of the Income Tax Act. For a self-occupied property, the deduction is capped at INR 2 lakh per financial year. For a property that is let out or deemed to be let out, there is no such cap, and the actual interest paid can be claimed as a deduction.
2. **Indexation of Interest Expense:** Unlike the cost of acquisition or improvement of a property, interest expenses on a housing loan are not indexed for inflation (Cost Inflation Index - CII) for the purpose of computing capital gains. The indexation benefit applies specifically to the cost of acquisition and improvement of assets under Section 48 of the Income Tax Act.
3. **Claiming Interest Expenses:** You can claim the interest expenses incurred during the pre-construction period (up to 5 years from the year of obtaining the loan) in 5 equal installments starting from the year in which the construction or acquisition of the property is completed. Post the construction period, the entire interest amount can be claimed as a deduction.
4. **Impact on Capital Gains Calculation:** When you sell a property, the indexed cost of acquisition and improvement (if any) is deducted from the sale proceeds to calculate capital gains. However, the interest expense claimed under Section 24 for income from house property purposes is not indexed.
5. **Practical Application:** In your example, if you incurred interest expenses in different financial years, you can claim them under Section 24(b) in the respective years. These cannot be indexed for the purpose of computing capital gains when the property is sold.
In conclusion, while you can claim the interest expenses paid on a housing loan as a deduction under Section 24(b) of the Income Tax Act, you cannot index these interest expenses for the purpose of calculating capital gains when the property is sold. Indexation benefit specifically applies to the cost of acquisition and improvement of assets under Section 48. Therefore, you should claim the interest deductions appropriately under Section 24(b) in the respective financial years without considering indexation for these expenses.
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