Does repaying a house mortgage with MFs enable tax exemption on capital beneficial properties?

New Delhi: When you promote capital property like shares, mutual funds (MFs) and gold, utilizing the sale quantity to purchase a house exempts you from paying tax on the capital beneficial properties made. This tax break is offered beneath part 54F of the Income Tax Act.

There are three key circumstances to qualify: the asset whose sale proceeds are to be invested needs to be held for the long run, the home have to be purchased one yr after or earlier than promoting the principle asset, and you need to not personal a couple of home on the time of sale of the asset.

However, this isn’t as easy an answer as a result of Section 54F places a number of circumstances.

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In this story, Mint addresses the intricacies of Section 54F in a query and reply format.

Can I take advantage of the sale proceeds to pay an present dwelling mortgage?

Prakash Hegde, chartered accountant, Acer Tax & Corporate Services, mentioned tax payers can use the sale proceeds to repay a house mortgage and get exemption so long as the opposite circumstances are being met. “If the home property is bought or constructed inside the specified interval (earlier than or after the sale of shares/MF), regardless of the aim for which the proceeds are utilised, exemption could be accessible,” he mentioned.

For instance, if you happen to purchased a home with a mortgage two years earlier than promoting the principle asset, say shares, you’ll not get exemption on capital beneficial properties tax if you happen to use the sale proceeds of shares to pay the mortgage. However, if the identical home was purchased inside one yr earlier than you bought the shares, you possibly can declare exemption on LTCG tax to be paid on the shares.

What if I promote my shares as a single holder and need to purchase the home in joint possession?

You will get exemption, nonetheless, the acquisition value for calculating exemption is not going to be the total quantity. The normal rule beneath 54F is that one should use your complete sale quantity, and never simply capital beneficial properties, to purchase the property so as to declare exemption. When the property buy value is lower than the full sale quantity of the capital asset, you get a deduction on a proportionate quantity of capital beneficial properties. “In case of joint possession, it’s higher to contemplate your share just for computing capital beneficial properties,” mentioned Karan Batra, managing associate, Chartered Club.

What if I promote shares that have been in joint possession and need to purchase a home as a single proprietor?

In this case, you need to use the sale proceeds that you simply obtain in proportion to your possession to say exemption. For occasion, if you happen to maintain 50% possession in shares, you need to use half of the full gross sales proceeds to reinvest and declare exemption.

If I deposit sale proceeds from shares in a Capital Gains Accounts Scheme (CGAS), do I nonetheless have to disclose it in ITR?

No, it’s not required. The concept behind depositing the sale proceeds in CGAS is to order the cash for buying a home and to not pay tax on the beneficial properties if you happen to intend to buy the home after the Income Tax Return (ITR) submitting due date. However, you need to reinvest the sale proceeds in a property inside a yr of promoting the principle capital asset, else, you’ll have to pay capital beneficial properties tax later.

Are registration and stamp obligation included in calculating buy value of the brand new home property?

Yes, registration and stamp obligation make up the full buy value of a property. “Any bills incurred solely for the acquisition of the brand new asset are factored into the asset’s value. This consists of bills comparable to stamp obligation, registration costs, brokerage charges, and the like,” mentioned Neeraj Agarwala, Partner, Nangia Andersen India.

Will I be eligible if I take advantage of the sale proceeds to reconstruct an present home?

Agarwala mentioned the reconstruction or renovation of an present home is just not lined beneath part 54F. This is as a result of plain studying of part 54F within the Income Tax Act means that the exemption is allowed on buying a brand new asset. “…the assessee has, inside a interval of 1 yr earlier than or after the date on which the switch passed off bought, or has inside a interval of three years after that date constructed, a residential home (hereafter on this part known as the brand new asset)…” the Section reads.

If I personal a home and one empty plot on the time of promoting my shares, and want to purchase one other home with the sale quantity of shares, will I be eligible for exemption?

Yes, on this case sale proceeds of shares can be eligible for exemption, mentioned Batra. “IT legal guidelines don’t deal with plots as residential property. So, within the above case, the taxpayer primarily owns one home and therefore, is eligible to say exemption on capital beneficial properties tax by shopping for yet one more home. They may construct a home on the plot and declare exemption,” he mentioned.

Are NRIs eligible?

NRIs are eligible to hunt tax exemptions beneath Sections 54 and 54F if the home property is purchased in India. “It is essential to notice that the vendor can not use the proceeds to purchase a residential property overseas whereas nonetheless claiming the exemption,” mentioned Agarwala.

Also Read: How shopping for a brand new dwelling can prevent capital beneficial properties tax on shares, mutual funds