Can capital gains tax be saved by repaying a home loan (old or new)? Is this allowed under Section 54F of the Income Tax Act? Let’s discuss this question in detail.

Mr. A may have an existing home loan on a property in Bangalore. He can make capital gains when he sells his Bangalore property. Can one save this tax by paying off the existing home loan of the Bangalore property from capital gains?

Mr. B may be willing to buy a new house, but the current house is not selling. For this reason, he preferred a mortgage loan to buy a new house. If the old house is sold in the future, can Mr. B use the capital gains to pay off the new mortgage and save tax?

Mr C owns two properties. He has a loan on a property. He has no credit on any other property. If he sells the property (without a loan) and realizes a capital gain, is he tax-free if he uses such capital gain to repay the loan on another home?

Such questions are common in nature. That’s why I thought of writing a detailed article on this subject.

Can I save Capital Gains Tax by repaying my home loan?

Let me share the details of Sec.54F with you so that we can reach what we can judge.

All about Section 54F

Exemption under Section 54F can be availed if the following conditions are met.

• Who can request exemption? – Only an individual or HUF can claim exemption under Section 54F. In other words, no other person is entitled to claim exemption under Section 54F.
• Which assets are eligible for exemption? – Under Section 54F, the exemption applies only if the capital asset transferred is a LONG-TERM capital asset but NON RESIDENTIAL or PROPERTY (could be a land, commercial house property, gold, shares or any other asset but not a residential house property).
• What new asset should be purchased or acquired? – To avail exemption under Section 54F, the taxpayer will have to purchase a residential property (old or new) (but must be in India) or construct a residential property (new house). The new house must be purchased or constructed within -a) For new house – It must be purchased within 1 year or earlier or 2 years from the date of transfer of the principal asset. b) To build a new house – The construction must be completed within 3 years from the date of transfer of the original asset.

A few points to consider are:

1. Time limit in case of compulsory acquisition – In case of compulsory acquisition, the time limit of 1 year, 2 years or 3 years will be determined from the date of receipt of compensation (initial or additional).
2. Construction can begin before the transfer of the capital asset – The construction of the house must be completed within 3 years from the date of transfer of the principal asset. The start date of construction is not important. Construction even before the transfer of the original asset.
3. Possession of legal title is not necessary – If the taxpayer pays the whole or a substantial part of the consideration within the period specified above, exemption under Section 54F applies even if the title is delivered after the prescribed period or sale deed. is recorded later.
4. House must be purchased/purchased (may or may not be used for residential purposes) – The requirement of Section 54F is that the property is a house for residential purposes. Use of the property is not a relevant criterion for assessing eligibility for relief under Part 54F. What is needed is to invest in a residential house. Mere non-residential use does not make a property eligible for relief under Section 54F.
5. Investment in the name of the transferor – It is necessary and mandatory for the housing investment to be made only in the name of the transferor and not in the name of someone else.
6. Renovation or alteration of an existing house – Section 54F does not provide exemption for the renovation or alteration of an existing house.
7. Investment made within the period but not completed – Exemption under Section 54F cannot be denied if the residential investment is made within the period but the construction is completed after the expiration of the period.
8. Live linkage between net sale consideration and new property investment is not required – The benefit of exemption under Section 54F cannot be denied as only capital gains earned are used for other purposes and capital gains borrowed are credited to the investment account.
9. Taxpayer must not own more than one residential property – Exemption under Section 54F only applies if the taxpayer does not own more than one residential property at the time the original assets are transferred. In addition, they should not purchase any housing within 2 years from this date (or complete the construction within 3 years from this date).
10. The new entity must be located in India – As mentioned above, the new entity must be located in India.
11. Joint ownership of other properties – Exemption under Section 54F is not available if the taxpayer owns more than one dwelling, even jointly with another person.

What is the maximum limit under Section 54F?

There were no such restrictions before Budget 2023. However, with effect from April 1, 2024, the maximum limit available to avail the benefit under Sec.54F is limited to Rs.10 Crore. Note that the exemption amount cannot exceed the capital gain amount.

What is Deposit Scheme under Section 54F?

Under Section 54F the new house can be purchased or constructed within the above mentioned period. The taxpayer must file the return of income on or before the due date (usually July 31 or October 31 of the assessment year). The amount must be deposited into the capital gains deposit account plan if the proceeds are not used within the due date. Based on the amount used in acquiring the new property and the amount deposited in the deposit account, the assessment offer will grant an exemption under Section 54F.

A new house can be purchased or built within a specified period by withdrawing money from the deposit account.

In case the deposited amount is not used for the purchase or construction of a completely new house within the stipulated period, the following amount can be treated as LTCG of the previous year on which the period of three years has expired from the date of transfer of the original asset.

Unused amount in deposit account (claimed under Section 54F)* (Original capital gain amount/Net sale consideration).

In this case, the taxpayer can withdraw the unused amount at any time after 3 years from the date of transfer of the original asset in accordance with the said scheme.

If you go into the full details of Sec.54F and also refer to these links”Canon” And “ITAT Court Decision” Bombay High Court in CIT v. Dr. Where the cases of PS Pasricha, Kerala High Court in KC Gopalan 162 CTR 566 and IT Officer Vs Manish Sinha are mentioned, it is clear that you can use the sale proceeds to repay the home loan. . But with certain conditions as below.

# Mr A cannot benefit from the capital gains exemption by repaying the home loan on the property. It should be for a different new property, not on the property you are selling.

# Mr B and C can benefit from exemption benefits. However, only they can benefit from this exemption if the time conditions specified in Section 54F (purchase of the principal asset on or before 1 year or after 2 years from the date of transfer) are met.

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