Taking a Home Loan Doesn't Mean You Cant Claim Capital Gains Exception
Gains from a house sale are still exempt if you take a housing loan
It is well known that capital gains from the sale of a residential house can be claimed exempt if the house was held for more than 24 months (long-term) and a new residential house is bought either one year before or two years after the sale. The exemption is available even if a new house is constructed within three years from date of transfer.
Many believe that in order to avail this exemption, the capital gains amount itself must be utilized to buy the new house. However, numerous tax experts opine that there is no such requirement.
This is completely logical since exemption is granted even when the new house is purchased a year before sale. As the house is not even sold at that time, the question of using capital gains amount to buy the house doesn’t arise.
Let us consider the recent ruling of the Income Tax Appellate Tribunal (ITAT)- Kolkata Bench in this regard.
Mr. A sold a house and made gains of Rs. 59 lacs. He decided to purchase a new house to get benefit of capital gain exemption. For this, he took a home loan of Rs. 82 lacs and bought a house within the time bracket provided by the tax laws.
He utilized Rs. 9.37 lacs of the gains and loan funds to make this purchase.
The tax officer however, allowed exemption only to the extent of Rs. 9.37 lacs and added back Rs. 49.7 lacs to Mr. A’s income. Aggrieved by this, Mr. A appealed against the judgment.
When the case reached ITAT, it was found that exemption was declined only because whole of capital gains amount was not used to buy the house. The tribunal held that Mr. A cannot be denied exemption simply because he took a loan to buy the new house.
This reasoning can also be applied when a house is bought for claiming exemption on gains arising from sale of long-term non-residential property. The benefit is however subject to conditions like the person owns only one other house on date of sale, the house should be purchased either one year before sale or two years after sale etc.
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