Can I save Capital Gain Tax by repaying home loan?

Can one save capital gain tax by repaying home loan (old or new)? Is it allowed under the Sec.54F of the Income Tax Act? Let us discuss this question in detail.

Mr.A may have an existing home loan on a property in Bangalore. When he sells the Bangalore property, he may incur capital gain. Can he save that tax by repaying the existing home loan of Bangalore property from the capital gain?

Mr.B may be willing to buy a new house but the existing house is not selling. Hence, he opted for a home loan to purchase the new house. If the old house is sold in the future, then whether Mr.B can use capital gain to repay new home loan and save the tax?

Mr.C owns two properties. On one property he has a loan. On another property, he does not have any loan. If he sells the property (on which no loan) and incurs capital gain, then whether such capital gain be exempted from tax if he uses it for repaying of loan of another house property?

Such questions are common in nature. Hence, thought to write a detailed post on this.

Can I save Capital Gain Tax by repaying home loan?

Let me share with you the Sec.54F details to arrive at what we can judge.

All about Section 54F

Exemption under Sec.54F is available if the following conditions are satisfied.

• Who can claim exemption – Under Sec.54F, only an individual or a HUF can claim exemption. In other words, no other person is eligible for claiming exemptions under Sec.54F.
• Which asset is qualified for exemption – Under Sec.54F, the exemption is available only if the capital asset that is transferred is a LONGTERM capital asset but OTHER THAN A RESIDENTIAL HOUSE or PROPERTY (it may be a plot of land, commercial house property, gold, share or any asset but not a residential house property).
• Which new asset should be purchased or acquired – To claim the exemption under Sec.54F, the taxpayer will have to purchase one residential house property (old or new) (but must be within India) or construct a residential house property (new house). The new house should be purchased or constructed within the time limit – a) For new house – It should be purchased within 1 year or before, or within 2 years after, the date of transfer of the original asset. b) For constructing a new house – The construction should be completed within 3 years from the date of transfer of original asset.

Few points to consider are –

1. Time limit in the case of compulsory acquisition – In case of compulsory acquisition, the time limit of 1 yr, 2 years, or 3 years will be determined from the date of receipt of compensation (whether initial or additional).
2. Construction may commence before the transfer of capital asset – Construction of the house should be completed within 3 years from the date of the transfer of the original asset. The date of commencement of construction is irrelevant. Construction even before the transfer of the original asset.
3. Holding of legal title is not necessary – If the taxpayer pays full consideration or a substantial portion of it within the stipulated period given above, the exemption under Sec.54F is available even if the possession is handed over after the stipulated period or the sale deed is registered later on.
4. The residential house should be purchased/acquired (may or may not be used for residential purposes) – The requirement of Sec.54F is that the property should be a residential house. The use of the property is not the relevant criterion to consider the eligibility for a benefit under Sec.54F. What is required is an investment in a residential house. Mere non-residential use would not render a property ineligible for benefit under Sec.54F.
5. Investment in the name of the transferor – It is necessary and obligatory to have an investment made in a residential house in the name of the transferor only and not in the name of any other person.
6. Renovation or modification of an existing house – Sec.54F does not provide for exemption in case of renovation or modification of an existing house.
7. The investment made within the time limit but construction not completed – Exemption under Sec.54F can not be denied where investment in a residential house is made within the time limit but construction is completed after the expiry of the time limit.
8. The live link between net sale consideration and investment in new property is not necessary – Merely because capital gains earned have been utilized for other purposes and borrowed are deposited in a capital gains investment account, the benefit of exemption under Sec.54F can not be denied.
9. Not more than one residential house property should be owned by the taxpayer – Under Sec.54F, the exemption is available only if on the date of transfer of the original assets, the taxpayer does not own more than one residential house property. He should also not purchase within a period of 2 years after such date (or complete construction within a period of 3 years after such date) any residential house.
10. The new asset should be situated in India – As mentioned above, the new asset should be within India.
11. Joint ownership in other properties – If the taxpayer owns more than one residential house even jointly, with another person, the benefit of exemption under Sec.54F is not available.

How much maximum limit can one avail under Sec.54F?

Before the Budget 2023, there were no such restrictions. However, effective from 1st April 2024, the maximum limit available to avail of the benefit under Sec.54F is capped at Rs.10 Crore. Do note that the amount of exemption can not exceed the amount of capital gain.

What is the Scheme of Deposit under Sec.54F?

Under Sec.54F, the new house can be purchased or constructed within the time limit given above. The taxpayer has to submit his return of income on or before the due date of submission of return of income (generally 31st July or 31st Oct of the assessment year). If the amount is not utilized within the due date of submission of income, then it should be deposited in the capital gains deposit account scheme. On the basis of the amount utilized in acquiring the new property and the amount deposited in the deposit account, the assessing offer will give an exemption under Sec.54F.

By withdrawing the amount from the deposit account, a new house can be purchased or constructed within the specified time limit.

If the amount deposited is not utilized fully for purchase or construction of new house within the stipulated period, then the following amount can be treated as LTCG of the previous year in which the period of three years from the date of transfer of original asset expires.

Unutilized amount in the deposit account (Claimed under Sec.54F)* (Amount of original capital gain/Net sale consideration).

In such case, the taxpayer can withdraw the unutilized amount at any time after the expire of 3 years from the date of transfer of the original asset in accordance with the aforesaid scheme.

If you go by all the details of Sec.54F and also by referring to these links “Kanoon” and “ITAT Tribunal Order” where the cases of Bombay High Court in CIT vs. Dr. P. S. Pasricha, Kerala High Court in K. C. Gopalan 162 CTR 566 and IT Officer Vs Manish Sinha where mentioned, it is clear that you can use the sales proceeds to repay the home loan. But with certain conditions as below.

# Mr.A can’t claim the capital gain exemption by repaying the home loan on the property. It should be for a different new property not on the property that you are selling.

# Mr.B and C can avail the benefits of exemption. However, if the conditions of time period as per Sec.54F (should be purchased within 1 year or before, or within 2 years after, the date of transfer of the original asset) are meeting then only they can avail of the exemption.

Refer to our latest posts on Income Tax topics –