The government, in order to encourage reinvestment of the capital gains made on the sale of capital assets by the seller, has provided with relief from capital gains tax if such capital gain is re-invested in certain specified assets within a specified time limit.
In many cases, the time limit available is much longer and even exceeds the due date of filing return. To address this, in order to enable the taxpayer park his funds till they are invested for the prescribed purpose, the concept of Capital Gains Account Scheme(CGAS) was introduced. Through this article, let us understand a little more in details about this scheme.
- What is Capital Gains Account Scheme?
- Who can deposit in Capital Gains Account Scheme?
- When can one deposit in Capital Gains Account Scheme?
- Where should the capital gains account be opened?
- What are the types of deposits available under capital gains account scheme?
- Withdrawal from capital gains account scheme
- Must know
1. What is Capital Gains Account Scheme
Capital Gains Account Scheme was introduced in 1988 by the Central Government. 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 ‘Capital Gains Account’ introduced under Capital Gains Account Scheme. Any capital gain invested in Capital Gains Account Scheme will be eligible for capital gain exemption as it would in case of re-investment.
2. Who can deposit in Capital Gains Account Scheme?
Category of taxpayer with capital gains who is eligible to invest in CGAS from Section 54 to 54F of the Income-tax Act, 1961 “Act”, is provided below:
| Section Number | Capital gains made on | Category of person |
| 54 | Sale of residential house | Individual or HUF |
| 54B | Sale of land used for agricultural purpose | Individual or HUF |
| 54D | Compulsory acquisition of land and building | Any taxpayer |
| 54E | Sale of any long term capital asset | Any taxpayer |
| 54EC | Sale of long term capital asset being land or building or both | Any taxpayer |
| 54F | Sale of any long term capital asset not being residential property | Individual or HUF |
| 54G | Transfer of asset (machinery, plant or building, land or right in land or building) in case of shifting of industrial undertaking from urban area | Any taxpayer |
| 54GA | Transfer of asset/s (machinery, plant or building, land or right in land or building) in case of shifting of industrial undertaking from urban area to Special Economic Zone | Any taxpayer |
| 54GB | Transfer of residential property | Any taxpayer |
3. When can one deposit in Capital Gains Account Scheme?
A taxpayer who is unable to re-invest capital gains in the specified investment before furnishing the return of income and specified time limit for the investment has not expired, is required to deposit such unutilised capital gain in the capital gains account before furnishing return of income but not beyond the due date for furnishing return of income.
4. Where should the capital gains account be opened?
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, photograph would be required.
- Deposit can be made by any mode such as cash, cheque, demand draft etc. In case of deposits via cheque or DD, date of deposit will be date on which cheque or DD is received in the deposit office subject to its realisation.
- 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.
5. What are the types of deposits available under capital gains account scheme?
Two types of deposits can be made under capital gains account scheme which is explained below:
- Type A – Savings deposit – Type A account is similar to regular savings bank account of any bank where interest at the rate similar to saving bank account interest will be credited periodically and also passbook is issued to the deposit holder. Just like savings deposit, Type A account offers better liquidity and withdrawals can be made at any time.
- Type B – Term deposit – 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. 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 deposit certificate containing all the details of deposit and is required to be submitted at the time of withdrawal. Further, auto-renewal of term deposit 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.
6. Withdrawal from capital gains account scheme
As mentioned there are no restrictions on withdrawal from Type A – savings account. While premature withdrawal from Type B account is allowed, it is allowed only after transferring the amount to Type A account and there may also be consequential penalty.
Any amount withdrawn is required to be utilised for specified investment within 60 days of withdrawal and any unutilised amount may be re-deposited to 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.
7. Must know
- Transfer of account
- While change in nature of deposit is allowed such as savings to term deposit or vice versa, any transfer from Type B account to Type A account before maturity period is considered as 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 account requires approval from jurisdictional income tax officer. Form G is required to be submitted for the closure of account along with jurisdictional income tax officer’s approval.
- Form H shall be submitted for closure of account by nominee/legal heir of deceased depositor in the absence of nominee.
- Nomination
- Nomination to inherit the account upon depositor’s death can be made by submitting Form E and change of nominee can be made by submitting Form F.
- Nomination up to 3 persons is allowed and 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 minor, HUF, AOP, BOI or firm. However, the nominee can be a minor and depositor can appoint a person to receive the amount in case of his death and during the minority of the nominee.
- Nomination to inherit the account upon depositor’s death can be made by submitting Form E and change of nominee can be made by submitting Form F.
- Loan facility
- No loan can be obtained against Capital Gains Account Ccheme. Deposit certificate can neither be offered as collateral security or guarantee nor any charge be created on the same.
- Income tax implications
- While as per tax law it is necessary to attach proof of deposit to the income tax return for availing capital gain exemption, income tax return forms are attachment less forms and hence no document can be annexed to income tax forms. However, proof of deposit is required to be retained by taxpayer for submission to 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 deposit office and TDS certificate will be issued to the depositor.
- Any amount either underutilised beyond 60 days of withdrawal or beyond specified time limit will be offered to tax.
- While as per tax law it is necessary to attach proof of deposit to the income tax return for availing capital gain exemption, income tax return forms are attachment less forms and hence no document can be annexed to income tax forms. However, proof of deposit is required to be retained by taxpayer for submission to income tax department on demand in the future.
