News: Capital gains tax exemption available even if loan used for new house: ITAT-09-08-2019
Updated On: August 09, 2019
Capital gains are taxable under the Income-tax (I-T) Act. If on sale of a residential house (which has been held for at least two years), the taxpayer makes a profit, then such profit is treated as a long-term capital gain (LTCG).
MUMBAI: The Mumbai bench of the Income-tax Appellate Tribunal (ITAT) has recently held that the investment-linked capital gains tax exemption, which is available on purchase of a new house, cannot be denied merely because the taxpayer has utilised a home loan instead of the sale proceeds of his old house.
Capital gains are taxable under the Income-tax (I-T) Act. If on sale of a residential house (which has been held for at least two years), the taxpayer makes a profit, then such profit is treated as a long-term capital gain (LTCG). This gain is taxable at 20% with an adjustment for inflation, referred to as indexation benefit.
Section 54 of the I-T Act provides for investment-linked capital gains tax exemption. If an investment is made in another house in India, within the stipulated period of time, then the ‘cost of the new house’ is deducted and only the balance component of the LTCGs is taxable. Such deduction results in a lower I-T outgo. If the amount of the capital gain is equal to or less than the cost of the new house, the entire sum of LTCG is not taxable.
The new house needs to be purchased either within a period of one year prior to or two years from the date of sale of the old house. This tax benefit is also available if the taxpayer within three years after the date of sale of the old house constructs a new residential house.
In the case decided by the ITAT on August 2, Manish Sinha, the taxpayer, had claimed a capital gains tax exemption under section 54, arising on sale of his old house. Instead of using the sale proceeds aggregating to Rs. 55 lakh for investment in the new house, he utilised a home loan of Rs. 40 lakh taken from HDFC Bank.
The tax tribunal noted that the only requirement to be eligible for exemption under section 54 is that the taxpayer should purchase or construct the new house within the prescribed time. This condition had been complied with by Sinha.
