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Tax benefits claimed on home loans get reversed if house sold in five years

LTCG arising on sale/transfer of a residential house can be claimed exempt if the capital gains are invested in buying another residential house within a specified time under Section 54 of Income Tax Act, 1961. (iStock)Premium
LTCG arising on sale/transfer of a residential house can be claimed exempt if the capital gains are invested in buying another residential house within a specified time under Section 54 of Income Tax Act, 1961. (iStock)

One can claim a deduction for repayment of a home loan taken from specified entities for acquiring a residential house up to 1.50 lakh every year

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Question: I had purchased a 2 bedroom flat in Delhi in December 2018 through a home loan from SBI. Since then I am also availing income tax rebate on repayment of loans and interest. Now I want to sell out this flat to purchase another three-bedroom flat in some other area by putting in some more money. In this case, will I have to return the tax benefits availed from December 2018 to date? What are the other implications of these transactions?

Answer: One can claim a deduction for repayment of a home loan taken from specified entities for acquiring a residential house up to 1.50 lakh every year along with other eligible items under Section 80 C of the Income Tax Act, 1961. However, in case you sell or transfer, such house purchased, within five years from the end of the year in which it was so purchased, all the benefits in respect of repayment of such home loan availed under Section 80 C gets reversed and become taxable in the year in which you sell the property. So in your case any amount of principal repayment claimed under Section 80 C shall become taxable in the year in which you sell the house. Please note that there is no similar provision for reversing the tax benefits claimed in respect of interest on the home loans. So any tax benefit claimed by you under Section 24(b) in respect of interest shall not be reversed.

Since you are selling the house after completing 24 months, profits if any made on this shall be treated as long term capital gains (LTCG). For computing the LTCG, you are entitled to enhance the cost of your house with the help of the cost inflation index announced by the government every year. LTCG arising on sale/transfer of a residential house can be claimed exempt if the capital gains are invested in buying another residential house within a specified time under Section 54 of Income Tax Act, 1961.

Since your investment in the new house is likely to be more than such indexed long term capital gains, all of your LTCG will be tax-free in your hands. Please note that the investment for acquiring a new house can be made within a period of three years from the date of sale of the house. However, in case you are not able to utilize full amount of capital gains before the due date of filing of your income tax return, you will have to deposit the amount of capital gains, to the extend not so utilized, in a capital gains account with a bank.

Balwant Jain is a tax and investment expert and can be reached at jainbalwant@gmail.com and @jainbalwant on Twitter.

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