The Query

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 ramalingam@holisticinvestment.in

Author Bio

Qualification: MBA
Company: Holistic Investment Planners Private Limited
Location: Chennai, Tamil Nadu, IN
Member Since: 01 Dec 2017 | Total Posts: 195
Ramalingam is the Founder and Director of Holistic Investment Planners Private Limited (WEBSITE - www.holisticinvestment.in). As the creator and architect of the 3-Dimensional Holistic Investment Approach, he has advised hundreds of clients including affluent business owners, corporate executives View Full Profile

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4 responses to “What every investor needs to know about Capital Gains Account Scheme?”

  1. K S Prakash says:

    Sir, My sister sold a plot and received 35 lacs as sale proceeds and the capital gains work out to 22 lacs. She wanted to invest in NHAI Bonds before 6 months from the date of sale. Due to delay in opening DMat account, the purchase of Bonds is being delayed by 2 months. However, her IT Return has been processed and received Refund order for TDS deducted by the buyer. She will deposit the cap gains now. Will it have any implications post receipt of Refund for IT purposes.

  2. SD Chhabra says:

    Thanks for the elaborating the points with regard to Capital Gains Tax.

  3. VSR MURTHY says:

    I want to invest major portion of sale proceeds of my current residential house, in a big residential plot and build a small 400 sft tiled house on it by operating a Capital Gains Account – Type A…. The idea is simple—I have a 95 sq yards house in the heart of the city. I want to sell it for a crore of and buy a 400 sq land in suburbs of the city and build a 1 BHK tiled house and move to it, and hope that my son, some day will build a good house there

    • VISHNU says:

      Yes, you can do like that and the sale proceeds will not come under the provision of tax as per sec 54 of the income tax act , 1961. But there is one condition that the construction should be completed in a span of three years. If it is not done all the capital gain you earned previously will be taxable.

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