Deduction u/s 54 by repayment of housing loan

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

08 November 2013 Dear experts,

One of my client received money on sale of flat. He had already bought 1 house but that house was bought 1.5 years before date of sale of flat. He used amount of sale consideration to repay the housing loan which was taken to purchase new house.

My question is , can he take deduction u/s 54 equal to amount of loan repaid?

Querist : Anonymous

Querist : Anonymous (Querist)

18 November 2013 Dear Experts,

Kindly guide. Waiting for your valuable reply.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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20 July 2024 Under Section 54 of the Income Tax Act, 1961, an individual can claim an exemption on capital gains arising from the sale of a residential property, if the following conditions are met:

1. **Purchase of New Residential House:**
- The taxpayer must purchase a new residential house within either one year before the date of transfer of the old house or within two years after the date of transfer. Alternatively, the taxpayer can construct a new residential house within three years after the date of transfer.

2. **Conditions for Claiming Deduction:**
- The exemption under Section 54 is available if the capital gains are invested in purchasing or constructing a new residential house property.
- The amount of exemption is calculated as follows:
- If the cost of the new residential house is equal to or more than the capital gains arising from the sale of the old house, the entire capital gains are exempt.
- If the cost of the new residential house is less than the capital gains, the exemption is restricted to the cost of the new house. The balance capital gains not invested in the new house will be taxable.

3. **Repayment of Housing Loan:**
- Section 54 does not specifically allow deduction for the repayment of housing loan taken to purchase the new house. The deduction is linked to the investment made in the purchase or construction of the new house.
- If your client has utilized the sale proceeds of the old flat to repay the housing loan taken for the new house, this does not qualify as an investment under Section 54 unless the amount is used directly for the purchase or construction of the new house.

4. **Conclusion:**
- Your client can claim exemption under Section 54 to the extent that the capital gains from the sale of the old flat are invested in the purchase or construction of a new residential house.
- However, repayment of the housing loan for the new house does not directly qualify for exemption under Section 54. The exemption is based on the investment in acquiring the new residential property.

5. **Consultation:**
- It is advisable for your client to consult with a tax professional or chartered accountant who can provide personalized advice based on all relevant details of the transaction and ensure compliance with tax laws.

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