Home/ Money / Personal Finance/  ITR filing: Is income tax rebate possible on home loan repayment from residential property sale proceeds?

My father had a residential flat which was given to my mother under his Will. We transferred that flat in my mother name after his death in 2017. She also owns another flat bought in 2020 on which a home loan is running. My mother wants to sell the inherited flat and pay the home loan running on the new flat. Can she do so to claim the capital gain exemption or she needs to buy a new property to claim the exemption. Can she gift some amount from the money received on sale of the flat to her daughter? The inherited flat was bought in 1987 for Rs. 5 lakhs which will fetch now 50 lakhs now. I would like to know the long term capital gain tax liability.

Ans: A residential house which is sold after having held for more than two years is treated as long term capital asset and the profits on sale of such house is treated as long term capital gains. One has to pay tax at 20% on such long term capital gains computed after applying indexation to the cost. The taxpayer can also claim exemption against this long term capital gains tax liability either by investing such indexed capital gains in a residential house or by investing the indexed capital gains in capital gains bonds of some specified financial institutions within prescribed time period.

The exemption from long term capital gains is not available in respect of repayment of a home loan. You can claim deduction under Section 80C for repayment of home loan to the extent of 1.5 lakh rupees every year along with other eligible items. So your mother will not be able to claim any tax exemption in respect of long term capital gains tax liability by repaying an existing home loan. In order to claim exemption your mother will have to either invest the capital gains in a residential house or in capital gains bonds. If she does not want to do either of these two she will have to pay tax at 20% on the indexed long term capital gains.

As far as your question on making gift of part of some money to her daughter is concerned, she can gift any amount to her daughter and there is no restriction on it.

To compute the long term capital gains liability in respect of sale of the house inherited, your mother has the option to take fair market value (FMV) as on 1st April 2001 as her cost. The indexation is to be applied to the FMV so taken. So for computing your long term capital gain liability we need FMV of the house on 1st April 2001 which you can obtain from a registered valuer. The FMV valuation as obtained from the valuer cannot be higher than the stamp duty valuation as on 1st April 2001.

Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant on his twitter handle.

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Updated: 06 Mar 2023, 11:20 AM IST
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