Tax on Property Sale With Loan in It

Hi Mayank,

Here’s a clear breakdown regarding the tax implications and practical points on your cousin’s property sale with an existing loan:

1. Tax on Property Sale (Capital Gains Tax):

• When your cousin sells the property, the sale consideration is ₹36 lakh, irrespective of how the loan repayment is handled.

• The outstanding loan of ₹20 lakh is part of the transaction but does not reduce the taxable capital gains.

• Capital gains are calculated as:

  $Capital\; Gains=Sale\; Consideration-Cost\; of\; Acquisition-Indexed\; Cost\; of\; Improvements-Expenses\; on\; Transfer$

• The loan repayment itself is not a deductible expense for capital gains tax.

2. How Buyer’s Payment Affects Taxation:

• Whether the buyer pays off the loan directly to the bank or pays the entire ₹36 lakh to your cousin, who then repays the loan, does not change the capital gains tax liability.

• For your cousin, the entire ₹36 lakh is the sale price declared for capital gains.

3. Practical & Legal Considerations:

• Direct payment by buyer to bank for loan repayment is often smoother and transparent. This reduces risk and ensures loan closure before the property ownership transfers.

• If the buyer pays the entire amount to your cousin, your cousin will need to ensure timely repayment of the loan to avoid complications.

• Bank will issue a No Objection Certificate (NOC) after the loan is cleared, which is essential for smooth property title transfer.

4. Loan for Remaining Amount:

• Buyer taking a new loan of ₹16 lakh from the same bank is a practical solution.

• This can expedite the process since the bank already has records of the property and your cousin’s existing loan.

5. TDS on Property Sale:

• If the sale consideration exceeds ₹50 lakh, the buyer needs to deduct TDS @ 1% on the total consideration and deposit it with the government.

• In your case (₹36 lakh), TDS is not applicable.

Summary: