ITR filing: Is income tax rebate possible on home loan repayment from residential property sale proceeds?
6 min read . Updated: 04 Mar 2023, 02:26 PM IST
Premium- ITR filing: Income tax exemption from long term capital gains is not available in respect of repayment of a home loan
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.
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.
Can I buy two residential house properties from the sale proceeds of single residential house property for claiming the exemption from long term capital gains jointly with my children? One property was purchased just 1 month prior to the sale and another is planned to be purchased within 2 years from the date of sale using the entire sale proceeds. If not, please guide me as to how I should go ahead with a view to ensuring that the benefits could be passed on to my son and daughter without any income tax implication either to me or my children in the event of my death.
For availing exemption for long term capital gains arising on sale of a residential house, you are required to invest only the indexed capital gains from sale of the existing house property and not the entire sale consideration. For claiming exemption under Section 54 the investment has to be made only in one house and if investment is made in more than one house, you have to choose the house in respect of which you want to claim the exemption.
However as per various judicial pronouncements, if more than one flats are used as a single unit like adjoining flats or duplex in the same building, the benefit can be claimed under Section 54 even for investment made in more than one flats. There is no restriction on you buying the new property in joint names of yourself and your son or daughter to claim the exemption under Section 54. What is required is that you should invest the required long term capital gains in the house. Your son or daughter can be made joint owner in the agreement even if they do not invest any money in the property. In case full capital gains cannot be invested for purchase of a house, you can invest up to Rs. 50 lakhs in capital gains bonds of specified financial institutions within six months from date of sale of the house. In order to ensure that the property passes on smoothly to your son and daughter after your death, please prepare a will specifying the share of your son and daughter in all your properties whether movable or immovable. Your son or daughter will not have to pay any tax at the time of inheriting the properties but may have to pay tax as and when the property is sold.
I am 34 years old working with Private sector. I have a 3 year old daughter. I am planning to invest in a Child Plan of an insurance company, where the money is paid back in installments at different dates to take care of her education and marriage needs. Please advise whether I should buy the child plan if not please suggest me where should I invest the money?.
As a prudent personal financial principle one should never mix insurance and investment needs by buying single product to take care of both such needs. I would not advise you to buy any insurance plan as an investment option for your daughter’s education and marriage goals, as these insurance products are loaded with high irrecoverable charges. Just because a product has “child" word in its name does not mean that it is a suitable product for your child. Instead I would suggest you to buy adequate term life insurance, preferably online and invest in mutual funds through monthly SIPs in equity mutual funds. As far as the amount of life insurance cover needed for this purpose is concerned you will have to estimate your future goal value at the time of her education and marriage after taking into account inflation. Taking into account the fact that your goal is at least 15-18 years away, you should invest monthly through SIP route in Nifty 50 or Sensex fund. If you are not comfortable investing in equity, you can open an account under Sukanya Samridhi Scheme in the name of your daughter which offers you higher rate of interest and tax benefits too under section 80C.
The term plan will take care of her education and marriage needs in case you are not around. The combination of term plan and monthly SIP/deposit in Sukanya Samdirdhi Scheme will certainly beat the amount which you would get under any child plan. Consult a Certified Financial Planner to build a proper financial plan for all your goals.
Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant on his twitter handle.