Claiming LTCG Tax Exemption with Home Loan

Under the Income Tax Act, 1961, long-term capital gains (LTCG) utilised towards home loan repayment can qualify for tax exemption under Section 54 and Section 54F, provided the prescribed conditions are met. 

What is Capital Gains?

Capital gains are the profits earned when an asset such as shares, land, property etc. is sold. These profits are the excess that an individual earns i.e., the difference between the selling price and cost of acquisition. 

There are two types of capital gains:

• Short-term Capital Gains (STCG): are gains realised on the sale of an asset held for a shorter period (less than or equal to 2 years in the case of house property). Such gains are taxed at a 20% flat rate.
• Long-term Capital Gains (LTCG): are gains realised on the sale of an asset help for a longer period (more than 2 years in the case of house property). Such gains are taxed at a flat rate of 12.5% without indexation. However, the taxpayer has the opportunity to opt for indexation and pay tax at 20%.

As per the Finance Act, 2025 the cost of acquisition of the asset or the cost of improvement shall not include the deductions claimed under the income from house property or deductions under section 80C or 80EEA.

An exemption from capital gains tax can only be claimed when the asset is sold is a long-term asset i.e., when there are long-term capital gains. 

Eligibility for LTCG Exemption

Only long-term capital gains qualify for exemption. Various exemptions are available to the taxpayer provided that the taxpayer makes an alternative investment. 

Exemption can be claimed by

• Using the capital gains to buy a new house property, capped at ₹10 crore
• Investing in NHAI and REC bonds are a few ways to claim an exemption.

Can I Claim LTCG Exemption by paying off Home Loan?

Yes, paying off a home loan through capital gains can qualify as an exemption only if it is used to pay off a loan taken against a new house property. The requirement of Section 54 to claim an exemption is that the capital gains proceeds should be invested in a new residential property. So as long as the capital gains are used to pay off a home loan against a new house property, the taxpayer will be eligible for an exemption.

However, it is important to understand that if the capital gains are used to pay off existing or old home loans then such an exemption will not be available.