Capital gains are an essential aspect of income taxation, and individuals often seek ways to minimize the tax liability arising from the sale of assets. In India, the Capital Gains Account Scheme (CGAS) provides a valuable solution. By deferring tax payments on capital gains, individuals can effectively manage their tax burden. In this blog, we delve into CGAS, exploring its taxation implications and the different types of accounts it offers. Understanding the CGAS and its nuances can empower taxpayers to make informed decisions, optimize tax planning, and potentially maximize their savings. Let’s dive in and explore the world of CGAS.
What is Capital Gains Account Scheme?
The Capital Gains Account Scheme (CGAS) in India is a provision under the Income Tax Act that allows individuals to save on taxes incurred from capital gains. It enables taxpayers to set aside the gains from the sale of specific assets, such as property or securities, and use them for eligible investments, as specified in Sections 54 and 54F of the Income Tax Act. This scheme provides a way to defer capital gains tax liability until the funds are utilized for the designated purposes, helping individuals manage their tax obligations while facilitating investments in accordance with the law.
The CGAS offers tax benefits to individuals who utilize the scheme. The key provisions and benefits are as follows:
- Utilization of Funds: The deposited funds in the Type A account must be utilized within a specified time limit for specific purposes, primarily to avoid capital gains tax liability. The purposes for which the funds can be utilized include:
- Purchase of a new residential property: The funds can be utilized for purchasing a new residential property within two years from the date of transfer of the original asset.
- Construction of a residential property: The funds can be utilized for constructing a residential property within three years from the date of transfer of the original asset.
- Tax Deferral: By depositing the capital gains in the CGAS account, individuals can defer their tax liability on the capital gains until the funds are withdrawn or the specified time limit for utilization expires. The unutilized funds in the CGAS account are not taxable until utilized or until the expiry of the time limit.
- Multiple Deposits: Making multiple deposits in the CGAS account is possible, as long as they pertain to different capital gains transactions. Each deposit has its own specified time limit for utilization.
Types of Capital Gains Account Scheme
Under the Capital Gains Account Scheme (CGAS) in India, there are two types of accounts available:
Type A Account
Savings Deposit A Type A account is like a regular savings account you find at any bank. It pays you interest just like a normal savings account, and you get a passbook to keep track of your money. You can take out your money whenever you want, just like you would with a regular savings account.
Type B Account
Term Deposit A Type B account is similar to a fixed deposit account in a bank. It gives you interest like a fixed deposit, and there are rules you need to follow, just like with a fixed deposit. The longest time you can keep your money in a Type B account is three years. You have to decide how long you want to keep your money based on what you want to do with it, like saving for a new house (2 years) or building something (3 years). When you open this account, they’ll give you a certificate with all the details. You’ll need to show this certificate when you want to take out your money. Unlike a regular fixed deposit, this type of account won’t automatically renew. You can choose if you want your interest to add up with your main money (cumulative) or if you want it to be given to you at certain times (non-cumulative).
Taxation on Capital Gains Account Scheme
The taxation on Capital Gains Account Scheme (CGAS) in India depends on how the funds in the account are utilized. Here’s a general overview of the taxation aspects of CGAS:
- Tax on Deposited Amount:
- The amount deposited in the Type A account of CGAS is not taxable in the year of deposit.
- However, any interest earned on the deposited amount is taxable as per the applicable tax rates.
- Utilization for Purchase or Construction of Property:
- If the deposited funds are utilized for purchasing a new residential property or constructing a residential property within the specified time limit, the capital gains tax liability can be avoided.
- The cost of the new property is reduced by the amount deposited in the CGAS account. Consequently, the capital gains tax liability will be lower.
- Unutilized Amount:
- If the funds deposited in the CGAS account are not utilized for the specified purposes within the time limit, the unutilized amount will become taxable in the year following the expiry of the time limit.
- The unutilized amount will be treated as long-term capital gains and will be taxed at the applicable capital gains tax rate for that year.
- Interest Earned on Unutilized Amount:
- Any interest earned on the unutilized amount in the CGAS account is taxable in the year it is credited to the account. It is subject to the applicable tax rates.
- When you make a withdrawal from the Type B account, the withdrawal is not subject to any tax liability.
- However, the withdrawn amount must be utilized for the specified purposes within the specified time limit to avoid capital gains tax liability.
Who can Deposit in a Capital Gains Account Scheme?
The Capital Gains Account Scheme (CGAS) is a beneficial choice for individuals and Hindu Undivided Families (HUFs) who have generated capital gains through the sale of a property or asset. By depositing the proceeds into a designated account under the scheme, they can take advantage of tax benefits. The following table provides an overview of the eligibility criteria for depositing in a CGAS:
- Individuals who have earned capital gains from selling a property or asset, regardless of their residency status, are eligible to deposit in a CGAS account.
- Hindu Undivided Families (HUFs) are also allowed to deposit their capital gains in a CGAS account.
When can One Deposit in a Capital Gains Account Scheme?
Taxpayers who are unable to reinvest their capital gains within the specified time limit and before filing their income tax returns must deposit the unutilized capital gains into a capital gains account. This deposit should be made before the deadline for filing income tax returns, and not after it.
Where should One Open a Capital Gains Account?
A capital gains account can be opened at authorized bank branches, excluding rural branches.
Here are the steps to open a capital gains account-
- To open a capital gains account, an application in duplicate in Form A needs to be submitted.
- Required documents that need to be submitted include PAN, proof of address, and a photograph.
- Deposits can be made through various modes such as cash, cheque, demand draft, etc.
- If depositing through cheque or DD, the date of deposit will be considered the date when the cheque or DD is received in the deposit office, subject to realization.
- Deposits can be made in a lump sum or in instalments.
- Separate applications should be submitted for availing exemptions under different sections, and separate capital gains accounts should be opened.
How to Withdraw Money from a Capital Gains Account?
To withdraw money from a Capital Gains Account (CGA) in India, you need to follow the prescribed procedure outlined by the bank where you have the CGA. Here is a general process for withdrawing money from a CGA:
- Visit the Bank: Visit the authorized bank where you have the CGA account. Ensure you carry the necessary identification documents, such as your PAN card, passbook, and any other documents required by the bank.
- Fill the Withdrawal Form: Obtain a withdrawal form from the bank or request it from the bank staff. Fill in the required details accurately, including your account information, the amount you wish to withdraw, and the purpose of withdrawal.
- Submit the Withdrawal Form: Once you have completed the withdrawal form, submit it to the bank staff along with the necessary identification documents and your CGA passbook.
- Verification and Processing: The bank staff will verify your details and check the availability of funds in your CGA account. They will process the withdrawal from capital gains account scheme request if all the details are in order and there are sufficient funds.
- Withdrawal Mode: Specify the mode of withdrawal, such as cash or cheque, depending on the options provided by the bank. The bank may also offer electronic transfer options like NEFT/RTGS for transferring the funds to your linked bank account.
- Receive the Funds: Once the withdrawal from capital gains account scheme request is processed, you will receive the funds according to the chosen mode of withdrawal. If you opt for cash, the bank will provide you with the requested amount. If you choose a cheque or electronic transfer, the funds will be credited to your specified bank account.
- Update Passbook: Ensure that the bank staff updates your CGA passbook with the withdrawal details, including the amount withdrawn and the date of withdrawal from capital gains account scheme. This will help you keep track of your CGA transactions.
Forms for Managing Your Capital Gains Account
Form C – When you want to take out money from a capital gains account, you should complete Form C and submit it. Once the withdrawal from capital gains account scheme is processed, you have 60 days to use the funds, but you can’t put the money back into the account right away. If you need to make a second withdrawal from capital gains account scheme, you need to submit another application through Form C.
Form D – It’s possible to shift your account from one branch of the same bank, but transferring it to a different bank is not allowed. You can also change the type of your account, partly or completely, such as switching from a Savings Account to a Term Deposit Account or the other way around. However, if you move your money from a term deposit to a savings account before the maturity period ends, it will be treated as an early withdrawal, and penalties will apply.
Form E – Only individuals and Hindu United Families (HUF) can open a Capital Gains Account, and you cannot use this account to obtain a loan. If you wish to nominate someone to inherit the funds in case of your demise, you can do this using Form E. Any changes to the nominee can be made through Form F.
Form F – To close your Capital Gains Account, you will need approval from the Income Tax Officer in your jurisdiction. Remember to use the deposited amount within 2 years of selling the property to avail the benefits under Sections 54, 54EC, and 54F. Failure to do so will result in the unutilized amount being subject to capital gains tax in the fiscal year the deadline expires.
Who is Eligible to Deposit in the Capital Gains Account Scheme?
Under the Capital Gains Accounts Scheme (CGAS) in India, the following individuals are eligible to deposit funds:
- Individuals: Any individual, whether resident or non-resident, who has earned capital gains from the sale of a property or asset, can deposit funds in the CGAS. This includes both salaried individuals and self-employed individuals.
- Hindu Undivided Families (HUFs): HUFs, which are considered separate taxable entity under Indian tax laws, can also deposit funds in the CGAS if they have earned capital gains.
|Section Number||Capital Gains Source||Eligible Person Category|
|54||Sale of residential house||Individual or HUF|
|54B||Sale of agricultural land||Individual or HUF|
|54D||Compulsory acquisition of land and building||Any taxpayer|
|54E||Sale of long-term capital asset||Any taxpayer|
|54EC||Sale of land or building (long term)||Any taxpayer|
|54F||Sale of non-residential long term capital asset||Individual or HUF|
|54G||Transfer of the asset during industrial shift||Any taxpayer|
|54GA||Transfer of an asset during a shift to Special Economic Zone||Any taxpayer|
|54GB||Transfer of residential property||Any taxpayer|
It’s important to note that only the individuals or HUFs who have earned capital gains from the sale of a property or asset are eligible to deposit funds in the CGAS. The scheme is specifically designed to provide tax benefits on capital gains, and therefore, the deposits must be related to capital gains transactions. Additionally, the CGAS is available for both long-term capital gains (arising from the sale of assets held for more than 24 months) and short-term capital gains (arising from the sale of assets held for 24 months or less). The eligibility to deposit funds in the CGAS is not restricted based on the type of capital gains.
Saving Long Term Capital Gains in CGAS
The Income Tax Act provides options for saving on capital gains taxes, such as investing the entire capital gains in a residential property or in capital gains bonds under Section 54EC. These investments must be made either one year before selling the property or within two years of the transaction.
However, if you are unable to invest your full long-term capital gains in a residential property before the deadline for filing your income tax return, you can inform the tax department that you intend to invest the capital gains but require additional time. To facilitate this, you can open a Capital Gains Account Scheme (CGAS) with any scheduled bank. The funds deposited in this account can be withdrawn at any time to assist you in purchasing or constructing a house and avoid paying long-term capital gains tax.
In conclusion, the Capital Gains Account Scheme (CGAS) in India provides individuals and Hindu Undivided Families (HUFs) with a means to save on taxes arising from capital gains. The scheme offers two types of accounts: Type A (Deposit Account) and Type B (Withdrawal Account). Under the CGAS, individuals can deposit their capital gains in a Type A account, deferring the tax liability until the funds are utilized or the specified time limit expires. The deposited funds must be utilized within the prescribed time frame for specific purposes such as purchasing a new residential property or constructing one.
By utilizing the CGAS, individuals can reduce their tax burden by lowering the capital gains tax liability. However, any unutilized amount in the CGAS account becomes taxable in the year following the expiration of the time limit. Interest earned on the deposited and unutilized amount is also subject to taxation.