Can I Pay Off A Loan With Home Sale Proceeds And Still Get Tax Relief In 2026?

The rule gets fresh attention as tax filings enter the last quarter. Buyers, sellers and advisers now revisit the same question before February 2026 deadlines.

Would a seller escape tax if the entire sale amount went to clear an old loan. This question came back after a Mint report dated 30 November 2025 showed a case where a homeowner sold a residential flat for around ₹1.50 crore. The property had been purchased for ₹20 lakh in 2003. The seller cleared an education loan with the sale proceeds. The report confirmed that exemption was denied because the funds were not reinvested in a new home.

That report set the tone for this season of filings. It also pushed many sellers to check the rule once more.

What Has Changed In Public View Since The 2025 Report?

The issue grew again when ClearTax released its 2025 update on capital gains rules. The guidance repeated the rule that a new residential house must be purchased within one year before the sale or within two years after the sale or completed within three years. It also repeated that paying off any existing loan does not count as reinvestment for exemption.

Read More – How to Save Tax on Your Home Loan Before the Filing Season Starts

This point is simple. Loan repayment does not create a fresh residential asset in the eyes of the tax law. Only the act of buying or constructing a new house qualifies.

The Income Tax Department lists these conditions on its portal. The table reflects those rules and sets a base for the discussion.

Conditions Listed On Income Tax Department Portal

The below table shows the official requirements.
 

These points show why sellers often misread the rule when loan repayment feels like a housing-linked use of money. The law does not treat it that way.

The Mint case triggered more questions because it showed a real example with dates and amounts. A seller who used sale proceeds to repay an education loan could not claim exemption. The tax department examined the case under Section 54 and refused exemption due to lack of reinvestment.

During the same period, a LoansJagat article published in 2025 mentioned that short term capital gains on listed equity shares were taxed at 20 percent after that year’s update under Section 111A. Though unrelated to property, this number returned to public debate because taxpayers compared tax changes across asset classes when reviewing their filings.

The next table reflects tax rates for immovable property as shown on the government portal. This forms the backdrop against which sellers take their decisions.

The table below captures the tax rates listed on the portal.
 

These figures show that exemption becomes important for large gains. If reinvestment does not take place, tax becomes payable at these rates.

How Governments And Banks Looked At Similar Situations In Previous Years?

Government circulars before 2023 repeated a fixed view. Exemption required a new house purchase or construction within the timeline. Loan repayment did not qualify. Banks also followed the same view. They stated that clearing an old loan does not create a new asset.

Also Read – Is ELSS Taxable After 3 Years? Impact of Death on Fund Redemption

Some tribunal rulings before 2022 examined cases where sellers bought a new house with a home loan and later used sale proceeds to repay that loan. A few rulings allowed exemption due to fund movement. These were narrow rulings. They did not change the core rule set by Section 54.

This brings the story back to where the present filing season stands.

Conclusion 

The filing cycle of 2026 will see more sellers facing situations similar to the Mint example. The exemption depends only on reinvestment in a new residential house. Paying off loan with home sale proceeds does not replace that step. 

Sellers must follow statutory timelines and create a qualifying asset to avoid long term capital gains tax.