Can my wife add unclaimed interest on home loan that I paid to cost of acquisition?

We are going to sell a house in my wife’s name. My wife and I had a joint home loan on the house which I paid fully. I did not claim any tax deduction on the home loan interest. At the time of sale, can my wife add the unclaimed interest to the cost of acquisition to calculate capital gains?

—Name withheld on request

As per the limited facts provided, it seems that the house is in your spouse’s name, however, you are co-borrower in the home loan and the loan has been fully repaid by you.

Read more: New tax regime: Deductions and exemptions explained

At the outset, please note that as per the clubbing provisions in the tax laws, income which arises to the spouse, from property transferred directly/indirectly to the spouse, otherwise than for adequate consideration, should be added to the total income of the transferor spouse. Hence, there is a view that if the house is jointly funded, capital gains from sale of such a house, should be included in the income of the respective spouses, in the ratio of their respective funding towards the cost of acquisition.

Similar principle also applies to income offered and deductions claimed under the head income from house property. You may need to evaluate the above considerations basis the facts of your case, while offering the capital gains to tax.

With respect to your specific query, the tax laws provide that while calculating the taxable capital gains, one can take a deduction towards cost of acquisition of the asset and the cost of any improvement thereto, from full value of the consideration. As per an amendment introduced effective fiscal 2023-24, it has been stipulated that the cost of acquisition of the asset for above purpose, shall not include the deductions claimed towards interest on housing loan.

The amendment was brought in to prevent the claim of double deduction of the same interest, firstly under the head ‘income from house-property’ and subsequently, as part of cost of acquisition while calculating capital gains.

While this amendment only restricts a double deduction and does not per se stipulate that the interest can be added to the cost of acquisition, there may be an implicit interpretation effective FY24, that such interest payment can form part of cost of acquisition, to the extent not claimed as deduction earlier. One may note that there have been conflicting judicial precedents in the past on the issue of whether housing loan interest can be added towards cost of acquisition, hence litigation in this regard cannot be ruled out.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.