PROSPERR.IO

Last year, my friend Vikram sold a flat he'd bought with a home loan back in 2018. Made a decent profit—₹35 lakh capital gains. His CA asked him one question that completely changed his tax calculation: "How much interest did you pay on the home loan?"

Vikram looked confused. "Why does that matter? I already claimed deductions for it under Section 24 every year."

"That's exactly why it matters," his CA said. "You can't claim it twice."

This conversation highlights something most people don't realize: interest on money you borrowed to buy an asset affects your capital gains calculation when you sell that asset. Sometimes it helps you. Sometimes there's a trap. And from April 2024, the rules got stricter.

Let me explain what happens with borrowed capital interest and capital gains.

The Basic Principle: Interest as Part of Cost

Section 48 of the Income Tax Act says capital gains are calculated by subtracting the cost of acquisition from the sale price. Pretty straightforward.

But what is "cost of acquisition"? It's not just the price you paid. It includes all expenditure incurred wholly and exclusively for acquiring the asset.

If you borrowed money to buy property or shares, the interest you paid on that loan is an expenditure for acquiring the asset. Courts have consistently held that this interest forms part of the cost of acquisition.

Why this matters: Higher cost of acquisition = lower capital gains = lower tax.

Example: You bought a flat for ₹40 lakh. Paid ₹8 lakh as interest on the home loan. When calculating capital gains, your cost isn't ₹40 lakh it's ₹48 lakh.

That ₹8 lakh interest addition directly reduces your taxable capital gains.

Pre-Acquisition vs Post-Acquisition Interest

Not all interest is treated equally. This is where it gets technical.

Pre-Acquisition Interest: Interest paid till the date you acquire the asset. This is universally accepted as part of cost of acquisition.

For property: Interest till you get possession or registration (whichever is earlier). For shares: Interest till you purchase the shares. For land: Interest till the sale deed is executed in your favor.

Post-Acquisition Interest: Interest paid after you've acquired the asset but the loan continues.

This is controversial. Some courts say it can be added to cost of acquisition. Others say no it's a holding cost, not an acquisition cost.

Practical position: Most tax authorities allow pre-acquisition interest without question. Post-acquisition interest invites scrutiny and potential disallowance.

The 2023 Rule Change: No More Double Dipping

Here's where Vikram's confusion came from. Before April 1, 2024, there was a gray area. People were claiming interest in two places:

1. As a deduction under Section 24 (for house property) every year
2. As part of cost of acquisition under Section 48 when selling

Finance Act 2023 plugged this gap. From AY 2024-25 onwards, Section 48 has a new proviso:

"The cost of acquisition or cost of improvement shall not include the amount of interest claimed under Section 24 or Chapter VIA."

Translation: If you've already claimed interest as a yearly deduction, you can't add it again to acquisition cost.

How It Works: Different Asset Types

For Residential Property (Home Loan):

You get two options, not both:

Option 1: Claim interest under Section 24 annually (maximum ₹2 lakh for self-occupied property). When you sell, this interest cannot be added to cost of acquisition.

Option 2: Don't claim under Section 24. Add full interest to cost of acquisition when you sell. Reduces capital gains at that time.

Most people choose Option 1 because it gives immediate tax relief every year. But then they lose the benefit when selling.

For Shares/Mutual Funds:

Interest on loans taken to buy shares cannot be claimed as revenue expenditure under Section 57 (some people tried this with dividend income). It must be capitalized as part of the cost of acquisition.

When you sell, add the interest to your purchase price. Capital gains get reduced.

For Investment Property (Let Out):

If you're renting out the property, you claim interest under Section 24 annually (no ₹2 lakh limit for let-out property).

That same interest cannot be added to cost when selling.

Real Calculation: Vikram's Case

Let me show you exactly how Vikram's numbers worked:

Purchase details (2018):

• Flat cost: ₹40 lakh
• Home loan: ₹30 lakh
• Own funds: ₹10 lakh
• Total interest paid (2018-2025): ₹9 lakh
• Interest claimed under Section 24 each year: ₹9 lakh total

Sale (2025):

• Sale price: ₹75 lakh
• Selling expenses: ₹1 lakh

Vikram's initial calculation (wrong): Sale price: ₹75 lakh Less: Cost (₹40L) + Interest (₹9L) + Expenses (₹1L) = ₹50 lakh Capital Gains: ₹25 lakh

Correct calculation: Sale price: ₹75 lakh Less: Cost ₹40L + Expenses ₹1L = ₹41 lakh (Interest already claimed under Section 24, cannot add again) Capital Gains: ₹34 lakh

Difference: ₹9 lakh higher taxable gains because he'd already claimed the interest.

At 12.5% LTCG rate, that's ₹1.12 lakh more tax.

Strategic Planning: When to Claim What

Common Mistakes People Make

Mistake 1: Claiming interest both places

People forget they've been getting Section 24 deductions. Come sale time, they add full interest to cost. Tax department catches this in matching returns year over year.

Mistake 2: Not documenting interest payments

You need proof. Loan statement, interest certificates, payment records. Without documentation, the department can disallow the addition.

Mistake 3: Adding post-acquisition interest without basis

Adding interest paid 10 years after buying the house. Department questions it. Unless the loan was genuinely for acquisition/construction, post-acquisition interest is risky.

Mistake 4: Not tracking interest for under-construction property

Pre-construction interest can be huge. People forget to capitalize it. Miss out on legitimate cost addition.

Mistake 5: Confusing indexation with interest

Indexation adjusts cost for inflation. Interest is actual expenditure. Both reduce gains but through different mechanisms. Don't mix them up.

What Courts Have Said

The legal position has evolved through various court cases:

Mithlesh Kumari case (Delhi High Court, 2008): Interest on money borrowed to purchase shares is part of cost of acquisition under Section 48.

Maithreyi Pai case (Karnataka High Court): If interest was already allowed as deduction under Section 57, the same cannot be allowed again under Section 48. No double deduction.

Hariram Hotels case (Karnataka High Court): Confirmed the Maithreyi Pai position. Same amount cannot be deducted twice.

These cases established the "no double deduction" principle that Finance Act 2023 codified into law.

Conclusion

Interest on borrowed capital for buying assets is a legitimate part of acquisition cost. But the 2023 rule change made it clear: you get one bite at the apple, not two.

Claim it annually under Section 24? Fine, but then it's gone when you sell.

Skip the annual claim and add to cost at sale? Also fine, reduces capital gains then.

But claim it both places? Not anymore.

Vikram learned this the hard way. His ₹34 lakh capital gains should have been planned better. If he'd known years ago he'd sell in 2025, he might have skipped Section 24 claims and saved ₹1.12 lakh in capital gains tax instead.

Your takeaway: Before taking a loan for buying any asset, think about your long-term plan. Will you sell soon? Will you hold long? Your interest claiming strategy should match your exit timeline.

And whatever you choose, document everything. Every rupee of interest claimed or capitalized needs paper trail proof. Without it, the tax department won't allow the deduction in either place.

Book a free tax assessment call with us now!

Frequently Asked Questions

Q1: I took a personal loan and used it to buy shares. Can I add the interest to the cost of shares when I sell them?

Yes, but with conditions. The loan must have been taken specifically for buying those shares—you need documentation proving the link between the loan and the share purchase. Bank statement showing loan disbursement followed by share purchase is good evidence. The interest paid on this loan can be capitalized as part of the cost of acquisition of the shares. When you sell, add this interest to your purchase price to arrive at the total cost of acquisition. This reduces your capital gains. Just make sure you didn't claim this interest as a deduction under Section 57 against any dividend income from those shares—that would be double deduction, which isn't allowed.

Q2: I bought a house in 2015 with a loan. Claimed Section 24 deductions every year. Now in 2026 I'm selling. Can I add any interest to acquisition cost?

No. Since you've already claimed interest as a deduction under Section 24 in your annual returns from 2015 onwards, the Finance Act 2023 amendment (effective from AY 2024-25) explicitly bars you from adding that same interest to the cost of acquisition when computing capital gains. Your cost of acquisition remains the original purchase price (plus any improvement costs that don't involve claimed interest). This prevents double deduction. Had you not claimed Section 24 deductions, you could have added the full interest to cost. But you can't have it both ways.

Q3: I'm constructing a house on a plot I own. The construction loan interest is ₹12 lakh. I haven't claimed Section 24 yet since construction isn't complete. When I sell, can I add this ₹12 lakh?

Yes, absolutely. Interest paid during the pre-construction period (until the construction is complete or you occupy it, whichever is earlier) is part of the cost of improvement of the property. Since you haven't claimed it under Section 24, you can add it to the cost when you sell. This ₹12 lakh gets added to your cost of improvement, which along with cost of acquisition gets deducted from the sale price to calculate capital gains. Make sure you have proper documentation—loan statements, contractor bills, bank transfer records—showing the interest was paid specifically for this construction. Post-construction interest (after the house is ready) is more debatable and might not be allowed.

Q4: What's the difference between claiming interest under Section 24 vs adding to cost under Section 48? Which gives more tax benefit?

Section 24 gives you immediate annual tax relief. For a self-occupied property, you can claim up to ₹2 lakh interest per year as a deduction. This reduces your taxable income that year. For a let-out property, there's no limit. Section 48 treatment means you don't get annual benefit, but when you sell, the full interest adds to your acquisition cost, reducing capital gains. Which is better? If you're in a high tax bracket (30%) and plan to hold the property long-term, Section 24 annual deductions often give more total benefit. If you're selling relatively quickly and capital gains will be substantial, adding to cost might be better. It's situational and needs calculation based on your holding period, tax bracket, and interest amount.

Q5: I took a loan to buy land in 2010. Paid ₹15 lakh interest over the years. I never claimed this anywhere. Now I'm selling the land in 2026. Can I add all ₹15 lakh to cost?

Likely yes for pre-acquisition interest, but with scrutiny. Land doesn't have a Section 24 claim (that's only for house property), so there's no double deduction issue. The interest paid specifically for acquiring the land can be added to the cost of acquisition. However, you'll need to justify which portion of the ₹15 lakh was pre-acquisition (paid until you got possession/registration) versus post-acquisition. Pre-acquisition interest is safer. Post-acquisition interest might be challenged by the tax department as a holding cost rather than acquisition cost. Documentation is critical—loan agreement showing purpose as land purchase, payment records, timeline matching the acquisition date. Get a CA to review before claiming this to avoid issues during assessment.