Long-Term Capital Gain From Sale Of House: Here’s How It Is Calculated For Tax Purpose

Question: I have earned long-term capital gains (LTCG) of Rs. 40 lakh on the sale of a residential house during the financial year 21-22. To save tax, I will invest Rs. 20 lakh in the NHAI Capital Gains Bonds, and the balance Rs. 20 lakh as margin money for booking an under-construction residential house, which will cost me Rs. 50 lakh. The remaining amount will be funded through a home loan. Will I be eligible to claim exemption from payment of tax on LTCG of Rs. 20 lakh (paid as margin money)?

Answer:  The tax exemption under Section 54 of the Income Tax Act, 1961 on long-term capital gains on the sale of a residential house can be claimed to the extent of the cost of the new residential house, without any reference to the source of funding of the same. So what is important, is the amount of investment in the property. It is immaterial how you fund the purchase of the property. Even a loan taken for this purpose can be treated as your investment for this purpose.

Since you are planning to buy a house costing more than the long-term capital gains earned, you need not to invest in NHAI bonds. To claim this benefit for an under-construction property, you must invest the amount of long-term capital gains by the due date of filing of the income tax return, i.e., July 31, 2022. In case you are not able to fully utilise the money, you need to deposit the unutilised long-term capital gain in the Capital Gain Account, which can be used for paying to the builder. You have to ensure that the construction is completed within three years from the date of the sale of your house.
 
Question: I am claiming Rs. 1.50 lakh under Section 80 C of the Income Tax Act. Is there any way, I can save further taxes, like by taking loans from banks to buy residential or commercial property and letting them out? Can we offset the interest payment or the equated monthly instalment (EMI) to the bank, and reduce our tax payment?  

Answer: In addition to the tax benefits of up to Rs. 1.50 lakh under Section 80C of the Income Tax Act, you can further avail yourself of exclusive tax benefits under Section 80CCD (1B) by investing Rs. 50,000 in the National Pension Scheme (NPS) tier I account.

As far as your tax benefits for a home loan are concerned, please note that the rental income is taxed under the head “Income from House Property” after a standard deduction of 30 per cent of the rent. You can claim the full interest on your home loan, but you are allowed to set off the loss under the head "Income From House Property" only up to Rs. 2 lakh against other income during the current year, and the unabsorbed loss, if any, is allowed to be carried forward for set-off against the income from house property in eight subsequent years. You are also allowed to claim the benefit in respect of the principal amount of a home loan within the overall limit of Rs. 1.50 lakh every year. Please note that these benefits are only available under the old tax regime.

Balwant Jain is a tax and investment expert

(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)