Taxpayer Eligible For Capital Gains Deduction Even If Home Loan Is Availed Of: Income Tax Tribunal

Property investments are made, primarily to make capital gains. However, there is a price to be paid for that. The profit a seller earns by the sale is taxable under the provisions of the law. If a property is held for at least two years, the seller will be paying long-term capital gains (LTCG) tax at 20 per cent.

So, if you purchased a property for Rs 50 lakh in 2014, and sold it for Rs 70 in 2017, 20 per cent LTCG tax will be deducted from the profit of Rs 20 lakh. Adjustments would be made keeping in mind inflation change during this period. In case the entire amount — Rs 70 lakh— is used to buy a new property, the taxpayer would be liable to pay an LTCG tax.

However, if an owner sells his property and uses the sale proceeds to buy another house, they are eligible to claim tax exemptions under Section 54 of the Income Tax (I-T) Act. To avail of the tax exemptions, they must meet certain conditions.

First of all, these sale proceeds must be used within two years of the sale to buy another property. Even if you have bought a new property one year before you were able to sell the house, you can avail of the tax benefits. The period to avail of the tax benefits could extend to three years in case you are constructing a residential property. Basically, time is the key.

For the benefit of such taxpayers, the Kolkata Bench of the Income Tax Appellate Tribunal (ITAT) provided further clarity for availing of exemptions on LTCG while passing an order recently.

The tribunal has ruled that the tax deduction cannot be denied on the basis that the taxpayer has taken a home loan to make the purchase.

One Amit Parekh had claimed exemption on capital gains tax of Rs 59 lakh under Section 54. I-T authorities, however, argued Parekh was not eligible to claim the deduction since he took a home loan of Rs 82 lakh from a private lender to make the purchase, and only Rs 9.37 lakh was used from the sale proceed to buy the new property. Since the Parekh did not adhere to “the spirit of the Section”, exemption was allowed on only Rs 9.37 lakh. After the recalculation, Parekh was told to pay tax on the entire amount of Rs 59 lakh. The taxpayer move court, challenging the decision.

Giving its order, the ITAT ruled that since cost of the new house was more than the money earned through the sale of the new house and since the taxpayers has followed the timeline in this regard, he could not be denied tax deduction on the basis that he avail of a home loan to make the purchase. Several courts had passed similar orders in the past, the tribunal noted.

Also read: Invested Capital Gains In Property? Now, Claim Deductions More Than Once