Can I save Capital Achieve Tax by repaying house mortgage?

Can one save capital acquire tax by repaying house mortgage (outdated or new)? Is it allowed below the Sec.54F of the Earnings Tax Act? Allow us to focus on this query intimately.

Mr.A could have an current house mortgage on a property in Bangalore. When he sells the Bangalore property, he could incur capital acquire. Can he save that tax by repaying the prevailing house mortgage of Bangalore property from the capital acquire?

Mr.B could also be prepared to purchase a brand new home however the current home just isn’t promoting. Therefore, he opted for a house mortgage to buy the brand new home. If the outdated home is offered sooner or later, then whether or not Mr.B can use capital acquire to repay new house mortgage and save the tax?

Mr.C owns two properties. On one property he has a mortgage. On one other property, he doesn’t have any mortgage. If he sells the property (on which no mortgage) and incurs capital acquire, then whether or not such capital acquire be exempted from tax if he makes use of it for repaying of mortgage of one other home property?

Such questions are widespread in nature. Therefore, thought to jot down an in depth publish on this.

Can I save Capital Achieve Tax by repaying house mortgage?

Let me share with you the Sec.54F particulars to reach at what we are able to choose.

All about Part 54F

Exemption below Sec.54F is offered if the next situations are happy.

• Who can declare exemption – Beneath Sec.54F, solely a person or a HUF can declare exemption. In different phrases, no different particular person is eligible for claiming exemptions below Sec.54F.
• Which asset is certified for exemption – Beneath Sec.54F, the exemption is offered provided that the capital asset that’s transferred is a LONGTERM capital asset however OTHER THAN A RESIDENTIAL HOUSE or PROPERTY (it might be a plot of land, industrial home property, gold, share or any asset however not a residential home property).
• Which new asset needs to be bought or acquired – To say the exemption below Sec.54F, the taxpayer should buy one residential home property (outdated or new) (however should be inside India) or assemble a residential home property (new home). The brand new home needs to be bought or constructed inside the time restrict – a) For brand new home – It needs to be bought inside 1 yr or earlier than, or inside 2 years after, the date of switch of the unique asset. b) For developing a brand new home – The development needs to be accomplished inside 3 years from the date of switch of unique asset.

Few factors to think about are –

1. Time restrict within the case of obligatory acquisition – In case of obligatory acquisition, the time restrict of 1 yr, 2 years, or 3 years will probably be decided from the date of receipt of compensation (whether or not preliminary or extra).
2. Building could begin earlier than the switch of capital asset – Building of the home needs to be accomplished inside 3 years from the date of the switch of the unique asset. The date of graduation of building is irrelevant. Building even earlier than the switch of the unique asset.
3. Holding of authorized title just isn’t needed – If the taxpayer pays full consideration or a considerable portion of it inside the stipulated interval given above, the exemption below Sec.54F is offered even when the possession is handed over after the stipulated interval or the sale deed is registered in a while.
4. The residential home needs to be bought/acquired (could or might not be used for residential functions) – The requirement of Sec.54F is that the property needs to be a residential home. The usage of the property just isn’t the related criterion to think about the eligibility for a profit below Sec.54F. What’s required is an funding in a residential home. Mere non-residential use wouldn’t render a property ineligible for profit below Sec.54F.
5. Funding within the title of the transferor – It’s needed and compulsory to have an funding made in a residential home within the title of the transferor solely and never within the title of another particular person.
6. Renovation or modification of an current home – Sec.54F doesn’t present for exemption in case of renovation or modification of an current home.
7. The funding made inside the time restrict however building not accomplished – Exemption below Sec.54F cannot be denied the place funding in a residential home is made inside the time restrict however building is accomplished after the expiry of the time restrict.
8. The reside hyperlink between internet sale consideration and funding in new property just isn’t needed – Merely as a result of capital good points earned have been utilized for different functions and borrowed are deposited in a capital good points funding account, the good thing about exemption below Sec.54F cannot be denied.
9. Not multiple residential home property needs to be owned by the taxpayer – Beneath Sec.54F, the exemption is offered provided that on the date of switch of the unique belongings, the taxpayer doesn’t personal multiple residential home property. He must also not buy inside a interval of two years after such date (or full building inside a interval of three years after such date) any residential home.
10. The brand new asset needs to be located in India – As talked about above, the brand new asset needs to be inside India.
11. Joint possession in different properties – If the taxpayer owns multiple residential home even collectively, with one other particular person, the good thing about exemption below Sec.54F just isn’t obtainable.

How a lot most restrict can one avail below Sec.54F?

Earlier than the Price range 2023, there have been no such restrictions. Nevertheless, efficient from 1st April 2024, the utmost restrict obtainable to avail of the profit below Sec.54F is capped at Rs.10 Crore. Do notice that the quantity of exemption cannot exceed the quantity of capital acquire.

What’s the Scheme of Deposit below Sec.54F?

Beneath Sec.54F, the brand new home might be bought or constructed inside the time restrict given above. The taxpayer has to submit his return of earnings on or earlier than the due date of submission of return of earnings (typically thirty first July or thirty first Oct of the evaluation yr). If the quantity just isn’t utilized inside the due date of submission of earnings, then it needs to be deposited within the capital good points deposit account scheme. On the idea of the quantity utilized in buying the brand new property and the quantity deposited within the deposit account, the assessing provide will give an exemption below Sec.54F.

By withdrawing the quantity from the deposit account, a brand new home might be bought or constructed inside the specified time restrict.

If the quantity deposited just isn’t utilized totally for buy or building of recent home inside the stipulated interval, then the next quantity might be handled as LTCG of the earlier yr wherein the interval of three years from the date of switch of unique asset expires.

Unutilized quantity within the deposit account (Claimed below Sec.54F)* (Quantity of unique capital acquire/Internet sale consideration).

In such case, the taxpayer can withdraw the unutilized quantity at any time after the expire of three years from the date of switch of the unique asset in accordance with the aforesaid scheme.

If you happen to go by all the small print of Sec.54F and likewise by referring to those hyperlinks “Kanoon” and “ITAT Tribunal Order” the place the circumstances of Bombay Excessive Court docket in CIT vs. Dr. P. S. Pasricha, Kerala Excessive Court docket in Okay. C. Gopalan 162 CTR 566 and IT Officer Vs Manish Sinha the place talked about, it’s clear that you should utilize the gross sales proceeds to repay the house mortgage. However with sure situations as beneath.

# Mr.A can’t declare the capital acquire exemption by repaying the house mortgage on the property. It needs to be for a special new property not on the property that you’re promoting.

# Mr.B and C can avail the advantages of exemption. Nevertheless, if the situations of time interval as per Sec.54F (needs to be bought inside 1 yr or earlier than, or inside 2 years after, the date of switch of the unique asset) are assembly then solely they’ll avail of the exemption.

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