Planning to sell your house? Know the income tax rules before you repay your loan

A common question among homeowners is whether sale proceeds from an existing property can be used to repay a home loan on a new house while still claiming the capital gains exemption.

Under Section 54 of the Income Tax Act, the benefit is available if the capital gains are invested in another residential property within the prescribed time limits. However, whether repayment of a housing loan qualifies for this exemption often creates confusion among taxpayers.

Today's Q&A explains such details in response to a query by a reader.

The exemption can still be claimed if a house has already been bought within one year prior to the date of the sale of the house. If you opt for the self-construction of a house or book an under-construction residential property, a longer period of three years is available within which the construction of the house has to be completed from the date of sale of the existing house.

Since you are planning to sell the existing house and as the cost of the under construction house is higher than the amount of long term capital gains on sale of the existing house property, you can claim exemption under section 54 for full long term capital gains as the construction of the under construction house is expected to be completed within three years from the date of sale of your existing house.

The exemption under section 54 is not dependent on actual use of the sale proceeds of the existing house as long as the requisite money is invested for acquisition of the house. The source of funding for this purpose is not relevant as decided by various income tax tribunals.