Can I save Capital Acquire Tax by repaying residence mortgage?

Can one save capital achieve tax by repaying residence mortgage (outdated or new)? Is it allowed below the Sec.54F of the Earnings Tax Act? Allow us to talk about this query intimately.

Mr.A could have an present residence mortgage on a property in Bangalore. When he sells the Bangalore property, he could incur capital achieve. Can he save that tax by repaying the prevailing residence mortgage of Bangalore property from the capital achieve?

Mr.B could also be prepared to purchase a brand new home however the present home just isn’t promoting. Therefore, he opted for a house mortgage to buy the brand new home. If the outdated home is offered sooner or later, then whether or not Mr.B can use capital achieve to repay new residence mortgage and save the tax?

Mr.C owns two properties. On one property he has a mortgage. On one other property, he doesn’t have any mortgage. If he sells the property (on which no mortgage) and incurs capital achieve, then whether or not such capital achieve be exempted from tax if he makes use of it for repaying of mortgage of one other home property?

Such questions are widespread in nature. Therefore, thought to jot down an in depth submit on this.

Can I save Capital Acquire Tax by repaying residence mortgage?

Let me share with you the Sec.54F particulars to reach at what we are able to choose.

All about Part 54F

Exemption below Sec.54F is out there if the next situations are glad.

• Who can declare exemption – Underneath Sec.54F, solely a person or a HUF can declare exemption. In different phrases, no different individual is eligible for claiming exemptions below Sec.54F.
• Which asset is certified for exemption – Underneath Sec.54F, the exemption is out there provided that the capital asset that’s transferred is a LONGTERM capital asset however OTHER THAN A RESIDENTIAL HOUSE or PROPERTY (it could be a plot of land, business home property, gold, share or any asset however not a residential home property).
• Which new asset ought to be bought or acquired – To say the exemption below Sec.54F, the taxpayer must buy one residential home property (outdated or new) (however should be inside India) or assemble a residential home property (new home). The brand new home ought to be bought or constructed inside the time restrict – a) For brand spanking new home – It ought to be bought inside 1 12 months or earlier than, or inside 2 years after, the date of switch of the unique asset. b) For establishing a brand new home – The development ought to be accomplished inside 3 years from the date of switch of unique asset.

Few factors to contemplate are –

1. Time restrict within the case of obligatory acquisition – In case of obligatory acquisition, the time restrict of 1 yr, 2 years, or 3 years will likely be decided from the date of receipt of compensation (whether or not preliminary or further).
2. Development could start earlier than the switch of capital asset – Development of the home ought to be accomplished inside 3 years from the date of the switch of the unique asset. The date of graduation of development is irrelevant. Development even earlier than the switch of the unique asset.
3. Holding of authorized title just isn’t mandatory – If the taxpayer pays full consideration or a considerable portion of it inside the stipulated interval given above, the exemption below Sec.54F is out there even when the possession is handed over after the stipulated interval or the sale deed is registered afterward.
4. The residential home ought to be bought/acquired (could or is probably not used for residential functions) – The requirement of Sec.54F is that the property ought to be a residential home. The usage of the property just isn’t the related criterion to contemplate the eligibility for a profit below Sec.54F. What’s required is an funding in a residential home. Mere non-residential use wouldn’t render a property ineligible for profit below Sec.54F.
5. Funding within the title of the transferor – It’s mandatory and compulsory to have an funding made in a residential home within the title of the transferor solely and never within the title of another individual.
6. Renovation or modification of an present home – Sec.54F doesn’t present for exemption in case of renovation or modification of an present home.
7. The funding made inside the time restrict however development not accomplished – Exemption below Sec.54F cannot be denied the place funding in a residential home is made inside the time restrict however development is accomplished after the expiry of the time restrict.
8. The dwell hyperlink between internet sale consideration and funding in new property just isn’t mandatory – Merely as a result of capital good points earned have been utilized for different functions and borrowed are deposited in a capital good points funding account, the advantage of exemption below Sec.54F cannot be denied.
9. Not a couple of residential home property ought to be owned by the taxpayer – Underneath Sec.54F, the exemption is out there provided that on the date of switch of the unique property, the taxpayer doesn’t personal a couple of residential home property. He must also not buy inside a interval of two years after such date (or full development inside a interval of three years after such date) any residential home.
10. The brand new asset ought to be located in India – As talked about above, the brand new asset ought to be inside India.
11. Joint possession in different properties – If the taxpayer owns a couple of residential home even collectively, with one other individual, the advantage of exemption below Sec.54F just isn’t accessible.

How a lot most restrict can one avail below Sec.54F?

Earlier than the Price range 2023, there have been no such restrictions. Nonetheless, efficient from 1st April 2024, the utmost restrict accessible to avail of the profit below Sec.54F is capped at Rs.10 Crore. Do be aware that the quantity of exemption cannot exceed the quantity of capital achieve.

What’s the Scheme of Deposit below Sec.54F?

Underneath Sec.54F, the brand new home will be bought or constructed inside the time restrict given above. The taxpayer has to submit his return of revenue on or earlier than the due date of submission of return of revenue (usually thirty first July or thirty first Oct of the evaluation 12 months). If the quantity just isn’t utilized inside the due date of submission of revenue, then it ought to be deposited within the capital good points deposit account scheme. On the idea of the quantity utilized in buying the brand new property and the quantity deposited within the deposit account, the assessing supply will give an exemption below Sec.54F.

By withdrawing the quantity from the deposit account, a brand new home will be bought or constructed inside the specified time restrict.

If the quantity deposited just isn’t utilized totally for buy or development of latest home inside the stipulated interval, then the next quantity will be handled as LTCG of the earlier 12 months during which the interval of three years from the date of switch of unique asset expires.

Unutilized quantity within the deposit account (Claimed below Sec.54F)* (Quantity of unique capital achieve/Web sale consideration).

In such case, the taxpayer can withdraw the unutilized quantity at any time after the expire of three years from the date of switch of the unique asset in accordance with the aforesaid scheme.

Should you go by all the main points of Sec.54F and in addition by referring to those hyperlinks “Kanoon” and “ITAT Tribunal Order” the place the circumstances of Bombay Excessive Courtroom in CIT vs. Dr. P. S. Pasricha, Kerala Excessive Courtroom in Ok. C. Gopalan 162 CTR 566 and IT Officer Vs Manish Sinha the place talked about, it’s clear that you should use the gross sales proceeds to repay the house mortgage. However with sure situations as under.

# Mr.A can’t declare the capital achieve exemption by repaying the house mortgage on the property. It ought to be for a unique new property not on the property that you’re promoting.

# Mr.B and C can avail the advantages of exemption. Nonetheless, if the situations of time interval as per Sec.54F (ought to be bought inside 1 12 months or earlier than, or inside 2 years after, the date of switch of the unique asset) are assembly then solely they will avail of the exemption.

Check with our newest posts on Earnings Tax matters –