The clear answer to this question is No. You cannot claim a capital gains exemption for the repayment of a home loan in India. The Income Tax Act of India does not provide any exemption for the repayment of a home loan, even if the loan is used to purchase a residential property. However, you can claim a deduction under Section 80C of the Income Tax Act for the principal repayment of a home loan up to a maximum of ₹1.5 lakh per year. This deduction is available for all eligible taxpayers, regardless of whether they are selling a residential property. So, if you sell a residential property and make a profit, you will have to pay capital gains tax on the entire amount of profit. You cannot reduce the capital gains tax liability by paying off the home loan using the sale proceeds.
However, there are some exceptions to this rule. For example, if you sell a residential property and use the proceeds to purchase another residential property within one year, you may be eligible for a capital gains exemption under Section 54 or Section 54F of the Income Tax Act. In these cases, the amount of capital gains exemption will be equal to the indexed capital gains or the purchase price of the new property, whichever is lower.
Let’s Understand in Detail by Examining the Following Case.
I am moving into a new home and trying to sell my current home, but I’m not finding a buyer. I will take out a mortgage for the new residential property, which I will pay off when I sell my current flat. Can I receive a capital gains exemption to cover the interest on the mortgage I took out to purchase the new home?
A residential property investment must be made within two years after the property’s sale date. You are still eligible for capital gains exemption up to the lesser of the value of the earlier-purchased home or the amount of indexed capital gains, even if you sell the residential property within a year of buying another residential property. You must invest the amount of the indexed capital gain in either another residential property or in capital gain bonds issued by specific financial institutions in order to avoid paying taxes on long-term gains on the sale of a residential property. If you want to purchase a property that is still under construction or have a house built, the construction must be finished in three years.
The bonds must be purchased within six months following the home’s sale. Please be aware that, except for the amount permitted by Section 80C, there is no capital gains exemption with regard to the repayment of a home loan taken out to purchase a residential property.
On the other hand, you will be eligible to claim the exemption for long-term capital gains resulting from the sale of your current home if you can sell it within a year of the date you bought the new one. There will be no capital gains exemption available for the intended acquisition of the dwelling property if you are unable to sell your current residence within a year of buying it.
However, if you invest the indexed long-term capital gains in capital gains bonds of designated financial institutions within six months of the date of the sale of the existing flat, you may be eligible for an exemption under Section 54EC. The interest on these bonds is completely taxable, and they have a five-year term. You can arrange to repay the home loan once the bond’s five-year term expires.
Key Things to Keep in Mind:
- Proportionately, the exemption is granted if the cost of the newly constructed residential property is less than the whole amount of the sale. You have six months to reinvest the remaining sum under Section 54EC.
- The seller is the only name on which the property may be purchased; no other names may be used.
- The exemption is still valid even if the builder of the newly constructed residential property does not turn over the property to the taxpayer within three years of the purchase.