Capital Gains, Clever Moves: Can Your Old House Fund Your New Dream?

Increasing numbers of Indian homebuyers are facing a typical dilemma—buying a new house on a home loan while waiting to sell the old property. The silver lining? Tax experts assure that this is possible and can even be eligible for capital gains tax relief under Section 54 of the Income Tax Act.

Key Highlights:

Section 54 provides exemption for long-term capital gain arising from sale of residential house on investment of the gain in a residential house within one year of the date of sale or within two years from the date of sale.

The law does not require the utilization of capital gains for the direct purchase. Buying the new house on loan and refunding subsequently from sale proceeds is permissible.

Judicial precedents support this trend, but some assessing officers may oppose it if gains are not directly used for buying.

Accurate records of transactions and timelines must be kept to support exemption claims.

If the new house is purchased within the given time frame and the capital gains are used for repaying the loan, the Section 54 exemption is not lost.

Strategic Recommendation:

Ensure the new property is residential and not commercial.

Complete the purchasing or building within the time constraint limits.

Consult a tax professional to avoid any queries and maximize exemption qualification.

Plan to prepay over the capital gains amount to keep interest burden low.

This method leaves room for late possession dates and delayed completions for buyers, making a financial balancing act a tax-smart one.

Sources: Economic Times, Rediff Gurus, Indian Kaanoon, Bajaj Finserv.