I am trying to sell a 3-BHK flat that I own, but the sale is taking time. Meanwhile, the new flat I intend to purchase is ready for possession. To buy this new flat, I plan to take a bank loan. Once I sell the first flat, can I use the capital gains to repay the home loan for the new property and still claim the capital gain tax exemption?
Amit Maheshwari Tax Partner, AKM Global: Under Section 54 of the Income Tax Act, 1961, an individual can claim exemption from taxation of long-term capital gains (LTCG) arising from the sale of a residential property if the gains are invested in the purchase of another residential property either within a year before or two years after the date of sale (or within three years in case of construction). Section 54 does not mandate that the capital gains be directly used for the purchase. It only requires that the investment in the new residential property falls within the specified timelines. Judicial precedents have affirmed that the exemption under Section 54 can be claimed even if the new property is acquired through a loan and the capital gains are later used to repay that loan. Though supported by several tribunal rulings, assessing officers may deny the exemption if capital gains aren’t directly used for the purchase. However, courts have allowed it in similar cases where gains were used to repay a home loan for the new property.
I am 59 years old and recently retired from an IT job. I have a housing loan of Rs 1 crore with 6.5 years still remaining. I plan to sell a property to prepay the loan. Am I eligible for any tax exemption if the sale proceeds are used for the loan, or will I need to pay tax on the property sale and use the balance to prepay the loan?
Sudhir Kaushik Co-founder & CEO, TaxSpanner: The best option is to continue with your home loan if you have taxable income to claim deductions under Section 24. This will help you save on income tax and potentially avoid capital gains tax. If you have no taxable income (from pension, rental income, interest, or dividends), consider selling the house and using the proceeds to prepay the loan. To minimise tax liability, use the capital gains for prepayment. You can pay more than the capital gains if you wish. The capital gains tax can be avoided if the house was purchased within one year using the home loan. Otherwise, you will need to pay tax on the capital gains.
Ask our experts
Have a question for the experts? etwealth@timesgroup.com
aniltikotekar4sme.com 