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Property booking refund: Can I avoid taxes on Rs. 30 Lakh?

Ramalingam

Ramalingam Kalirajan  |7621 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Dec 07, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more
PADMAKUMAR Question by PADMAKUMAR on Dec 05, 2024Hindi
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Sir, I had booked a property in 2016 and made a payment of approx Rs. 27,00,000/- through savings and home loan availed. Since the property is not yet delivered, I have asked for refund and the builder is ready to make the payment of approx Rs. 30,00,000/-. This amount includes the EMI and interest payment made upto 2021 wherein I had closed the loan availed. Kindly advise as to 1) whether I will have to pay any tax? 2) whether I can transfer the amount to my spouse 3) whether I will be subjected to any Income Tax payment or otherwise

Ans: The refund you receive is considered a capital transaction. Whether it is taxable depends on specific factors. Below is a detailed analysis:

1. Taxability of Refund Received
Principal Amount Paid:
The principal amount refunded is not taxable. This is because it is your own money returned.

Interest Paid by the Builder:
Any interest or additional amount refunded is taxable. It will be considered "Income from Other Sources."

Loan EMIs Paid:
Refund of EMIs made towards loan repayment may include interest and principal components. The interest portion refunded could be taxable as per tax rules.

Cost Indexation Benefit:
Since you booked the property for investment, any capital gain or loss may apply. This depends on how the tax department views the refund transaction.

2. Possibility of Transferring the Amount to Your Spouse
Gifting to Spouse:
You can transfer the amount to your spouse without immediate tax implications. Gifts to a spouse are exempt under the Income Tax Act.

Clubbed Income Rule:
However, if your spouse invests this amount and earns income, it will be clubbed with your taxable income. You will have to pay tax on the income generated from such investments.

Using a Joint Account:
Alternatively, consider using a joint account for better transparency and tracking of funds.

Steps for Managing Tax Liability
Evaluate Refund Break-Up
Ask the builder for a detailed breakup of the refund amount.
This should include the principal amount, interest, and EMI refund details.
Tax on Interest Component
The interest portion will be taxed under "Income from Other Sources."
Include this amount while filing your income tax return (ITR).
Utilise Capital Gains Exemptions (If Applicable)
If the refund amount results in capital gains, you can reinvest in certain tax-saving bonds under Section 54EC.
Alternatively, reinvesting in another residential property could provide tax exemption under Section 54F.
Keep Documentation Ready
Maintain all records of payments made to the builder and the refund received.
This will be helpful in case of any scrutiny or queries from the Income Tax Department.
Recommendations for the Refund Amount
Do Not Invest Entirely in Fixed Deposits
Fixed deposits offer low returns, which may not beat inflation in the long term.
Consider growth-oriented investments like mutual funds for better returns.
Explore Mutual Funds for Better Returns
Invest part of the amount in diversified mutual funds for wealth creation.
Actively managed funds outperform passive options over the long term.
Consult a Certified Financial Planner to align investments with your goals.
Maintain Liquidity for Immediate Needs
Keep a portion of the refund in a liquid or short-term debt fund.
This ensures funds are readily available for short-term needs.
Final Insights
The principal portion of the refund is not taxable.
Interest and EMI refunds may attract tax under specific conditions.
Transferring the amount to your spouse is possible but involves clubbing rules.
Diversify investments into mutual funds for long-term benefits.
Maintain proper documentation to handle tax implications smoothly.
Seek personalised guidance from a Certified Financial Planner to optimise the utilisation of this refund.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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Ramalingam

Ramalingam Kalirajan  |7621 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Oct 26, 2024

Asked by Anonymous - Oct 25, 2024Hindi
Money
my age is 68 years i have purchased a house jointly with family (4) members in june-2023 under construction which will be completed in dec-2026 for amounting to Rs.2.20 crore , Registration(Aggrement) is already made in August-23 against that 1.10 crore is already paid till september-24 by the way of loan. my old house is suppose to be sold in june/july-24 but somehow it is not sold. if it is sold by December-2024 or January 2025 should i have to pay tax further 2 to 3 installment are still to pay till possession please let me know
Ans: Current Situation and Potential Tax Implications
Joint House Purchase: You purchased a new property in June 2023 jointly with four family members. It will be completed by December 2026, with a total cost of Rs 2.2 crore.

Loan and Payments: A home loan has funded Rs 1.1 crore, and payments continue towards the installments.

Old House Sale Delayed: Your plan to sell an old house by June/July 2024 has been delayed, but you expect it could be sold by December 2024 or January 2025.

The sale timing is critical, as it affects tax calculations and investment strategy.

Understanding Capital Gains Tax on the Old Property Sale
If you sell the old house in the next few months, consider these points:

Long-Term Capital Gains (LTCG): If you held the old property for more than two years, the gain qualifies for long-term capital gains tax. The LTCG rate is 20% with indexation benefits, helping reduce the taxable amount.

Section 54 Exemption: If you invest the capital gains from selling the old house into a new property (your under-construction home), you may be eligible for a Section 54 exemption. This reduces or eliminates the tax burden.

Time Limits for Exemption: Under Section 54, the new property must be purchased one year before or two years after the old property’s sale date. For under-construction properties, the new home must be completed within three years of the sale. Since your home is scheduled for completion by December 2026, it may fall within this time frame for exemption.

Steps for Managing Installment Payments and Tax Considerations
To efficiently manage your installment payments and minimise tax liabilities, here are some key strategies:

Use Sale Proceeds for Installments: Once you sell the old house, allocate the proceeds to pay off the remaining installments of your new home. This method supports your Section 54 exemption, as the capital gains directly fund the new property.

Utilise Capital Gains Account Scheme: If the old house sale happens before the new home’s completion in December 2026, consider a Capital Gains Account Scheme. This scheme holds your gains until you’re ready to pay the final installments, allowing you to maintain the tax exemption.

Avoid Tax Penalties: By reinvesting the capital gains directly or through a Capital Gains Account, you stay aligned with the tax-exempt limits. This approach prevents tax penalties on unutilised gains.

Loan Repayment Strategies and Their Benefits
With an existing home loan, you have options for managing debt effectively:

Partial Loan Prepayment: If selling the old house frees up significant funds, consider partially repaying the home loan. Reducing the loan principal lowers interest obligations and eases financial pressure.

Maintain Liquidity: If your income sources post-retirement are limited, focus on balancing loan repayment with cash reserves. Avoid exhausting all funds on prepayments, as liquidity will support unforeseen expenses.

Interest Deduction Benefits: Home loan interest qualifies for tax deductions up to Rs 2 lakh per annum. So, if tax-saving on other income is beneficial, maintaining the loan could serve dual purposes.

Planning for Additional Financial Needs
You may have specific financial goals or family obligations. These plans ensure financial security alongside the property investment.

Consider Your Age and Income Needs: At 68, it’s essential to preserve funds for retirement. Make sure your reserves meet monthly expenses comfortably.

Health and Emergency Reserves: Reserve a portion of the proceeds or capital for health and emergency funds. These ensure stability, especially if unforeseen expenses arise.

Future Property Maintenance: Anticipate expenses related to the new property after completion, including maintenance and repairs.

Investment Strategy Post-Sale
If the old property sale yields surplus funds beyond the installment payments, strategically investing this surplus can optimise your finances:

Allocate to Mutual Funds for Growth: Investing some amount in mutual funds, with guidance from a Certified Financial Planner, can grow your wealth with tax-efficient returns. Actively managed funds offer the potential for better gains than traditional deposits.

Explore Debt Funds for Stability: Debt funds provide relatively stable returns, which are also tax-efficient. These funds suit conservative investors who prefer less market volatility.

Avoid High-Risk Products: Given your age, high-risk investments (like equities) may not align with your risk tolerance. Focusing on balanced or debt-oriented funds can offer stability with some growth potential.

Ensuring Compliance with Taxation Rules
To maximise tax savings while remaining compliant, consider these best practices:

Work with a Certified Financial Planner (CFP): A CFP can help navigate the specific tax exemptions, handle instalment planning, and advise on re-investing sale proceeds effectively.

Documentation and Filing: Maintain detailed records of the new property payments, loan interest, and any transactions related to the sale proceeds. Accurate records support tax filing and Section 54 claims.

Plan Ahead for Final Payments: Since you still have 2-3 instalments due, ensure funds from the old property sale remain accessible. This keeps the payment process smooth and helps you avoid penalty charges or tax complications.

Final Insights
Selling the old property offers a structured approach to fund your new home. It also offers potential tax benefits when done with thoughtful planning.

Utilise Capital Gains Exemptions: Applying Section 54 can save significant taxes, especially as the new property aligns with your long-term plans.

Balance Loan Repayment with Liquidity: Repay loan portions wisely without sacrificing cash reserves. This balance supports both current needs and future obligations.

Explore Moderate Investments for Surplus Funds: Any surplus should be invested in tax-efficient, moderate-risk avenues that align with retirement security.

Best Regards,
K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

..Read more

Latest Questions
Milind

Milind Vadjikar  |885 Answers  |Ask -

Insurance, Stocks, MF, PF Expert - Answered on Jan 23, 2025

Asked by Anonymous - Jan 23, 2025Hindi
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Hi , I am 40 years married and have one child residing in Bangalore. I have 30 lakh in PPF , 32 lakh in PF and 15 Lakh in MF and around 40 Lakh in Shares. A flat in different city of value around 60 lakh I have two emi for total 67000 per month running for next 3 years. Rent is 35k per month. Income around 3 lakh per month. I am planning to buy flat , 2.1 cr taking loan 1.5 cr for 20 years. Remaining 60 lakh as personal financing for flat purchase with income for next 2 years. Please advise what I can do to manage my finance and build corpus for saving as well
Ans: Hello;

Your monthly expenses:
Current EMIs: 67000
New EMI: ~133000
Rent: 35000
Household expenses:~ 50000
Total monthly Expense: 285000
Total monthly Income:~ 300000

You have hardly any income left for investments.

If I would have been in your place, I would have settled earlier loans before venturing into a new home loan, using part of the savings.

Also I would have sold the flat in other city and used the sale proceeds towards down payment of new house purchase.

This will ensure that my current investments remain mostly untouched(except loan prepayment).

I get exemption from long term capital gain arising from sale of old flat since reinvested into new residence(As per provisions of ITax Act).

My EMI burden will be much lesser and I can invest aggressively in mutual funds and NPS for:
1. Kid higher education &
2. Retirement

This was my perspective.

You may have different approach but key is to ensure reasonable amount of debt so that you have disposable income left for investments towards
future goals.

Happy Investing;
X: @mars_invest

...Read more

Milind

Milind Vadjikar  |885 Answers  |Ask -

Insurance, Stocks, MF, PF Expert - Answered on Jan 23, 2025

Asked by Anonymous - Jan 23, 2025Hindi
Listen
Money
Hi , I am 40 years married and have one child residing in Bangalore. I have 30 lakh in PPF , 32 lakh in PF and 15 Lakh in MF and around 40 Lakh in Shares. A flat in different city of value around 60 lakh I have two emi for total 67000 per month running for next 3 years. Rent is 35k per month. Income around 3 lakh per month. I am planning to buy flat , 2.1 cr taking loan 1.5 cr for 20 years. Remaining 60 lakh as personal financing for flat purchase with income for next 2 years. Please advise what I can do to manage my finance and build corpus for saving as well
Ans: Hello;

Your monthly expenses:
Current EMIs: 67000
New EMI: ~133000
Rent: 35000
Household expenses:~ 50000
Total monthly Expense: 285000
Total monthly Income:~ 300000

You have hardly any income left for investments.

If I would have been in your place, I would have settled earlier loans before venturing into a new home loan, using part of the savings.

Also I would have sold the flat in other city and used the sale proceeds towards down payment of new house purchase.

This will ensure that my current investments remain mostly untouched(except loan prepayment).

I get exemption from long term capital gain arising from sale of old flat since reinvested into new residence(As per provisions of ITax Act).

My EMI burden will be much lesser and I can invest aggressively in mutual funds and NPS for:
1. Kid higher education &
2. Retirement

This was my perspective.

You may have different approach but key is to ensure reasonable amount of debt so that you have disposable income left for investments towards
future goals.

Happy Investing;
X: @mars_invest

...Read more

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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