How buying a new home can save you capital gains tax on shares, MF

Long-term capital gains on shares, MFs, gold will be exempt from tax if used to purchase a residential property

- Shipra Singh

For many investors, buying a house is the fulfilment of a long-cherished financial goal. And, it comes with several incentives. For one, the Income Tax (IT) Act provides homebuyers several tax sops to encourage and assist people to own a residential house. These tax breaks are given in the form of deductions on home loans and the rental income. A bigger incentive is the exemption on capital gains made from a house property if the gains are used to purchase another property. That’s not all. If you use the sale amount of your other capital assets, including shares (both listed and unlisted), mutual funds and gold, to buy a residential property, the long-term capital gains made on the said asset will also be exempt from tax. This tax exemption is available under section 54F.

There are three primary conditions to qualify for section 54F. First, the gains should be long-term (LTCG). Different capital assets have different holding periods criteria for LTCG. Second, the entire sale amount, and not just the capital gains, have to be used to buy the house property. Otherwise, you get a deduction on a proportionate amount of capital gains. Third, the exemption can only be claimed if the house property is bought one year before or after the sale of the capital asset, the proceeds of which you intend to reinvest in buying the property. If you use the sale proceeds to construct a house, the window for such reinvestment is three years.

But there are concerns: what happens if the price of the house property is less than the sale proceeds of the capital asset sold? Also, what if you already own a house property that is let out on rent?