Capital gains – the profit you make on sale of an asset, whether short-term or long-term – are subject to taxation. The main difference is that short-term capital gains are added to your income and taxed as per the income tax rate slab you fall under, while long-term capital gains are taxed at a rate of 20%.
Let’s say your regular income is Rs. 5 lakh and you sell a house that you owned for less than 3 years at a profit of Rs. 8 lakh. This being a short-term capital gain, the taxation will be based on your income tax rate slab after addition of income and capital gains. So your income for the ongoing financial year will be considered as Rs. 13 lakh, and you have to pay 30% income tax on the amount. You can claim the exemptions and deductions applicable under Sections 80C to 80U on this income.
However, if you are selling a property that you owned for more than 3 years, long-term capital gains (LTCG) tax of 20% is applicable.
Saving Long-Term Capital Gains Tax
The Income Tax Act, however, allows you to save on these capital gains tax through Sections 54 and 54F, if you invest your entire capital gains in a residential property, or Section 54EC if you invest in capital gains bonds. These investments have to be made either within 1 year before the sale of the property, or within 2 years of the transaction.
But what would happen if you are unable to invest your entire long-term capital gains in a residential property before the time to file income tax return for the fiscal year approaches? You need to convince the tax department that you intend to invest the capital gains, but need some more time to do so. To achieve this, you can open a Capital Gains Account Scheme (CGAS) with any scheduled bank. The amount you put in this can be withdrawn at any time to buy or construct a house and save long-term capital gains tax.
What is CGAS?
Capital Gains Account Scheme (CGAS) allows individuals to safeguard their long-term capital gains until they are able to invest it as specified in Sections 54 and 54F. Under Section 54, you can invest the LTCG made from sale of an immovable property, in a residential property. Under Section 54F, you can invest the LTCG from sale of shares and bonds, in a residential property.
You are allowed to open a CGAS account only if you are unable to invest it in a house before the due date for filing income tax return (July 31 after the given assessment year). This scheme was started in 1988, and the account can be opened in any of the 28 banks notified by the government. This includes State Bank of India and other State Banks, Syndicate Bank, Central Bank of India, IDBI Bank, Bank of Baroda and Corporation Bank. However, the CGAS facility is not available in the rural branches of these banks.
A capital gains account can be opened by filling in and submitting Form A along with proof of address, PAN card copy and photograph. The amount can be deposited in the account through cheque, cash or demand draft. You can even deposit the amount in instalments. If you have made a deposit in the form of a cheque or demand draft, the date of deposit shall be counted from the date on which the cheque or DD is encashed. Additionally, if you intend to invest both in a house and in government bonds under different sections of the Income Tax Act, you need to open separate CGAS accounts.
Types of Capital Gains Account Scheme:
Capital gains accounts comes in 2 categories: Savings and Term Deposit.
CGAS Type A – Savings Account:
A capital gains savings account is similar to the regular savings account in any bank. The applicable interest rate is also the same as that given on regular saving schemes. You will receive a passbook that has records of all transactions – deposits, interest received, withdrawals – made in the account. The amount deposited in this account will have high liquidity and can be withdrawn any time.
CGAS Type B – Term Deposit Account:
A capital gains term deposit account is similar to the fixed deposit schemes of banks. The rate of interest and terms surrounding withdrawal before maturity also remain the same as the bank’s FD scheme. So if you withdraw the amount in this account before the end of the tenure that you agreed with the bank you may have to pay premature withdrawal penalty, depending on the terms of the bank. You will receive a deposit receipt that specifies the principal deposited, date of deposit, date of maturity and the interest rate. This account also offers cumulative and non-cumulative options. In the cumulative option, the interest amount is added to the term deposit and reinvested, thereby adding to the total interest accrued. The non-cumulative scheme, on the other hand, allows you to withdraw or receive the interest at regular intervals – quarterly, half-yearly or annually.
The tenure of a Type B account is a maximum of 36 months (3 years) if you are constructing a house, and 24 months (2 years) if you plan to buy a ready house. The capital gains term deposit account is recommended only if the capital gains are available in a lump sum. You could place the amount in a capital gains term deposit scheme for a period of less than 2 years, so that you can make the required investment before the end of 2 years by which such an investment should be made to get exemption on capital gains tax. This way, you can benefit from the interest accrued on the term deposit.
Capital gains savings account is better if you are getting the amount in instalments and if you would have to withdraw amounts in bits and pieces – for example if you are constructing a house rather than buying a ready-to-occupy flat.
The interest generated through these accounts is subject to TDS as per the Income Tax rules. These accounts do not come with a cheque book or debit card as the money can be withdrawn only through Forms C and D only.
How To Withdraw Money From a Capital Gains Account?
To withdraw money from a capital gains account, you need to make an application through Form C. Once the withdrawal is made, you need to utilise it within 60 days and it cannot be re-deposited in the account immediately. If a second withdrawal is required, you need to make an application through Form D.
You are allowed to transfer the account from one branch of the bank to another, but not from one bank to another bank. You may also change the nature of your account in part or whole between the account types – that is, from Savings Account to Term Deposit Account and vice versa. But if you are transferring the account from term deposit to savings before the end of the maturity period, then the transfer will be considered as premature withdrawal and penalties will be applied accordingly.
A Capital Gains Account can be opened only by individuals and Hindu United Families (HUF), and no loan can be taken based on this account. If you want to nominate anyone to inherit the money upon your death, you can do so using Form E, and a change in nominee can be done using Form F. To close the account, you will need the approval of the Income Tax Officer under whose jurisdiction you come. Also ensure that you utilise the amount deposited in capital gains account within 2 years of sale of property to avail the benefits under Sections 54, 54EC and 54F. If this is not done, the unutilised amount will be subject to capital gains tax in the fiscal in which the deadline ends.
Who can deposit in the Capital Gains Accounts Scheme?
Under the Income Tax Act 1961, Section 54 to 54F, taxpayers who have capital gains and are eligible to invest in the Capital Gains Account Scheme have been mentioned below:
|Section No.||Capital gains made on||Category of taxpayer|
|54||Sale of a residential house||HUF or individual|
|54B||Sale of land used for agriculture||HUF or individual|
|54D||Compulsory acquisition of building and land||Any taxpayer|
|54E||Sale of long-term capital assets||Any taxpayer|
|54EC||Sale of long-term capital assets such as building or land or both||Any taxpayer|
|54F||Sale of long-term capital asset that is not a residential building||HUF or individual|
|54G||When shifting of an industrial facility from an urban area, the transfer of assets such as plant, building, land, machinery, or right in building or land||HUF or individual|
|54GA||When shifting of an industrial facility from an urban area to a Special Economic Zone (SEZ), the transfer of assets such as plant, building, land, machinery, or right in building or land||HUF or individual|
|54GB||Transference of residential property||HUF or individual|
When can deposit in Capital Gains Account Scheme?
Taxpayers who are unable to reinvest their capital gains in a specified investment, before the specified time limit has expired for that investment, and before the income tax returns are furnished, have to deposit the capital gains which are unutilised into the capital gains account. This is to be done before the income tax returns are furnished. It should not be after the due date for furnishing of the income tax returns.
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