Mr. Sudhir (imaginary character) earned long-term capital gains of Rs 40 lacs from the sale of one of his residential house property during the current financial year. Here his tax liability will be at 20% of the gains amount i.e. Rs 8 lacs (here 3% education cess has been ignored for ease of understanding). As per Section 54 of the income tax act, he can save the entire tax amount by investing the gains amount in a new residential property i.e. if he purchases it within 2 years or constructs within 3 years a residential house costing Rs 40 lacs at least. Alternatively he can invest the gain amount in 54EC bonds to save long term capital gains tax which will have a lock in period of 3 years.
What if, Mr. Sudhir doesn’t want to block the money for 3 years in such bonds, even he doesn’t want to take immediate decision for investing in new house property? In this case the option under section 54 brings him a solution. And the solution is Capital Gain Account Scheme.
This is an awesome option for all those tax payers who derive long-term capital gains and have the same issue as Mr. Sudhir have. Under Capital Gain Account Scheme (CGAS), the amount of capital gain which has not so utilised for the purchase or construction of a new residential house before the due date of furnishing of the return of income, it shall be deposited by him on or before the due date in an account with a public sector bank in accordance with the Capital Gain Account Scheme (CGAS), 1988.
What is Capital Gain Account Scheme all about?
The said scheme has been in force since 22nd June, 1988. The amount so deposited under this scheme would be required to be utilised by the tax payer, within the specified period, for acquisition of new asset under the respective Section of the Income Tax Act, 1961.
Under this scheme, the tax payers can avail of the benefit of exemption from Capital Gains, if the amount of Capital Gains or the net consideration is deposited in the bank on or before the due date of filling the return of income.
There will be two types of accounts under the scheme:
Account Type – A: This account will be in the form of Saving Fund Account and the depositor will be provided with a Pass Book, giving the details of receipt, payments and interest paid on deposit as well.
Account Type – B: This account will be in the form of Term Deposit Account and depositor will be issued a deposit receipt. Term Deposit Account can be both Cumulative as well as Non-cumulative on quarterly basis.
Who can take the advantages of Capital Gain Account Scheme?
The advantage of Capital Gains Scheme Account can be availed by individuals and Hindu Undivided Family (HUF). In short, all those tax payers who would like to invest in buying a residential property or in constructing a residential property so as to save tax in respect of long-term capital gain can open CGAS.
Where and how can I open the Capital Gain Account Scheme?
This account can be opened in State bank India or any bank which is authorised for the scheme. To open CGAS account you will have to fill up and submit a form (Form A) and deposit the money in the account. If the money deposited in the form of Cheque or Draft, the effective date for the purpose of provision of exemption will be the date of cheque/draft deposited date subject to realisation.
What is the procedure to withdraw money from Capital Gain Account Scheme?
For withdrawals of funds from CGAS under Account Type – A can be made from time to time by the depositor, subject to specified terms and provisions of the Scheme by submitting the requisite form where withdrawals under Account Type – B can be made after the expiry of the deposit period only.
Form C should be filled up and submitted to the bank for the initial withdrawal from Account Type – A. For subsequent withdrawal from Account Type – A, form D should be used. Since Account Type – B is a term deposit account, for withdrawal, it will first have to converted in to Account Type – A, by filling Form B and then follow the method of withdrawal as Account Type – A.
When to open Capital Gain Account Scheme?
You can open this account any time before the last date for filing returns of a particular financial year after the capital gains earned. For e.g. If the sale of asset has taken place in August 2012 of Rs. 50 lacs and it arises the capital gain of Rs. 30 lacs, if you don’t utilise this capital gain to buy another property, you can open the CGAS before July 31, 2013 and park the gain amount.
Few Important Points to Remember:
- Interest earned in this account is taxable.
- It does not allow any withdrawals, except for the specified purpose (of buying the house).
- Any unutilised amount after withdrawal has to deposit back.
- Amount can be easily transferable from Account Type – A to Account Type – B and vice-versa.
- If the amount is not utilised wholly or partly for the desired purpose, within the specified period, the unutilised amount shall be treated as capital gains of the year during which the specified period expires
Procedure to Close Capital Gain Account Scheme:
The depositor himself at any time with the approval from his assessing officer can close the account by submitting requisite from (Form G) to the bank.
On death of the depositor the nominee of the account can also close the account with the approval from his assessing officer can close the account by submitting requisite from (Form H) to the bank.
In absence of nominee the legal heir of the deceased depositor with the approval from his assessing officer can close the account by submitting requisite from (Form H) to the bank. The disclaimer of other legal heir is also required to be submitted to the bank.
In the case, where there is more than one legal heir, the approval of assessing officer will be obtained only providing probate of a will, succession certificate or a letter of administration to the estate of the deceased depositor.