In our earlier blog, we have discussed some of the ways in which you can reduce your capital gains while selling a house - but what if you are unable to reinvest your capital gains before the specified duration to benefit from the exemption available? To address this, the Capital Gains Account Scheme(CGAS) concept was introduced.
For example, Mr A sold a residential property in January 2022 and he intends to claim capital gains exemption by purchasing a new residential house. To claim the capital gains exemption, he must purchase the new residential house within 2 years i.e. before January 2024. However, the due date of filing of ITR for the Financial Year 2021-22 is 31st July 2022 and the gains arising on the sale of the property are required to be reported in the ITR.
In such cases, the govt prescribes that the amount to be reinvested be deposited in a Capital Gains Account before the filing of the ITR. The seller does not immediately have to deposit the amount in the Capital Gains Account and he can do so at any time before the due date of filing of ITR i.e. before 31st July for non-audit cases and before 30th Sept for audit cases.
By claiming this Capital Gains Exemption, the taxpayer would be able to save the 20% Long Term Capital Gains Tax which he would be required to pay in case he does not intend to claim this exemption.
What is a Capital Gains Account Scheme?
Capital Gains Account Scheme (CGAS) allows you to safeguard your long-term capital gains until you are unable to invest it in a house before the due date for filing an income tax return (July 31 after the given assessment year) and before the income tax returns are furnished.
But to benefit from this, you need to ensure that you utilise the amount deposited in the capital gains account within 2 years of the sale of the property. If this is not done, the unutilised amount will be subject to capital gains tax in the fiscal in which the deadline ends.
Also note, You are not permitted to hold a joint account under this scheme but up to 3 Nominees can be nominated). The proof of deposit into the CGAS account should be attached along with the income tax return for you to be able to claim exemption from long term capital gain tax for the financial year during which the transfer was made.
Where can you open a Capital Gains Account?
You can open a Capital Gains Account in any branch of the authorised banks recommended by the Government which includes Central Bank of India - State Bank of India and the public sector banks like Bank of Baroda, Bank of India, Bank of Maharashtra, Canara Bank, Central Bank of India, Indian Bank, as well as Union Bank of India are some of the 28 permitted banks. However, these facilities are unavailable for their branches in rural areas.
What are the different types of deposits available?
There are two different types of deposits that you can avail of under the Capital Gains Account Scheme.
Type A: Referred to as a savings deposit, this capital gains account is similar to a regular savings account. It even earns a similar interest rate. The interest is credited at regular intervals, and you will receive a passbook to record all your transactions. Like a savings account, this type of deposit is highly liquid, so you can easily withdraw at any time.
Type B: Referred to as term deposits, this type of deposit is similar to fixed deposit schemes of banks. The rate of interest, terms of investment, and restrictions are also very similar to that of a fixed deposit. This type of account has a maximum term of 3 years if you are constructing a house, and 2 years if you plan to buy a ready house, and it will not auto-renew at the end of the term - any premature withdrawal will attract a penalty. Like you would with a fixed deposit, you will receive a deposit certificate, which will be required when you need to withdraw. The term deposits can be cumulative or non-cumulative.
For both types of deposits, the RBI fixes the rate of interest periodically. Based on your plan of investment and rate of interest, you can select the deposit type that best aligns with your requirements.
Generally, it is Prevailing Interest Rates as applicable to general Saving Bank and Term Deposits shall also apply to Savings and Term Deposit opened under CGAS.
Withdrawl from Capital Gains Account Scheme
Withdrawal is a slightly complex process. You cannot withdraw money freely from your Capital Gains Account, you can utilise it only for the purpose for which the deposit was made. Such purpose needs to be submitted to the bank in Form C while withdrawing money from Account A whereas to withdraw money from Account B, you need to transfer the balance amount from Account B to Account-A and then according to the CGAS provisions you can withdraw the amount. Also, you need to make payment through crossed demand draft for withdrawal of more than INR 25,000.
The amount withdrawn should be utilized within 60 days of such withdrawal. The unutilized amount should be again re-deposited into the CGAS account. In case the withdrawal amount is not utilized and not deposited back within 60 days then you will lose the benefit of exemptions i.e. it becomes taxable.
At the time of closure of all accounts, the depositor will have to produce a specific authority letter/ certificate from the Income Tax Officer of the respective jurisdiction. The closure would be allowed on the terms mentioned in the letter of authority.
What happens if you were not able to construct or buy a new house till maturity?
If the amount not utilized remains in the Capital Gain Deposit Account Scheme even after a specified period of 2/3 years, 100% of the not utilized amount will be taxed as long term capital for the financial year in which the specific period gets over.
Things to note:
No loan facility against this deposit is available. This term deposit can neither be accepted as margin money for non-fund based nor as collateral to any type of fund-based facilities.
On your own desire, you can apply for a transfer of your account from one deposit office to another deposit office of the same bank.
Closure of both Type A and Type B accounts require prior approval from the jurisdictional income tax officers.
In case of closure of the account due to the death of the account holder, the legal heirs can claim the deposit through Form H. Please note, that the legal heir can withdraw the amount without any tax implications.
Wealth Cafe Advice
Purchasing a new residential property may take time. You have to find a preferred home/apartment that you like to buy, negotiate with the seller and complete paperwork – all of which can be time-consuming. Investing in capital gains accounts gives you temporary relief. Consider this as parking your capital gains tax safely for the time being, while you scout for a new property.