Explained: Income tax implication of the sale of a flat within three years funded by a home loan
2 min read 01 Aug 2023, 11:16 AM ISTTax implications for selling a flat-funded by a home loan: Principal repayment claimed under Section 80C becomes taxable, but no tax on capital gains if proceeds used to buy a new house within 3 years
PremiumQuestion: I purchased a ready-to-move-in flat in Mumbai in December, 2021 which was partly funded by a home loan. I have been availing income tax benefits in respect of repayment of a loan under Section 80C and interest under Section 24b on the home loan. Now I want to sell out this flat to buy a bigger flat. What are the tax implications for this transaction?
Answer: As per Section 80 C of the income tax act, in case you sell a residential house funded with a home loan, within five years from the end of the year in which possession of the house was taken, all the benefits for repayment of home loan availed under Section 80 C, in respect of such house, shall be treated as income of the year in which you sell such house.
So in your case, the aggregate of the principal repayment claimed under Section 80 C shall become taxable during the year in which you sell it. Please note that there is no similar provision for reversing the tax benefits claimed in respect of interest paid on home loans.
I presume that you will sell this flat after completing three years. So profits if any made on this transaction shall be treated as long-term capital gains. Since you are planning to buy a new house, you will not have to pay any capital gains tax on such profits as per Section 54 of the Income Tax Act provided the investment in the new house is equal to or more than indexed long-term capital gains on such sale. Please note that the investment for purchasing a new house can be made within a period of three years from the date of sale of the flat.
However, in case you are not able to utilize the full amount of capital gains before the due date of filing your income tax return, you will have to deposit the taxable capital gains to the extent not utilized in a capital gains account with a bank.
In case you sell this house within two years, the profits shall be treated as short-term capital gains and shall be included in your regular income and taxed at your slab rate. It may be noted that there is no provision for claiming exemption against short-term capital gains under income tax laws.
Balwant Jain is a tax and investment expert and can be reached at jainbalwant@gmail.com and on @jainbalwant on Twitter.
