Hello Mihir : I wanted to ask about capital gain tax for the below scenario. I purchased a flat in 2021 with loan from ICICI that still has a balance of around 75 lakhs to be paid off. The property price on agreement was Rs. 1.25 Crores, while the original loan amount was around 100 lakhs. I plan to sell this property this year after 5 years of purchasing this property and may be able to get total 160 lakhs as an estimate. a) I plan to repay the loan of Rs.75 lakhs from this sale and close the loan a/c . Will I need to pay Capital gain tax If I to buy a shop for commercial use or use the money to build a house in a plot I own? If yes what are the alternatives to avoid please suggest.

Ans: You are planning correctly by reviewing tax impact before selling the property. Since the flat was purchased in 2021 and sold after 5 years, the gain will be treated as long-term capital gain.

» Loan repayment and tax impact

Repaying the outstanding loan of about Rs 75 lakhs does not reduce capital gain tax. Tax is calculated only on the difference between sale value and indexed purchase cost plus expenses.

» Buying a commercial shop

If you invest the sale proceeds in a commercial shop, you cannot claim capital gain exemption. Tax will be payable.

» Constructing a house on your own plot

If you construct a residential house on your existing plot:

– You can claim exemption under capital gain rules
– Construction must complete within 3 years from sale date
– This is the most suitable tax-saving option in your case

» Other alternative

You may also invest the capital gain amount in capital gain bonds within 6 months to reduce tax liability.

» Finally

Closing the loan gives no tax benefit. Buying a commercial property gives no exemption. Constructing a residential house can help you save capital gain tax effectively.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

https://www.linkedin.com/in/ramalingamcfp/