Mr Chaudhury has just sold his old ancestral house for a lump sum consideration of Rs.20,00,000. He has now set his eyes on a new apartment which is due for possession within the next two years. Mr. Chaudhury is in a dilemma, he is aware that the amount he has received is a Capital Gain in his hands and is liable to tax. His intention is to use this fund towards paying for his new abode. What are his options?
What is Capital Gains Account Scheme?
The Income Tax Act of India had foreseen such an eventuality and has thus launched the Capital Gains Account Scheme (CGAS) in 1988. As per the provisions of this scheme, Mr Chaudhury can park his funds in this account and keep them outside the ambit of taxation if he opens the Capital Gains Account within the last date of filing his income tax returns. Thus, assuming that he made the sale in the financial year 2013-14, Mr Chaudhury has to open the account and deposit the unutilized sum by 31st July 2014. In fact as per the provisions of the act anyone can save tax on Long Term Capital gains provided:
ü A residential property is purchased within 2 years of the sale having been effected.
ü A residential property is constructed within 3 years of the sale having been effected.
Modalities of Capital Gains Account Scheme?
Having come to know about this scheme, Mr Chaudhury is feeling relaxed, but he still needs to know more before he can actually accomplish his primary task of saving tax on Capital Gains.
> Where can the Capital Gains Account Scheme- CGAS account be opened?
The Government has laid out a complete list of 28 PSU banks where this account can be opened. SBI, its subsidiaries, UCO Bank, Bank of Baroda, Canara Bank, IOB etc., appear in this list. It is however to be noted that only urban and metro branches are permitted to offer this account to the customers and rural branches are not included. IDBI bank has been added to the list last year.
Ø What are the types of deposits which can be made in Capital Gains Account Scheme?
I. Capital Gains Account – Type A – Savings Account:
This is like a normal savings account and the interest payable on this account is the same as the rate of interest paid on any normal savings account by that particular bank.
II. Capital Gains Account -Type B – Term Deposit Account:
This resembles a fixed deposit account, wherein the amount is deposited for a fixed period of time. The interest rate on this account is equivalent to the interest paid on fixed deposits by the bank. As Type B accounts are same as Fixed Deposits Account, any withdrawal from this type of account attracts a penalty for pre-maturity withdrawal.
Interests earned from both the accounts are liable to be taxed and attract TDS.
If Mr Chaudhury has to make the final payment for his apartment at one go then he would be better served by opening the Type B account. For those who are constructing a house, Type A account would be a better option as this would provide the flexibility of multiple withdrawals.
> How to withdraw funds from Capital Gains Account Scheme?
The amount deposited in the Capital Gains Account can be withdrawn by making an application in the appropriate form. The amount so withdrawn needs to be utilized within 60 days from the date of such withdrawal and only for the specific purpose for which such withdrawal was made. The unutilised amount has to be re-deposited immediately.
For subsequent withdrawal, an application is required to be made mentioning details of the manner/purpose in which the previous withdrawal was utilized.
Most banks do not issue any cheque books to the CGAS-Capital Gain Account Scheme holders as the withdrawal is effected by filling up the specified form only.
All amounts withdrawn in excess of Rs. 25000/- are disbursed by the bank through Demand Drafts directly in the name of the vendor or builder.
> How to close the Capital Gain Account Scheme – CGAS account?
The Income Tax assessing officer can approve the closure of the account. On the closure of the account or after the lapse of three years, whichever is earlier, the entire unutilized funds lying in the account are liable to be taxed under capital gains.
Other Salient Features of the Capital Gains Account Scheme
v Only Individuals and HUF are permitted to open Capital Gains Account.
v The amount deposited in the Capital Gains Account is inadmissible as a security for any loan or guarantee.
v The taxpayer can also appoint nominees to this account by making an application in the appropriate form.
The various subtleties associated with the Capital Gains Account Scheme have been demystified and discussed threadbare in the hope that individuals like Mr Chaudhury can now confidently go ahead and transform their realty plans into reality.
The author is Ramalingam.K an MBA (Finance) and certified financial planner. He is the Director & Chief Financial Planner of holistic investment planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He Can be reached at firstname.lastname@example.org