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Can I use the capital gains or money received from the sale of a property to repay the housing loan of existing property?  Often we get the questions  I have bought this flat 2 years back and currently paying housing loan on the same. I want to sell my old flat and from the money received will repay the loan of my flat which was bought 2 years back. Will I have to pay any Capital gain tax?  or  If I sell a property and use the sale proceeds to pay off the Home Loan taken for purchase of a residential house, whether I can claim exemption under section 54/54F? 

Home loan and Capital Gains Exemption are two separate things. You can claim the Capital gain exemption only if you use the money from the sale of the property to buy another house. The purchase of new house has to be done one year before the sale of the house or  2 years after the sale of the house.  The property should be bought in the name of the seller.  Income tax department is not concerned if you used the sale money for repaying the home loan or not.

When you sell the house within five years of the end of the financial year in which it was purchased, the tax benefits under 80C which were claimed earlier will have to be reversed. The tax deduction claimed for the principal repayment, stamp duty and registration under Sec 80C are reversed and the amount becomes taxable in the year of sale. Only the deduction of the interest payment under Section 24B is left untouched. 

Timing is important in finance. In case of a house you not only need to see the appreciation in value of your house, but it’s equally important to keep an eye on the calendar to avoid paying a hefty amount as tax. This article gives an overview on how various aspects of selling a house such as Home Loan and Tax, Capital Gains on Sale of House, Save tax by investing your Capital Gains and answering questions on when money from the sale of property can or can’t be used to repay the housing loan?

Home Loan and Tax

Tax benefits on a home loan are available to all the joint owners. Please note that ownership in the property is a must if you want to avail any tax benefits against the property. The Indian Income Tax Act allows both Principal repayment as well as Interest repayment as eligible deductions from your income can only be claimed when the construction of the property is complete.  The period from borrowing money until construction of the house is completed is called pre-construction periodInterest paid during this time can be claimed as tax deduction in five equal instalments starting from the year in which the construction of the property is completed. Our article Tax : Income From House Property and Income from House Property and Income Tax Return  discusses it in detail. For An individual.

  • The principal can be claimed :
    • Up to the maximum of Rs. 150,000 under Section 80C. This is subject to the maximum limit of Rs 1,50,000 across all 80C investments such as EPF,PPF,Insurance Premiums etc.  Before FY 2014-15 the limit for 80C was 1 lakh.
    • Principal Repayment can be considered as a valid investment under section 80C only if it is made for a self occupied house or you are not living in the house  due to work
  • Interest on the home loan can be claimed:
    • As a deduction under Section 24 under the head Income from house property.
    • You can claim up to Rs 200,000 or the actual interest repaid whichever is lower. The limit before FY 2014-15 was 1.5 lakh. Our article Tax and Income From One Self Occupied property explain it in detail.
    • If the house is given on rent, there is no restriction on the interest amount.
  • Co-owners and Co-Borrowers can claim deductions in the ratio of ownership.
  • The certificate issued by the housing loan company, showing the split between principal and interest for the EMI paid, is required for claiming tax benefits.

Conditions for Home Loan are as follows. Our article Joint Home Loan and Tax explains it in detail

  1. The home loan must be for purchase or construction of a new house property.
  2. The property must not be sold in five years from the time you took possession. Doing so will add back the deduction to your income again in the year you sell. Also, if a house is sold within five years of the end of the financial year in which it was purchased, all the deductions claimed under Section 80C with respect to the property are added to the taxable income in the year of sale.
  3. If you sell a house within two (three years before 1 Apr 2017) years of buying it, the tax benefits on the principal repayment and interest paid on the home loan are reversed. These then need to included in your income when you file your tax return.

If you own more than one property and none of these are let out, only one is considered to be occupied by you and you will have to pay tax on a deemed rental income from the other properties. Our article Tax and Income from Let out House Property discusses it in detail.

When you pay interest on a home loan for a Self Occupied House Property, you may end up with a loss under the head ‘Income from House Property’ in your Income Tax Return. In case of a Let Out Property there can be a Loss too – when your Net Annual Value is less than the Deductions allowed.

Capital Gains on Sale of House

Real estate, land, house, is regarded as an asset. Gains or Loss which arise from the sale of capital assets,such as Gold,  Debt Mutual Fund and Property etc are subject to tax under the Income-tax Act, under the head Capital gains.  Capital gains on the sale of house/land are:

How to Save tax on Sale of House Property

When you sell your house, you are liable to pay tax.   The tax paid on the capital gains is called Capital Gains Tax. The sale proceeds will be calculated on the basis of the valuation adopted by the state’s Stamp Duty and Registration Authority and will not be the amount mentioned in the deed of conveyance. This is intended to cover the cases where a portion of the sale price is received by the seller as unaccounted for cash.You can save the capital gain tax in 3 ways.

  • Purchasing Another Property: The Income tax act allows an exemption on capital gains to the extent these have been invested in purchasing a new house property.
    • You have to invest the amount of capital gains and not the entire sale proceeds.
    • The sale proceeds should be invested only in a residential property, not a commercial property or a vacant plot of land.
    • You should not own more than one house and in India (from AY 2015-16)
    • You can claim tax exemption under Section 54 on the long-term capital gain on the sale of a house by using the entire profit to either buy another house within two years or construct one in three years. If you had already bought a second house within a year before selling the first one, you could still avail of the tax exemption. The date of commencement of the construction of the new house is not material. To get the benefit of section 54,you must construct the new house within the prescribed period from the date of sale of the old house.
    • Section 54F gives you exemption from the capital gains if you sell any asset. But, the new property is a residential property.
  • By Investing in Capital Gains Account Scheme: If capital gains have not been invested in a property, the gains can be deposited by opening a capital gains account in a PSU bank or other banks as per the Capital Gains Account Scheme, 1988. This deposit can then be claimed as an exemption from capital gains, and no tax has to be paid on it.
  • Purchasing Capital Gains Bonds: If you do not intend to purchase another property, then tax can be saved on capital gains, buy investing them in certain bonds under Section 54 (EC) within six months of selling the house. Bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) have been specified for this purpose. These are redeemable after 3 years and must not be sold before the lapse of 3 years from the date of sale of the house property. However, you can invest only up to Rs 50 lakh.

Can we use the money received from selling a property to repay the housing loan of an existing property

If I sell a property and use the sale proceeds to pay off the Home Loan taken for purchase of a residential house, whether I can claim exemption under section 54F?

Exemption under section 54/54F can be claimed if the sale proceeds are utilized within one year before or 2 years after the date of transfer. So where a house is bought one year before the date of transfer by taking loan and you sell your house property and use that amount to pay back the loan, such repayment should be taken as fulfilling the condition of using the sale proceeds.

I have bought this flat 2 years back and currently paying housing loan on the same. I want to sell my old flat and from the money received will repay the loan of my flat which was bought 2 years back. In this situation would I have to pay any Capital gain tax?

Capital Gains Exemption under section 54/54F can be claimed if the sale proceeds are utilized max one year before or 2 years after the date of transfer.  As the flat has been purchased by you 2 years before the sale of the property, therefore capital gains exemption will not be allowed in this case.

I am going to book a flat which is under construction, I will be taking home loan for this. The expected delivery time is Mar 2016. I’ve another property, which I am planing to sell and use that amount towards repaying this home loan. The approximate capital gain from this transaction would be 20 Lakh and I have held it for 3 years. I would like to know what are my options in saving from capital gain tax. Since the booking of new flat is done much ahead of the sale of the old properly,will I be able to use the capital gain of 20 lakh in this new flat to repay home loan?

In  booking a flat you have entered into a Construction Agreement with the Builder to have the house/flat completed before 31-03-2016, wherefore you are constructing the house although through the Builder. The property you propose to sell is a House Property the income from which is assessable in your hands under the head Income from House Property, and you have held it for more than 36 months.

If you sell the existing House Property before 31-03-2016 or on a date before such that the construction of the new House Property would be within 3 years after  the sale of the existing House Property and the cost of construction of the new Flat is more than the amount of  Capital Gains you are deriving from the sale of the existing House Property Rs i.e 20 lakh no Capital Gains will be assessable, in view of Section 54.

If amount of Capital Gains is more than the home loan prepayment then invest the balance amount in Capital Gains tax Bonds, under Section 54EC

I bought a flat two years back on loan in Noida. Now, I’ve received an offer in Bengaluru with the option of buying another apartment close to my office. But, this apartment is still under construction and will take another year to be completed. Can I sell my apartment in Noida to cover the loan and use the profit to make a down payment on the new house? Will it be hard to get a home loan for the second apartment? What are the tax implications on the sale and purchase? 

You can consider selling your apartment in Noida to cover the purchase but do a cost-benefit analysis before going through with the transaction. If you sell the house in Noida, you will have to pay short-term capital gains tax on it as you are selling the property before holding it for three years. The profit on the property will be taxed as per your slab. But, if you hold on to the property for one more year, it will be considered a long-term investment and capital gained from it will be taxed at 20% with indexation.The long term capital gains can be used to buy the new apartment. So, check which of the two options will leave you with more money in hand, meaning the difference in tax paid added to all transaction costs. Getting a loan on a second house depends on many factors including outstanding loan amount, EMI on existing loan, current salary, credit score and so on.

I own a house and inherited a second property, which has been given on rent. About a year ago, I purchased a third property as investment on loan. Will I get tax rebate on the loan as it is my third investment in property? If I sell the house I inherited and the new apartment to buy a property, will I have to pay capital gains tax? Ref:BusinessToday 

Tax deduction on the principal amount of the loan, under Section 80C, up to a maximum of Rs 1.5 lakh is available for any number of houses. Further, under Section 24, deduction on interest paid on the loan is up to a maximum of Rs 2 lakh if the property is occupied by you, but there is no cap on deduction if the property is not occupied by you. Also, if the property is rented out, you can deduct the interest paid from the rental income. Also, if you own more than one property and none of these are let out, only one is considered to be occupied by you and you will have to pay tax on a deemed rental income from the other properties.

Capital gains from the sale of your inheritance and new apartment will be treated differently. Assuming that the inherited real estate was bought over three years ago, long-term capital gains will be applicable on the sale. If you reinvest this money to buy another property, no tax is payable. Note that indexation benefit is only applicable for the number of years you have owned the property.

On the other had, capital gains from the sale of the new apartment, which is assumed to have been held for less than three years, will be taxable as per your tax slab irrespective of whether you reinvest the profit to buy or construct another house.

A good reference for similar questions on sale of house/property is TaxGuru’s Exemption under Section 54, 54EC & 54F -FAQs & case laws 

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