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Income tax laws mandate a minimum holding period, before an owner sells his/her residential house, to avail of tax benefits. Let us analyse the various provisions, under the Income Tax Act, to understand the implications of transferring a residential house, before the stipulated holding period.
Capital gains tax exemption and concessional rate
Long-term capital gains tax on the sale of a residential house is 20%, while the tax on short-term capital gains is 30%, in case you fall in the highest tax bracket. One can avail of tax exemption on long-term capital gains, either by investing in another residential house, or by investing in capital gains bonds of specified companies. To avail of this benefit, the holding period of your residential house property should be more than 24 months. Moreover, the benefits of capital gains indexation are also not applicable, if your holding period is less than 24 months.
Holding period for new residential house acquired, to avail the long-term capital gains tax exemption
You can claim the tax benefits on long-term capital gains, if you buy or construct another residential house, within specified time limits. For long-term capital gains on a residential house, one has to invest the capital gains but in the case of other assets, one has to invest the entire sale consideration. The long-term capital gains exemption, shall be available in proportion to the amount invested.
The new residential house that is acquired for claiming exemption, needs to be held for a minimum period of three years, from the date of its acquisition. If the new residential property is transferred within three years, the amount of long-term capital gains for which the exemption was claimed earlier, shall be treated as short-term capital gains and taxed at the slab rate applicable to you.
Property acquired with the help of a home loan
Under Section 80C of the Income Tax Act, an individual assessee is allowed a deduction of up to Rs 1.5 lakhs, for repayment of a housing loan, along with other eligible items of expenditure or investments, such as life insurance premium, school fee, PPF, ELSS, EPF, NSC, etc. You are also allowed to claim any amount of stamp duty and registration charges, paid within this limit. This benefit is available, for home loans taken from specified institutions such as banks, housing finance companies, the central or state governments, etc. It is applicable on any repayment, including EMIs and lump-sum part prepayments.
However, in case an owner transfers a residential house property that was acquired with a housing loan, within five years from the end of the financial year in which the possession was obtained, then, s/he cannot claim any deduction for repayment made during the year. Moreover, any deduction availed in respect of such house property, for housing loan repayment, stamp duty and registration charges, in earlier years, shall be treated as income of the year in which you transfer the property. Please note that there is no similar provision, for reversal of benefits, in respect of interest claimed under Section 24(b), nor is there any similar provision for reversal of benefits claimed, in case you prepay your housing loan even before completion of the five-year period.
(The author is a taxation and home finance expert, with 35 years’ experience)