For many Indian homeowners, particularly those under the now-default new tax regime, the tax story around home loans feels incomplete. You diligently pay EMIs year after year and a large part of those payments is interest. Under the old tax regime, at least some of that interest brought annual tax relief. Under the new tax regime, especially for self-occupied homes, that relief has largely disappeared.
This raises a crucial question when it’s time to sell the house: Can the home loan interest that never gave a tax benefit earlier help reduce the capital gains tax now?
The short answer is: Yes and No, and often it depends on your risk appetite and how carefully you approach it.
Let us break this down calmly, without legal clutter, but with enough precision to help you take an informed decision.
The Core Concepts: Interest Deductions vs. Cost of Acquisition
Home loan interest appears in the tax law in two completely different contexts, i.e. claiming an annual deduction and adding the interest to your property’s cost base at the time of sale (a process known as capitalization). These are distinct strategies governed by different sections of the law. Your ability to use one often precludes the use of the other and mixing them up is where confusion begins.
Annual deduction while you own the house
Traditionally, under the old tax regime, interest on a home loan could be claimed each year under the head “Income from House Property”.
- For a self-occupied house, the deduction was capped at ₹2 lakh.
- For a let-out house, the interest was allowed without any ceiling, but the loss set-off was restricted to ₹2 lakh.
Under the new tax regime, which has become the default option for most taxpayers, the lower tax-rate structure comes at a cost: the elimination of many popular deductions including interest deduction under Section 24(b) for self-occupied properties.
Cost of Acquisition when you sell the house
When you sell a property, capital gains are calculated by a straightforward formula:
Capital Gains = Full Value of Consideration – (Cost of Acquisition + Cost of Improvement)
Here, the “Cost of Acquisition” includes the original purchase price, stamp duty, registration charges, brokerage fees, and other expenses directly related to acquiring the asset.
This is where the debate begins: can home loan interest be treated as part of the cost of acquiring the property?
One Absolute Rule: No Double-Dipping
In 2023, the law was amended to settle one thing beyond doubt.
If you have already claimed home loan interest as a deduction, you cannot add that same interest to the cost of acquisition when you sell the property.
This rule is now explicit. It applies regardless of whether you were under the old regime or the new one.
In plain language: One expense can give you one tax benefit, not two.
There is no workaround here, and any attempt to do so is almost guaranteed to be challenged.
The Grey Area: What About Interest You Never Claimed?
There are two large groups of homeowners who have paid interest but received no tax benefit for it:
- Those under the new tax regime with self-occupied homes.
- Those under the old tax regime whose interest exceeded the annual deduction limit and therefore leaving a substantial amount “unclaimed” each year.
For them, the argument is simple and intuitive: If I never claimed a deduction for this interest, adding it to the cost of acquisition is not a “second benefit”. It is the first and only one.
The law does not explicitly prohibit this. But it does not explicitly approve it either.
Conflicting Court Rulings: Door Open for Litigation
Tax tribunals in India have taken different views on this issue.
- Some rulings have accepted that interest paid on borrowed funds is intrinsically linked to acquiring the property and can therefore form part of its cost. (Jodhpur ITAT case: Gayatri Maheshwari v. ITO, May 5, 2017)
- Other rulings have taken a narrower view, holding that interest is merely a financing cost and lacks a direct enough connection to the purchase itself. (Delhi ITAT case: Rajesh Saluja v. DCIT, Feb 15, 2024)
This judicial split is the crux of the risk. A taxpayer in Delhi might face a precedent that works against them, while one in Jodhpur could cite a favourable ruling. This lack of uniformity means one uncomfortable truth: Capitalising unclaimed interest is legally arguable, but not risk-free.
Pre-Construction Interest: A Safer Bet
There is, however, one area where the taxpayer’s position is noticeably stronger.
Interest paid before the property is ready or before possession is obtained has a much closer connection to the creation of the asset itself.
At that stage, the house does not yet exist as a usable property. The interest is part of what it costs to bring the asset into existence. For this reason, courts have generally been more receptive to treating pre-construction interest as part of the cost.
If you are looking for a defensible and conservative starting point, treating pre-construction interest as part of cost is widely considered a more robust and defensible position than attempting to capitalize all interest paid over the entire life of the loan.
Avoiding Pitfalls: What a Sensible Approach Looks Like
If you are considering this strategy, discipline matters more than aggression. A few principles help keep things on solid ground:
- Never capitalise interest that was already claimed anywhere in your returns.
- Maintain clear documentation: loan statements, interest certificates, possession dates, past tax returns.
- Be transparent in your computation, especially if the amount is material.
- Accept that this is a matter of judgment, not entitlement.
Some taxpayers will choose the safest route and avoid capitalisation altogether. Others, especially where the numbers are large and documentation is strong, may decide the calculated risk is worth taking.
Both positions are rational and depends on your risk appetite.
Income Tax Act 2025: Does It Changes Anything
There is one point that deserves explicit clarification.
Despite the introduction of the new Income Tax Act, 2025, which is scheduled to come into force from 1 April 2026, nothing changes on this issue.
The provisions dealing with:
- Home loan interest [Section 24(b) in 1961 Act vs. Section 22(1)(b) in 2025 Act]
- Computation of capital gains and “no double benefit” principle [Section 48 in 1961 Act vs. Section 72 in 2025 Act]
- Default tax regime for Individuals [Section 115BAC in 1961 Act vs. Section 202 in 2025 Act]
have been carried forward verbatim from the Income Tax Act, 1961 into the new legislation. In substance, the relevant sections are a direct reproduction, not a policy shift.
So, whether your property sale happens before or after 1 April 2026, the legal position and analysis remain exactly the same.
Conclusion: A Calculated Risk
Home loan interest does not vanish just because it did not give you an annual tax deduction.
In certain situations, particularly where interest was genuinely unclaimed and well-documented, it may still play a role in reducing your capital gains tax. But this is not a mechanical deduction. It is a position that rests on facts, timing, and risk appetite.
If there is one takeaway, it is this: Tax planning around property sales is less about clever tricks and more about understanding how the law views fairness, duplication, and intent.
Handled thoughtfully, this strategy can save meaningful tax. Handled casually, it can invite unnecessary friction.
As always, prudence pays better than bravado.