CGAS Rule 9 Lacuna May Postpone Capital Gains Tax Despite Immediate Withdrawal

Deposit in Capital Gains Accounts Scheme Today, Withdraw Tomorrow & Pay Tax After Three Years- A Lacuna Hidden in Rule 9

Summary: The Capital Gains Accounts Scheme, 1988 (CGAS) was introduced to protect an assessee who genuinely intends to purchase or construct a new house but is unable to utilise the capital gain before the due date for filing the return of income. Under section 54(2) & 54F(4), the amount not utilised before filing the return may be deposited in CGAS on or before the due date u/s 139(1). However, a combined reading of the statutory provisions & Rule 9 of CGAS reveals an interesting lacuna. The first withdrawal from Deposit Account-A through Form C is substantially declaration-based & does not require prior proof of actual investment, while details regarding utilisation of the previous withdrawal become relevant for a subsequent withdrawal through Form D. Rule 9(4) requires an amount withdrawn but not utilised within 60 days to be redeposited, but there is no express provision taxing the amount immediately in the year of withdrawal or failure to redeposit. Sections 54(2) & 54F(4) instead provide for taxation of the unutilised amount in the tax year in which the prescribed three-year period expires. Thus, an assessee may not permanently avoid capital-gains tax, but may effectively obtain a statutory postponement of tax while retaining use of the withdrawn money.

Account-A & Account-B under CGAS

The Capital Gains Accounts Scheme, 1988 (CGAS) was introduced to protect an assessee who genuinely intends to purchase or construct a new house but is unable to utilise the capital gain before the due date for filing the return of income.

Under section 54(2) & 54F(4), the amount not utilised before filing the return may be deposited in CGAS on or before the due date u/s 139(1). The amount so deposited is deemed to have been utilised for the purpose of computing the exemption.

However, a combined reading of the statutory provisions & Rule 9 of CGAS reveals an interesting lacuna. An assessee may deposit the required amount before the due date, claim exemption, withdraw practically the entire amount immediately thereafter without first producing proof of actual investment & still postpone the capital-gains tax until the tax year in which the prescribed three-year period expires.

CGAS permits two forms of deposits:

Deposit Account-A is in the nature of a savings account. It is generally used for making withdrawals towards purchase or construction of the new asset.

Deposit Account-B is in the nature of a term deposit or fixed deposit. An assessee who does not immediately require the money may keep it in Account-B & subsequently convert it into Account-A when funds are required.

An assessee may, for example, deposit ₹99,99,000 in Account-B & ₹1,000 in Account-A. Subsequently, he may prematurely close or convert Account-B & transfer its proceeds to Account-A. Such conversion is not closure of the CGAS account. The amount merely moves from one type of deposit under the Scheme to another. Therefore, the Assessing Officer’s approval is not required merely because the fixed deposit is closed & its proceeds are credited to Account-A.

The approval of the Assessing Officer becomes relevant under Rule 13 when the assessee seeks the final closure of the CGAS account through Form G. Closure of Deposit Account-B & transfer of the amount to Deposit Account-A must not be confused with final closure of the CGAS account itself.

First Withdrawal under Rule 9- No Prior Proof Required

The crucial provision is Rule 9. For the first withdrawal from Deposit Account-A, the depositor is required to submit an application in Form C. The Form requires the depositor to mention the amount proposed to be withdrawn & the purpose for which it is required.

However, Rule 9 does not require the depositor to obtain:

• permission from the Assessing Officer;
• a certificate from a Chartered Accountant;
• a utilisation certificate;
• a registered purchase agreement;
• construction bills; or
• a builder’s demand letter.

The bank is not expected to undertake an assessment proceeding before allowing the first withdrawal. The first withdrawal is substantially based upon the depositor’s declaration in Form C.

The position is different in the case of the second or subsequent withdrawal. A subsequent withdrawal must be made through Form D, in which the depositor is required to furnish particulars regarding utilisation of the amount previously withdrawn. Thus, proof of utilisation becomes relevant mainly when the depositor seeks another withdrawal. If the depositor takes out practically the whole amount through the first withdrawal & does not seek any further withdrawal, the occasion for examining utilisation through Form D may never arise.

₹25,000 Cash Limit Does Not Prevent a Large First Withdrawal

Rule 9 also regulates the mode of payment. An amount up to ₹25,000 may be withdrawn in cash. Where the withdrawal exceeds ₹25,000, the original Scheme contemplates payment through a crossed demand draft drawn in favour of the person to whom the depositor intends to make payment.

The substantive issue remains. For the first withdrawal, the assessee mentions the proposed purpose & payee, but Rule 9 does not expressly require prior documentary proof establishing that the payee is actually the seller, builder or contractor of the proposed residential house. This payment could be to anyone. The bank must follow the prescribed mode of payment, but it cannot convert the first withdrawal into a tax-assessment proceeding by imposing conditions not found in the Scheme.

Rule 9(4)- Utilisation Within 60 Days

The safeguard is contained in Rule 9(4). It requires the amount withdrawn to be utilised for the specified purpose within 60 days from the date of withdrawal. If the whole or any part of the amount remains unutilised after 60 days, the unutilised amount must be immediately redeposited into Deposit Account-A.

Thus, if an assessee withdraws ₹99,99,000 but neither uses it for purchasing or constructing the new house nor redeposits it after 60 days, there is a clear violation of Rule 9(4).

The withdrawal need not always be the result of a deliberate tax-planning exercise. An assessee may consciously withdraw practically the entire amount immediately after making the CGAS deposit. Equally, the assessee may genuinely withdraw the money & make payment to a builder for purchasing a flat. The booking may thereafter be cancelled because of a defective title, delay in the project, failure to obtain approvals, a dispute with the builder, financial difficulty or for any other reason. The builder may refund the amount directly to the assessee.

Once the amount is refunded, Rule 9(4) requires the unutilised amount to be redeposited into Deposit Account-A. Nevertheless, the assessee may fail to redeposit it- whether due to ignorance, oversight, financial necessity or even for no valid reason. Thus, the breach may arise either from a deliberate withdrawal without any real investment or from a genuine investment which is subsequently cancelled & refunded. The legal consequence under the present wording remains the same: there is a violation of Rule 9(4), but no express provision taxes the amount immediately in the year of withdrawal, refund or failure to redeposit.

However, Rule 9 does not contain an effective post-withdrawal mechanism requiring the bank to independently verify, immediately after 60 days, whether the amount was actually utilised. The bank may obtain details of the earlier utilisation when the depositor submits Form D for a subsequent withdrawal. But if the entire amount was taken out through the first withdrawal, no subsequent Form D may be filed. The account may continue with a nominal balance, while the major portion of the money remains outside CGAS.

A Simple Example Demonstrating the Lacuna

Suppose an assessee sells a long-term capital asset on 15 .02.2026 & earns a capital gain of ₹1 crore. Assume that ₹1 crore is the amount required to be deposited for claiming the intended exemption u/s 54 or 54F. The assessee deposits ₹1 crore in CGAS on 31.07.2026, being on or before the applicable due date u/s 139(1). He files the return of income for AY 2026-27 & claims exemption u/s 54 or 54F.

The transaction may be summarised as follows:

The assessee may initially place ₹99,99,000 in Deposit Account-B & ₹1,000 in Deposit Account-A. Before withdrawal, Account-B can be converted into Account-A. This conversion does not amount to closure of the CGAS account & therefore, does not require the Assessing Officer’s approval.

On 2.08.2026, the assessee submits Form C & seeks withdrawal of ₹99,99,000. Since the amount exceeds ₹25,000, it must be released through the mode prescribed under Rule 9. However, no CA certificate or AO permission is prescribed for the first withdrawal. Assume that the assessee does not utilise the amount for purchasing or constructing a residential house & also does not redeposit it after 60 days. The assessee has clearly violated Rule 9(4). Nevertheless, section 54(2) does not expressly make the amount taxable on 2 August 2026 or immediately upon expiry of 60 days. It provides that the amount not utilised shall be charged under section 45 in the previous year in which the period of three years from the date of transfer of the original asset expires. Three years from 15.02.2026 expire on 14.02.2029. This date falls in Tax Year/FY 2028-29, corresponding to AY 2029-30 under the terminology of the Income-tax Act, 1961. Accordingly, the unutilised amount of ₹99,99,000– or the amount determined in accordance with section 54F(4)– would become taxable in Tax Year 2028-29.

Thus, although the assessee obtained possession & use of ₹99,99,000 on 2.08.2026, the capital-gains tax may arise only in Tax Year 2028-29. The assessee does not permanently avoid tax, but effectively enjoys the money for nearly two-& -a-half years without paying the capital-gains tax during that period.

The violation of Rule 9(4) occurs around October 2026, but the charging provision postpones taxation until the tax year in which the three-year period expires.

Most Bankers Are Not Aware of the Rules

A major practical problem is that many authorized bank branches themselves are unfamiliar with CGAS. Since these accounts are handled infrequently, the requirements often vary from bank to bank- & sometimes even between two branches of the same bank. Some banks demand a CA certificate even for the first withdrawal. Some insist upon a registered agreement, construction bills or builder’s demand letter. Others demand the Assessing Officer’s permission for conversion of Account-B into Account-A or for any substantial withdrawal.

These additional requirements do not flow from Rule 9. For the first withdrawal, the prescribed document is Form C. Details regarding utilisation of the previous withdrawal become relevant for the next withdrawal through Form D. Similarly, the AO’s approval is required for final closure under Rule 13- not merely for conversion of Account-B into Account-A.

Unfortunately, many professionals & tax practitioners are also unclear about the distinction between:

• conversion of Account-B into Account-A;
• first withdrawal through Form C;
• subsequent withdrawal through Form D; &
• final closure through Form G.

The result is paradoxical. Genuine taxpayers are frequently subjected to conditions not found in the Scheme, while the real weakness- the absence of effective verification after the entire amount is taken out through the first withdrawal- remains unnoticed.

Does Violation of Rule 9(4) Cancel the Exemption Immediately?

The amount deposited must undoubtedly be utilized in accordance with the Scheme. Therefore, the Revenue may argue that deliberate withdrawal for a non-specified purpose violates the statutory condition & that the assessee cannot claim the benefit of a deposit made merely as a colourable device. However, this argument faces the specific language of sections 54(2) & 54F(4). Parliament itself contemplated a situation where the amount deposited is ultimately not utilised & expressly provided the year in which the unutilised amount must be taxed.

There is no express provision stating that breach of Rule 9(4) makes the amount taxable in the original year, the year of withdrawal or the year in which the 60-day period expires.

Vivek Juneja- Taxation Only After the Prescribed Period

In Vivek Juneja v. ACIT, ITA No. 8512/Mum/2025, order dated 29 May 2026, the assessee deposited the unspent capital gain in CGAS & subsequently withdrew the amount for investment in other immovable properties.

The Department sought to deny the CGAS benefit in the original assessment year. The Mumbai Tribunal held that once the unspent amount had been validly deposited in CGAS, it was not taxable in the original year. Any taxation arising from non-utilisation could be made only after expiry of the prescribed three-year period. The assessee had himself offered the remaining unutilised amount to tax in the later assessment yea, & the Tribunal accepted the treatment.

The decision supports the proposition that non-utilisation does not ordinarily result in retrospective cancellation of the exemption in the original year. However, the case did not involve a deliberately planned deposit followed by immediate withdrawal for personal use. In such an extreme case, the Department may invoke the principles relating to a colourable device or absence of genuine intention. The issue may therefore remain contentious until directly examined by a High Court.

Author’s Comments- A Clear Case of Tax Postponement

The lacuna arises from the interaction of three provisions:

First, deposit in CGAS before the due date enables the assessee to claim exemption.

Second, the first withdrawal under Rule 9 is substantially declaration-based & does not require prior proof of actual investment.

Third, failure to utilise or redeposit the amount after 60 days has no express immediate tax consequence. Sections 54(2) & 54F(4) postpone taxation until the tax year in which the three-year period expires. Therefore, an assessee may not permanently escape capital-gains tax, but may effectively obtain a statutory postponement of tax for nearly three years while retaining the use of the money. The law should be amended to provide that where an amount withdrawn from CGAS is neither utilised for the specified purpose nor redeposited within 60 days as required by Rule 9(4), it shall be deemed to be capital gain of the tax year in which the 60-day period expires. There is also a need for uniform directions to authorised banks clarifying that they cannot demand CA certificates or AO permission where the Scheme does not prescribe them. Until such amendments are made, CGAS presents an unusual situation- deposit ₹1 crore on 31 July, claim exemption, withdraw ₹99,99,000 on 2 August & , if it remains unutilised, pay the capital-gains tax only in Tax Year 2028-29.