Tax implication of sale of a flat inside three years funded by a house mortgage

Question: I bought a ready-to-move-in flat in Mumbai in December, 2021 which was partly funded by a house mortgage. I’ve been availing revenue tax advantages in respect of reimbursement of a mortgage beneath Section 80C and curiosity beneath Section 24b on the house mortgage. Now I wish to promote out this flat to purchase a much bigger flat. What are the tax implications for this transaction?

Answer: As per Section 80 C of the revenue tax act, in case you promote a residential home funded with a house mortgage, inside 5 years from the tip of the 12 months during which possession of the home was taken, all the advantages for reimbursement of dwelling mortgage availed beneath Section 80 C, in respect of such home, shall be handled as revenue of the 12 months during which you promote such home.

So in your case, the mixture of the principal reimbursement claimed beneath Section 80 C shall develop into taxable through the 12 months during which you promote it. Please observe that there isn’t a related provision for reversing the tax advantages claimed in respect of curiosity paid on dwelling loans.

I presume that you’ll promote this flat after finishing three years. So earnings if any made on this transaction shall be handled as long-term capital features. Since you’re planning to purchase a brand new home, you’ll not must pay any capital features tax on such earnings as per Section 54 of the Income Tax Act supplied the funding within the new home is the same as or greater than listed long-term capital features on such sale. Please observe that the funding for buying a brand new home may be made inside a interval of three years from the date of sale of the flat. 

However, in case you aren’t in a position to make the most of the complete quantity of capital features earlier than the due date of submitting your revenue tax return, you’ll have to deposit the taxable capital features to the extent not utilized in a capital features account with a financial institution.

In case you promote this home inside two years, the earnings shall be handled as short-term capital features and shall be included in your common revenue and taxed at your slab charge. It could also be famous that there isn’t a provision for claiming exemption in opposition to short-term capital features beneath revenue tax legal guidelines.

Balwant Jain is a tax and funding professional and may be reached at jainbalwant@gmail.com and on @jainbalwant on Twitter.

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Updated: 01 Aug 2023, 11:16 AM IST