Can SWPs from mutual funds support home loan prepayments? Key insights from industry expert on cap­ital gains tax relief

Many deliberating on buying a home consider multiple options to finance their investment while ensuring maximum tax relief. One such case relates to whether a home buyer can use Systematic Withdrawal Plan (SWPs) from long-term mutual funds or stocks for monthly home ­loan pre­pay­ments. Cleartax founder and chief exec­ut­ive Archit Gupta provided an insightful answer to this concerning question.

According to the industry expert, many home­buy­ers buy a house with a home loan, con­tinue their SIPS and use monthly SWP with­draw­als from mutual funds or stocks to repay the loan instead of liquid­ating their entire invest­ment port­fo­lio upfront. There is a reason why this approach is chosen over the other alternative.

The most preferred approach not only qual­i­fies for cap­ital gains exemp­tion under Sec­tion 54F of the Income Tax Act but also provides a clearer audit trail, stronger legal foot­ing and reduces risk of dis­putes dur­ing assess­ment pro­ceed­ings. Even though SWPs help manage ­monthly cash flows along­side home-loan EMIS, they intro­duce struc­tural risks under Sec­tion 54F and pro­ced­ural cm­plic­a­tions.

It is important to note that tax laws consider each monthly SWP pay­out, with its own ‘date of sale’, as an inde­pend­ent trans­ac­tion. Complicating the matter, this can split a single invest­ment into mul­tiple tax events. Archit Gupta warned against this frag­ment­a­tion which can potentially con­flict with Sec­tion 54F’s timelines and the oper­a­tional frame­work of Cap­ital Gains Account Scheme (CGAS). As a consequence, auto­mated sys­tem flags might be triggered due to which home buyers can face dis­al­low­ances dur­ing scru­tiny by an assess­ing officer (AO).

“Sec­tion 54F bene­fits can be claimed even when a res­id­en­tial prop­erty is bought with a home loan. However, the pro­vi­sion is designed around rein­vest­ing sale pro­ceeds in the house, not through a long-term SWP strategy,” the Cleartax CEO said.

In essence, tax­pay­ers should not rely­ on peri­odic with­draw­als from mutual funds or stocks. One must con­sider deploy­ing cap­ital gains pro­ceeds towards the prop­erty in a con­sol­id­ated man­ner within the pre­scribed timelines to stay away from trouble while seeking capital gains tax exemp­tion.

Struc­tured lump-sum redemp­tion of long-term cap­ital gains over SWP?

To avoid being caught in such situation, a struc­tured lump-sum redemp­tion of long-term cap­ital gains is strongly recom­men­ded over an SWP. Advocating for a clear audit trail, Archit Gupta advises a single, con­sol­id­ated liquid­a­tion within the win­dow. This not only redu­ces com­pli­ance risks but also poten­tial tax lit­ig­a­tion.

Sec­tion 54F of the Income Tax Act is avail­able under both the old and new tax regimes which per­mit cap­ital gains exemp­tion on a prop­erty bought with a home loan, provided the core invest­ment cri­teria are met. Capital gains tax exemp­tion can be full or pro­por­tion­ate, depend­ing on sum inves­ted provided the house is bought within one year before or two years after sale, or con­struc­ted within three years.