Can Paying Off Your Home Loan Help You Avoid Capital Gains Tax?

Selling a property can bring significant profits, but it can also come with a hefty tax bill in the form of capital gains tax. Naturally, you may wonder if there is a way to avoid or reduce this tax by paying off your home loan. The question arises: Can I avoid capital gains by paying off a home loan? Let us take a closer look at this issue and explore possible strategies to minimise your tax burden.

What is capital gains tax?

Before we dive into the main question, it is essential to understand what capital gains tax is. This is the tax you pay when you sell an asset, such as a property, for more than you bought it. The profit made from the sale is called a capital gain, and the tax rate depends on how long you have held the property.

There are two types of capital gains:

• Short-term capital gains (STCG): If you sell a property within two years of purchasing it, the tax rate is based on your income tax slab.
• Long-term capital gains (LTCG): If you sell after two years, the gains are taxed at 20%, with an option to adjust the purchase price for inflation through indexation.

Understanding how these taxes work helps you explore options to manage them effectively.

Can I avoid capital gains by paying off a home loan?

The simple answer is no — paying off your home loan does not automatically eliminate capital gains tax. However, there are specific scenarios where your capital gains tax liability can be reduced or deferred. Let us explore these possibilities.

1. Using capital gains to buy a new property

One way to reduce or eliminate capital gains tax is by reinvesting your sale proceeds into a new home. Under Section 54 of the Income Tax Act, you can be exempt from paying capital gains tax if you purchase another residential property with the proceeds from selling your old property.

To be eligible, the new property must be purchased within one year before or two years after selling the old property. Alternatively, you can construct a new home within three years. By using the proceeds to purchase a new home, you can be exempt from paying tax on the capital gains.

2. Paying off a home loan with capital gains

Now here is where it gets interesting: If you use the money from selling your property to pay off a home loan for a new property, you might still qualify for tax exemptions under Section 54.

The key requirement for Section 54 is that the proceeds from the sale of your property must go towards the purchase of a new residential property. Whether you pay for the entire property upfront or pay off a portion of your home loan using the sale proceeds, it still counts as reinvestment.

So, by using your capital gains to reduce the home loan on a new property, you fulfill the conditions for exemption, which helps you avoid capital gains tax.

3. Investing in capital gains bonds

If buying or constructing a new property is not your immediate plan, you can also opt for capital gains bonds under Section 54EC. These bonds allow you to reinvest your capital gains and avoid tax.

You can invest up to Rs. 50 lakh in bonds to claim an exemption. The bonds must be purchased within six months of selling the property. The lock-in period is five years.

Though this does not involve paying off your home loan, it is an effective way to reduce your capital gains tax if you do not plan on reinvesting in property immediately.

4. The role of home loans in your tax strategy

While paying off a home loan does not directly help you avoid capital gains tax, there are multiple ways home loans can reduce your overall tax burden. These benefits apply to home loan interest and principal repayment:

• Deduction on home loan interest: Under Section 24(b), you can claim a deduction of up to Rs 2 lakh on the interest paid on your home loan.
• Principal repayment deduction: Under Section 80C, you can claim a deduction of up to Rs. 1.5 lakh on the principal repayment made during the year.

These deductions help reduce your taxable income, indirectly easing your tax burden when purchasing a new property with a loan.

Explore Bajaj Housing Finance Home Loan

When you are ready to reinvest your capital gains into a new property, consider applying for a Bajaj Housing Finance Home Loan. With competitive interest rates, flexible repayment options, and quick approvals, Bajaj Housing Finance makes it easier to buy your next home and save on taxes in the process.

Here are some benefits of opting for a Bajaj Housing Finance Home Loan:

1. High loan amount: Secure funding up to Rs. 15 crore* to turn your dream home into reality.

2. Low interest rates: Enjoy interest rates starting 8.25%* p.a, and EMIs as low as Rs. 741/lakh*.

3. Quick approval: Get approved within 48 Hours* of applying – sometimes even sooner.

4. Flexible repayment tenure: Choose a repayment term of up to 32 years for comfortable EMIs.

5. Simple application: Take advantage of doorstep document collection for a smooth process.

6. Balance transfer facility: Move your existing home loan and get a top-up loan with better terms.

Apply for a Bajaj Housing Finance Home Loan today.