Can I buy a new house with home loan and pay it off soon when my old house is sold? Will I get capital gain tax benefit?
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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.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 expertsHave a question for the experts? etwealth@timesgroup.com
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