Do I need to repay my home loan to claim a long-term capital gains exemption?

I purchased a flat worth ₹50,00,000 on 15/4/2024, against which I took a home loan. On 15/10/2024, I sold my 10 years of commercial property for ₹45,00,000. So, to get long-term capital gain tax exemption, is it necessary to repay the home loan amount from the money I got from selling the commercial property? Or can I use that money for another purpose and continue the home loan instalments?

Since you have sold the commercial property after holding it for more than 24 months, the capital gains would become taxable as long-term capital gains. Section 54F of the Income Tax Act, 1961, provides an exemption to an individual and a HUF for long-term capital gains arising from the sale of any capital asset other than a residential house if the net sale proceeds are invested for acquiring a residential house within the prescribed period.

The prescribed period is within two years after the date of sale in case the investments are being made in a ready-to-move-in house. In case the taxpayer goes for self-construction or books a residential flat in an under-construction property within which the construction needs to be completed. Even if the taxpayer bought a residential house within one year before the asset's sale date, he is still eligible to claim this exemption.

Exemption rules for residential property purchases

Please note that linkage of the sale proceeds with the money invested is not required. What is required is that the taxpayer buys a residential property within a prescribed period, so even if you fund your house purchase with a home loan, you are still eligible to claim the exemption.

Since you have bought the residential house within one year before the date of sale of the commercial property, you are eligible to claim an exemption under section 54F, provided you do not own more than one house other than the house in respect of which the exemption is being claimed.

Since linkage of the sale proceeds and payment for the acquisition of the residential house property is not required, you became eligible for this exemption when buying the house, even with the home loan. You need not repay the home loan amount with the sale proceeds to retain the exemption. You are free to use the sale proceeds received on the sale of the commercial property the way you want.

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Balwant Jain is a tax and investment expert and can be reached at jainbalwant@gmail.com and @jainbalwant, his X handle.

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