Capital Gains Accounts Scheme (CGAS), 1988

The government, in order to encourage reinvestment of the capital gains made on the sale of capital assets by the seller, has provided relief from capital gains tax if such capital gain is re-invested in certain specified assets within a specified time limit under section 54 to 54GB.

There may be instances where the taxpayer is unable to re-invest the capital gains in modes as specified in the Act before the filing of return of income. To address this, in order to enable the taxpayer to park his funds till they are invested for the prescribed purpose, the concept of Capital Gains Account Scheme (CGAS) was introduced.

What is a Capital Gains Account Scheme (CGAS)?

The Capital Gains Account Scheme was introduced in 1988 by the Central Government. 

CAGS essentially is a Fixed Deposit with a Bank which can be utilised only for the purpose of the exemption claimed under sections 54 to 54GB.

As mentioned above, the time limit available to the depositor for re-investment and avail the exemption, in many cases, is longer than the due date to file the return of income. In such cases, the taxpayer is given an option of depositing such underutilised capital gains in the ‘Capital Gains Account’ introduced under the Capital Gains Account Scheme. 

Any capital gain invested in the Capital Gains Account Scheme will be eligible for capital gain exemption as it would in case of re-investment.

Who Can Deposit in Capital Gains Account Scheme?

The category of the taxpayer with capital gains who is eligible to invest in CGAS from Section 54 to 54F of the Income-tax Act, 1961, is provided below:

When Can One Deposit in Capital Gains Account Scheme?

Taxpayers who are unable to reinvest their capital gains in a specified investment (As per the table above) before the prescribed time restriction for that investment has expired and before the income tax returns are filed must deposit the unutilised capital gains into the capital gains account. This must be completed prior to the filing of income tax returns, i.e., before the due date of filing. It should not be after the deadline for filing income tax returns.

Saving Long-Term Capital Gains Tax in CGAS

The Income Tax Act, on the other hand, permits you to save on capital gains taxes by investing your whole capital gains in a residential property (Section 54 or 54F). These investments must be made either one year before the property is sold or within two years of the transaction.

But what if you are unable to invest your full long-term capital gains in a residential property before the deadline for filing your income tax return for the fiscal year? You must persuade the tax department that you want to invest the capital gains but require further time to do so. You can accomplish this by opening a Capital Gains Account Scheme (CGAS) with any scheduled bank. The money you put in here can be retrieved at any moment to help you buy or build a house and avoid paying long-term capital gains tax.

Where Should One Open a Capital Gains Account?

Capital gains account can be opened in any of the authorised bank branches excluding rural branches of such authorised banks.

Procedure to open capital gains account and manner of deposit:

• Capital Gains account can be opened by making an application in duplicate in Form A.
• Documents such as PAN, proof of address, and a photograph would be required.
• The deposit can be made by any mode, such as cash, cheque, demand draft etc. In the case of deposits via cheque or DD, the date of deposit will be the date on which the cheque or DD is received in the deposit office, subject to its realisation.
• The deposit can be made either in lump sum or instalments.
• Separate applications shall be made for availing exemption under different sections and separate capital gains accounts shall be opened.

What are the Types of Deposits Available Under the Capital Gains Account Scheme?

Two types of deposits can be made under the capital gains account scheme, which is explained below:

• Type A – Savings deposit: The type A account is similar to a regular savings bank account of any bank where interest at a rate similar to the savings bank account interest will be credited periodically, and also passbook is issued to the deposit holder. Just like a savings deposit, the type A account offers better liquidity and withdrawals can be made at any time.
• Type B – Term deposit: The type B account is similar to a fixed deposit account of a bank which offers interest at the rate applicable to term deposit and has restrictions similar to a term deposit. The maximum term allowed for a Type B account is 3 years. The depositor is required to choose the term based on his plan for specified investment, such as 2 years for the purchase of new house property or 3 years for construction. Just like fixed deposits, the depositor would receive a deposit certificate containing all the details of the deposit, which is required to be submitted at the time of withdrawal. Further, auto-renewal of term deposits is not possible like a regular fixed deposit. Term deposit can either be cumulative or non-cumulative i.e., interest is either cumulated and re-invested along with principal or paid at regular intervals respectively.

The interest rate for both deposits is fixed by RBI from time to time. The depositor may choose the appropriate type of deposit keeping in mind his plans for specified investment, requirement of fund, rate of interest etc.

How To Withdraw Money From a Capital Gains Account?

As mentioned, there are no restrictions on withdrawal from a Type A – savings account. While premature withdrawal from a Type B account is allowed, it is allowed only after transferring the amount to a Type A account, and there may also be a consequential penalty.

Any amount withdrawn is required to be utilised for a specified investment within 60 days of withdrawal, and any unutilised amount may be re-deposited to a Type A account immediately.

Form C shall be submitted for withdrawal from an account for the first time and Form D for subsequent withdrawal providing details of the manner of utilisation of money withdrawn earlier. Hence, no chequebook or debit card is issued to the depositor.

Must know

• Transfer of account
  • While the change in nature of the deposit is allowed, such as savings to a term deposit or vice versa, any transfer from a Type B account to a Type A account before the maturity period is considered a premature withdrawal. Further, transfer of account from one branch to another branch is allowed but not between different banks.
  • Form B is required to be submitted for conversion of account.
• Closure of account
  • Closure of both types of accounts requires approval from jurisdictional income tax officers. Form G is required to be submitted for the closure of the account along with the jurisdictional income tax officer’s approval.
  • Form H shall be submitted for closure of account by the nominee/legal heir of a deceased depositor in the absence of the nominee.
• Nomination
  • Nomination to inherit the account upon the depositor’s death can be made by submitting Form E, and the change of nominee can be made by submitting Form F.
  • Nominations up to 3 persons are allowed and the amount, if any, to be received by nominees will be in their order of nomination. No nomination is allowed for accounts opened on behalf of a minor, HUF, AOP, BOI or firm. However, the nominee can be a minor, and the depositor can appoint a person to receive the amount in case of his death and during the minority of the nominee.
• Loan facility
  • No loan can be obtained against the Capital Gains Account Scheme. A deposit certificate can neither be offered as collateral security or guarantee nor any charge be created on the same.
• Income tax implications
  • While according to tax law, it is necessary to attach proof of deposit to the income tax return to avail of the capital gain exemption, income tax return forms are attachmentless forms, and hence no document can be annexed to income tax forms. However, proof of deposit is required to be retained by the taxpayer for submission to the income tax department on demand in the future.
  • Interest earned on both Type A and Type B deposits is liable to tax subject to tax law, and tax will be deducted by the deposit office, and a TDS certificate will be issued to the depositor.
  • Any amount either underutilised beyond 60 days of withdrawal or beyond the specified time limit will be offered to tax.