The Hindu Business Line : House, loan, gains and all that

I also propose to use the balance to acquire another property. Will I be entitled to any tax exemptions in respect of the repayment of the loans and the reinvestment in the new property? — Balaga Srinivas

Section 54 of the Income-Tax Act would permit you to claim an exemption on the reinvestment in a new house property. This exemption can be claimed in respect of the capital gains earned by you on the sale of one of the house properties.

No exemption can be claimed by you on the amount used to repay the loans either for the house you are selling or that you plan to retain.

The exemption that can be claimed under Section 54 will be the lower of the amount invested in the new house property or the amount of capital gains from the sale of the house.

I am a bank employee. I constructed a house in June 2002. I sold this house in March 2007. For constructing the house I had taken a loan from my employer bank. I have been getting tax benefit for the principal repayment. Now that I have sold the property, my employer insists that the principal repayment on which tax benefits were claimed will become income of the previous year, 2006-07, when the property was sold.

My employer states that as the property was sold within five years of its acquisition, the same will become taxable. Is this view correct? — Sudhakar Murthy

Section 80C(5)(iii) specifically provides that if a property on which tax benefit is claimed in respect of the principal repayment of the housing loan and if the house is transferred within five years from the end of the financial year in which possession was taken, the benefit of deduction under this Section will not be available in the year of such transfer and further provides that the aggregate of deductions claimed in the earlier years will be deemed as the income of the year in which the house property is transferred.

A similar provision can also be found in Section 88(7) wherein the rebate claimed in earlier years under this Section would be deemed as the tax payable of the year of transfer.

That being so, it appears that your employer is correct in taking the view that there will be tax effect on the benefits claimed in earlier years.

This is because you have held the house property for less than five years subject to the modification that for the assessment year 2006-07, where you would have claimed the deduction under Section 80C, the amount of deduction would become income while for the earlier years where you would have claimed rebate under Section.88, the rebate would become the tax payable.

This tax effect will arise in the financial year 2006-07, that is, assessment year 2007-08.

I plan to sell a residential house in Faridabad. This house was acquired by my father (since deceased) 20 years ago for a very small price. Since I am selling a property came to me by inheritance, will I be liable to capital gains tax?

I propose to use half of the proceeds to reinvest in another house property. How will the capital gains tax be computed if I am liable? — S. S. Dhody

The fact that you got the property by way of inheritance cannot be a reason for capital gains tax not to arise in your hands.

You would still be liable for capital gains tax. Since the property was acquired by your father, the cost of acquisition would be taken as your cost.

This cost of acquisition can be indexed from the date on which you first held the property.

Such indexed cost of acquisition can be reduced from the net consideration from sale of the property in arriving at the capital gains.

Since you are reinvesting a part of the proceeds in another house property you will be entitled to an exemption under Section 54, which would be the lower of the capital gains or the amount invested in the new house property.

The balance of capital gains will be liable for tax at 20 per cent (as increased by the appropriate surcharge and additional surcharge).

I understand that interest on loan taken for purchase or construction of a house property is eligible for deduction under Section 24 in computing `income from house property'.

Will only the interest on loan taken from a bank or specified institution qualify for the deduction or will the interest on loan also qualify for deduction if it is taken from friends and relatives? — V. Siva Kumar

Section 24 allows a deduction in respect of loan taken for purchase, construction, repairs, renewals or reconstruction of a house property.

This Section does not place any restriction that the deduction can be claimed only where the loan is taken from a bank or specified institution.

You can, therefore, claim the deduction under this Section even where the loan is taken from friends and relatives.

You may also note that Section 80C which allows a deduction in respect of principal repayment of a housing loan taken for purchase or construction of a house property specifically provides that the repayment should be to the Government, bank or to certain other specified institutions.

(Mail your queries to taxtalk@thehindu.co.in or by post to `Tax Talk', Business Line, Kasturi Buildings, 859, Anna Salai, Chennai-600002)