Can I Get Tax Benefits on LTCG on Sale of Property and a Home Loan Together?

Updated on: 14 Dec 2023 // 4 min read // Home Loans
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Buying a home is one of the most significant moments of an individual’s life.

Due to the sky-high real estate prices across all major cities in India, it has become virtually impossible to make an outright purchase against a residential property. In such a scenario, you need to consider other options that you have to raise money to be able to purchase your dream home. Some of the possible options that you have are:

  • Using all your savings
  • Borrow from friends and family
  • Selling Gold and other precious metals
  • Selling another property
  • Apply for a Home Loan from any of the financial institutions

You can choose any one of these or a combination of these options to raise money for buying your own house. One of the most common combinations that are used by many home buyers is Savings + Selling another idle property + Housing Loan.

One crucial question that arises here in mind of every potential home buyer is “Can I Claim Tax Exemption on LTCG on Sale of Property along with availing a Home Loan?”

Before we discuss the answer to this question, let us understand the various terms and intricacies involved in this decision.

Essential Terms

  • Capital Gain/Loss: The difference between the purchase price and selling price of a capital asset (like a house) is termed as capital gain or loss.
  • Long-Term Capital Gain/Loss (LTCG):If the property that has been sold was held for the duration of more than two years, the gain/loss from its sale is called Long Term Capital Gain/Loss.
  • Short-Term Capital Gain/Loss(STGC): If the property that has been sold was held for a duration of fewerthan two years, the gain/loss from its sale is called Long Term Capital Gain/Loss.

How are LTCG and STGC Calculated?

  • Any STGC that you have made from the sale of a property is included in your income for the current assessment year and is taxed according to prevailing income tax rates. There are no exemptions to STGC, as such, there is no way to minimise your tax liability.
  • Any LTCG that you have made on the sale of a property istaxed at 20%. There are provisions in the income tax act that help you get exemptions on LTCG and reduce your tax liability for a given assessment year.

How to Claim LTCG Exemption?

It is possible for you to avail exemption on LTCG if you invest the amount in the purchase of any other residential property. But to avail this exemption, you need to ensure that the below-mentioned conditions are met:

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  • Property that is sold and a new property that is purchased must be a residential property only.
  • The new house that is purchased must have beenacquired within 24 months of the sale of the other house.
  • If the purchase cost of the new house is more than the entire LTCG, then the whole LTCG is exempted from tax.
  • If the new house is purchased in an under-construction property, then the construction must be completed within 36 months of the sale of the other house.

Tax Exemption on LTCG on Sale of Property Alongwith Availing a Home Loan

When you purchase a residential property with the help of a Housing Loan,you are supposed to repay the loan amount through monthly instalments spread over the tenure of the loan which is usually upto 30 years in case of a Home Loan.

Assume that you have purchased the home using the loan amount and are living in it with your family. It is possible that you have another residential property at another location that you have sold.

Now you are wondering if the proceeds from that sale can be used towards payment of your Home Loan amount. This is an interesting scenario as you have sold an existing property which you had owned for more than two years and are investing it towards payment of your home loan within the stipulated time period.

In such a scenario, there has been an order from the Income Tax tribunal in 2018 itself, that if a house has been purchased with the help of a Home Loan, one year before and the buyer has another residential property that he has sold within this one year, then he can use the amount of LTCG towards repayment of the running Home Loan and it would be eligible for LTCG exemption as per the prevailing rules.

You can claim tax exemption on LTCG on the sale of property along with availing a Home Loan, but there are certain conditions that have been mentioned above which you must fulfill.

Also Read: 6-Step Strategy for Single Women Home Loan Borrowers

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