Capital Gains Account Scheme
Posted on October 01 2020
Capital gains are defined as the profit that you make on the sale of an asset, whether it is short-term or long-term, are liable to taxation. The main difference is that short-term capital gains are added to your income and are taxed as per the income tax rate slab that you fall under, while the long-term capital gains are taxed at a rate of 20%.
For example, your regular income is Rs. 5 lakh and you sold 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 slab rate after the addition of the income and the capital gains. So your income for the ongoing financial year will be considered as Rs. 13 lakh, and you are liable to pay 30% income tax on the amount. You can claim the exemptions and the deductions useful under Sections 80C to 80U on this income.
Therefore, if you are selling a property that you owned for more than 3 years then the long-term capital gains (LTCG) will be tax at 20%.
Saving Long-Term Capital Gains Tax
The Income Tax Act, therefore, allows you to save on these capital gains tax through Sections 54 and 54F, if you have invested your entire capital gains in a residential property, or Section 54EC if you have invested in the capital gains bonds. These investments have to be made either before the sale of the property within 1 year, or within 2 years of the transaction.
But what will happen if you are unable to invest your entire long-term capital gains in a residential property before the time of filing your income tax return for the financial year approaches? You require convincing the tax department that you intend to invest the capital gains, but require some more time to do so. To do this, you can open a Capital Gains Account Scheme (CGAS) with any scheduled bank. The amount you put in this scheme can be withdrawn at any time to buy or construct a house and save long-term capital gains tax.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 the individuals to safeguard their long-term capital gains until they are able to invest it as described in Sections 54 and 54F. Under Section 54, you can invest the LTCG which is made from the sale of an immovable property, in a residential property. Under Section 54F, you can invest in the LTCG from the sale of the shares and the bonds, in a residential property.
You are allowed to open a CGAS account only if you are unable to invest the money in a house before the due date (31 st of July) for filing the income tax return after the given assessment year. This scheme was established in 1988, and the account can be opened in any of the 28 banks which are notified by the government. The bank includes State Bank of India and other State Banks, Syndicate Bank, Central Bank of India, IDBI Bank, Bank of Baroda and Corporation Bank. Therefore, the branches of these banks in the rural areas do not give the facility of CGAS.
A capital gains account can be opened by filling in and submitting the Form A along with the proof of address, PAN card copy and photograph. The amount can be deposited in the account either by cheque, cash or demand draft. You can also deposit the amount in instalments. If you have made a deposit in the form of a cheque or a demand draft, the date of deposit will 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 required to open a separate CGAS accounts.
Types of Capital Gains Account Scheme:
A capital gains account comes in 2 categories: Savings and Term Deposit.
CGAS Type A – Savings Account:
A capital gains savings account is the same as the regular savings account in any bank. The applicable interest rate is also similar to that of the regular saving schemes. You will receive a passbook where all the transactions will be recorded i.e., deposits, interest received, withdrawal made from the account. The amount deposited in this account will have high liquidity and withdrawal can be made at any time.
CGAS Type B – Term Deposit Account:
A capital gains term deposit account is the same to that of the fixed deposit schemes of the banks. The rate of interest and terms surrounding the withdrawal before the maturity also remain the same as that of the bank’s FD scheme. So if you withdraw the amount before the maturity of the account then you will have to pay a penalty for the premature period which you have agreed while opening this account depending on the terms of the bank. You will receive a deposit receipt which 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 principal deposit and reinvested, thereby adding to the total interest accumulated. On the other hand, the non-cumulative scheme allows you to withdraw or receive the interest at regular intervals i.e., quarterly, half-yearly or annually.
The tenure of a Type B account is a maximum of 36 months i.e., 3 years, if you are constructing a house and 24 months i.e., 2 years, if you plan to buy a ready-made 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 accumulated 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 the amounts in bits and pieces, for example if you are constructing a house rather than buying a ready-made flat.
The interest generated through these accounts is liable 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 the Forms C and D only.
How To Withdraw Money From a Capital Gains Account?
To withdraw money from a capital gains account, you require making an application via Form C. Once the withdrawal is made, you require utilising it within 60 days and it cannot be re-deposited in the account immediately. If a second withdrawal is required, you require to make an application via Form D.
You are allowed to transfer the account from one branch of the bank to another branch but not from one bank to another bank. You can 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 the term deposit to the savings account 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 the individuals and the Hindu United Families (HUF), and loan cannot be allowed based on this account. If you want to nominate anyone to inherit the money after your death then you can do so by using Form E, and a change in the nominee can be done by using Form F. To close the account, you will require the approval of the Income Tax Officer under whose jurisdiction you come. Make sure that you utilise the amount deposited in the capital gains account within 2 years of sale of the property to avail the benefits under Sections 54, 54EC and 54F. If this is not done, the unutilised amount will be liable to capital gains tax in the financial in which the deadline ends.
Tax Assist is a professional income tax consultancy in India for both corporate houses and individual tax payers; the latter comprising Salaried Individuals, Seafarers, Professionals and Non Resident Indians.
With the help of Tax Assist and its team of income tax professionals, taxpayers can minimize their Income Tax liability, maximize their net income and create opportunities to save for current and future needs while maintaining proper accounting standards and income tax returns which are compliant with the Law.