Selling Residential House Within Five Years Of Possession Will Reverse Tax Benefits On Home Loan

• December 26, 2022
• CA Chandan Agarwal's Office

It’s best to complete five financial years from end of the year in which the possession was taken, to avoid the consequences of reversal of tax benefits under sections 80C and 24. No tax benefits available on application of income. No deduction available for NSC interest

Question: I had bought a residential house in December 2018 for which I had taken a home loan. I have been availing the tax benefits under Section 80C and Section 24 of the Income-tax Act, 1961 for all these years. Now, I am planning to sell this house in March 2023 and repay the home loan. What are the tax implications if I prepay the home loan in March 2023 in full?

Answer: Under provisions of Section 80C, if you sell the residential house within a period of five years from the end of the financial year in which possession of the property was taken, all the tax benefits availed under Section 80C in respect of home loan repayment will be reversed and treated as income for the year in which the property gets sold.

Do note that there are no such provisions for reversal of tax benefits availed in respect of interest under Section 24(b). So, in case you sell the house property in March 2023, all the income tax benefits claimed by you in respect of principal repayment in the past shall be treated as your income for this year.

I would, therefore, advise you to ensure that you complete full five financial years from end of the year in which the possession was taken, so as to avoid the consequences of reversal of tax benefits availed by you earlier.

Since you are selling the house after holding it for more than 24 months, the profits, if any, made on sale shall be treated as long-term capital gains (LTCG) and you may have to pay on the difference between the indexed cost and the sale price of the property. Please note that if you prepay your home loan then there is no consequence on your tax liability on account of merely prepayment of the home loan, but the same can be claimed under Section 80C up to Rs. 1.50 lakh along with other eligible items.

Question: I am earning Rs. 6.5 lakh annually and need to give about 2.5 lakh to my relatives who are farmers. Can I deduct this amount from my income?

Answer: What you are doing is application of income earned by you and not expenditure incurred to earn this income. There are no tax benefits available for such application of income. This would be considered as gift to your family members. If the family members are among the specified relatives as defined under Section 56(2) of the Income-tax Act, 1961, there will not be any tax implication for them, otherwise the amount will be treated as their income, if the aggregate of all the gifts received by them individually exceeds Rs. 50,000 in a year.

Question: Can a senior citizen claim deduction for savings bank interest under Section 80TTA and for bank FD interest and accrued on National Savings Certificate (NSC) interest under Section 80TTB?

Answer: The deduction to a resident senior citizen is available under Section 80TTB for interest income from banks/post offices and credit cooperative bank up to Rs. 50,000 in a year whether it is from recurring deposit or savings bank. No deduction is available for NSC interest. One cannot claim deduction under Section 80TTA and 80TTB both at the same time.

Source: https://www.outlookindia.com/business/selling-residential-house-within-five-years-of-possession-will-reverse-tax-benefits-on-home-loan-news-247766