Capital Gains Account Scheme (CGAS), introduced by the GOI in 1988 helps to claim tax exemption on the capital gains earned from the sale of residential property. Capital gain is an individual’s profit from selling a movable or immovable property. These gains are liable for taxation irrespective of being long-term or short-term.
Under Section 54 of the Income Tax Act, income from capital gains must be reinvested within 3 years to avoid tax liability. However, there could be instances when the due date for filing income tax falls during this specified tenure. If a taxpayer is unable to invest in such a short period of time, they can deposit such underutilised capital gains under Capital Gains Account Scheme.
This blog provides a detailed overview of Capital Gains Account Scheme, its features, types, how to open a capital gains account and ways to save or postpone capital gains tax. Read on!
The primary features of CGAS are:
There are two types of deposit accounts under Capital Gains Account Scheme:
It is similar to a regular savings bank account, with similar interest rates to that of a bank. However, the interest is credited periodically, and the deposit holder also receives a passbook to record these transactions. Furthermore, this type of deposit account is highly liquid, like a savings account, which allows withdrawal at any time.
This account is similar to a regular fixed deposit account and offers an interest rate applicable to a term deposit. It also has similar restrictions to that of a term deposit account. Furthermore, it allows a maximum term of 3 years, where the depositor can choose a tenure of deposit according to their plan.
The depositor receives a deposit certificate, which shall be submitted during withdrawal. This type of deposit gets the facility of auto-renewal, similar to a regular fixed deposit. The interest earned from this account shall be either cumulative or non-cumulative.
If you are a taxpayer who has earned capital gains by selling assets under sections 54 to 54F of the Income Tax Act 1961, you are eligible to open a capital gains account.
The categories of taxpayers who can deposit funds under this scheme are:
|Section||Capital Gains on||Category of person|
|54||Sale of residential house||Individual or HUF|
|54B||Sale of agricultural land||Individual or HUF|
|54D||Acquisition of land and building||Any taxpayer|
|54E||Sale of long-term capital asset||Any taxpayer|
|54EC||Sale of long-term capital assets being land or building or both||Any taxpayer|
|54F||Sale of long-term capital asset not being residential property||Individual or HUF|
|54G||Transfer of capital assets||Any taxpayer|
|54GA||Transfer of capital assets to a Special Economic Zone (SEZ)||Any taxpayer|
|54GB||Transfer of residential property||Any taxpayer|
How to Open a Capital Gains Account?
To open a capital gains account, you can follow the steps below:
Note: You need to make separate applications if you wish to avail of exemption under different sections of the IT Act. In this case, separate capital gains accounts shall be opened.
The applicable interest is similar to that of regular savings and fixed deposit accounts for Type A and Type B deposits, respectively. This interest rate is specified and provided by the RBI for each month on the lowest balance between the 10th day and the month’s end. However, it is credited at the end of each half-year.
Furthermore, interest on both Type A and Type B deposits is liable for taxation under income from other sources. Authorised personnel will deduct tax from the depositor and also issue a TDS certificate to the same.
There are no restrictions on withdrawal from Type A deposit as it is like a savings account. However, a withdrawal from a Type B deposit account is possible only by transferring the amount to Type A. It also comes with a substantial penalty of 1% interest for premature withdrawal.
In addition, you are required to utilise the withdrawal amount for specific investments within 60 days, and the unutilised amount must be re-deposited immediately.
For first-time withdrawal of the amount, a depositor needs to submit Form C, whereas for subsequent withdrawals, submit Form D. Here, the depositor does not get the advantages of a chequebook or debit card.
If anyone fails to comply with the above rules, they might not be able to avail tax exemptions.
Once a depositor fulfils the criteria of purchasing a property within the time limit, he/she can close the respective capital gains account by filling up Form G. However, this also requires a copy of the passbook or deposit receipt and the approval of a jurisdictional tax officer. After acceptance of closure, the bank will pay you any balance amount in the capital gains account.
Furthermore, in the case of a deceased depositor, a nominee shall submit Form H for the closure of a capital gain account.
A depositor can apply for transferring a capital gain account from one deposit office to another of the same bank. Besides this, a depositor can convert the whole or part of a Type A account to Type B or vice versa. It is also possible to transfer funds between these two types of deposit accounts.
However, in case the conversion of an account takes place before maturity or expiry period, it will be treated as a premature withdrawal of deposit.
Here are the tax exemptions that a depositor can avail to save or postpone capital gains tax:
Under Section 54 of the Income Tax Act 1961, if a taxpayer invests in another house or property while selling the previous one, they will get a tax exemption. This is because the taxpayer is not earning income but investing in a better property to meet the needs.
However, this exemption is available only to individuals or HUFs if they invest in a long-term asset like residential property. Furthermore, this taxpayer should acquire another residential property within one or two years after transferring the old one. If the taxpayer is building a residential property, it should be done within three years of transferring the old property.
Under section 54EC of the Income Tax Act 1961, if a taxpayer reinvests in a specific bond after the sale of a property, he/she will receive tax exemption. Here, a taxpayer can invest up to Rs. 50 lakh in bonds issued by the Rural Electrification Corporation (REC) or the National Highway Authority of India (NHAI).
A taxpayer has six months to reinvest in a bond and be eligible for tax exemption. Furthermore, one can redeem this amount after a period of three years as these bonds cannot be sold before then.
Under section 54EC of the Income Tax Act 1961, if a taxpayer generates capital gains from the sale of agricultural land, he/she will receive a tax deduction. This exemption is only available to a HUF for two years prior to sale. In these two years, new agricultural land is to be purchased. However, to qualify under this exemption, a taxpayer must not sell this land within a period of 3 years from purchase.
Capital Gains Account Scheme (CGAS) is a beneficial scheme introduced by the Government. It is a safe avenue to hold funds that can be reinvested to purchase another asset. Furthermore, it also optimises tax payment of persons eligible for the same. Additionally, it comes with an easy application and withdrawal process, which promotes user-friendliness.
Ans: If you don’t utilise the funds in your capital gains account within 3 years, the account will lapse, and the entire fund will be taxed under capital gains. The same rule is applicable if you close your capital gains account prematurely.
Ans: In India, 29 PSU banks are authorised to provide an account under Capital Gains Account Scheme. Some of them are State Bank of India, Bank of India, Bank of Baroda, Punjab National Bank, Canara Bank, United Bank of India, Syndicate Bank, Dena Bank, Union Bank of India, Indian Bank and many more.
Ans: Some of the long-term investment options that come with tax exemption from capital gains are as follows:
• Public Provident Fund (PPF)
• Life Insurance Saving Plans
• National Pension Scheme (NPS)
• Unit Linked Insurance Plans (ULIPs)
Ans: No, this account cannot be opened online. Taxpayers are required to get Form A offline from the nationalised banks that offer this facility. They can also download Form A from the official websites of the banks; however, they would still need to submit it in person.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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