Any profit arising from the transfer of land, building, gold, or any other capital assets is chargeable to income tax as “Capital Gain”. Taxpayers have an option to save the tax arising from the transfer of Long Term Capital Assets by claiming an exemption under various provisions of the Income Tax Act-1961. The most commonly used sections for claiming capital gain exemptions are section 54 & Section 54F. Both this section offers exemption subject to the condition that the taxpayers invest the amount for the purchase or construction of another residential house property within a prescribed time frame as under:
For purchase:
One year before or two years after the date of sale.
For Constructions:
Three years from the date of sale.
About Capital Gains Accounts Scheme (CGAS):
The taxpayer is allowed a time period of 2 years & 3 years period for investment u/s 54 & 54F. However, the Income Tax Return (ITR) is required to be filed within the due date (i.e., July in a majority of the case) though the permissible period of investment of 2 years/ 3 years may fall after the due date.
To enable the taxpayers to claim an exemption at the time of filing ITR, the concept of CGAS is introduced. If the amount remained un-utilized till the due date of filing ITR then it is required to be demarcated by keeping it in CGAS. Amounts kept in CGAS need to be utilized subsequently for purchase or construction within the prescribed period. By depositing the amount in CGAS, taxpayers can claim an exemption from capital gain tax at the time of filing ITR.
Taxpayers may note that the deposit in the CGAS is just to enable the taxpayer to claim an exemption at the time of filing the ITR. Taxpayers need to ensure that the amount is ultimately utilized for purchase/construction within the prescribed period of 2 years or 3 years failing which the amount of exemption would stand withdrawn on completion of the period of 3 years. The amount will be taxable as Long Term Capital Gain (LTCG) of the year when the period of 3 years is over.
Where & how the capital gains Deposit Account can be opened?
The CGAS can be done in any of the specified 28 banks which include SBI, BOI, BOB, BOM, PNB, IOB, etc. All branches of these banks except the rural branches are authorized to receive the deposit under CGAS, 1988.
For opening the account, one has to make an application in duplicate in Form A. Documents such as PAN, proof of address, and a photograph are required to be submitted for opening the account.
The deposit in CGAS can be made either in lump sum or installments.
Separate applications shall be made for availing exemption under different sections and separate capital gains accounts shall be opened.
Types of capital gains account in CGAS:
There are two types of deposits account that can be opened under CGAS:
Type A – Savings deposit:
Type A account is similar to the normal savings bank account wherein the interest rate is almost similar to a saving bank account offered periodically. Here, a passbook is also issued to the deposit holder. Just like any other savings account, Type A accounts offer better liquidity as withdrawals can be made at any time.
Type B – Term deposit:
Type B account can be equated with a fixed deposit account of a bank wherein interest is offered at the rate applicable to a term deposit and has restrictions similar to a term deposit. The depositor can choose the tenure of investment as per his planning up to a maximum of 2 years for the purchase or 3 years for construction.
Here, the depositor would receive a deposit certificate containing all the details of the deposit which is required to be returned back at the time of withdrawal. 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, the requirement of the fund, rate of interest, etc.
How to withdraw the amount from CGAS:
For withdrawals of amount from CGAS, the prescribed procedure is required to be followed, as under:
Form C is required to be submitted for withdrawal for the first time. Submission of Form D is required for subsequent withdrawal wherein the details & manner of utilization of money withdrawn earlier are required to be given. No cheque book or debit card is issued to the depositor of CGAS.
There are no restrictions on withdrawal from Type A – savings accounts. In the case of a Type B Account, even premature withdrawal is allowed only after transferring the amount to a Type A account. Premature withdrawal is subject to a 1% reduction in interest rate as applicable to the FD of that period.
Any amount withdrawn is required to be utilized for specified investment within 60 days of withdrawal and any unutilized amount may be re-deposited to the Type A account immediately.
Closure of account:
One may carefully note that the closure of both types of accounts requires approval from a jurisdictional income tax officer.
Form G is required to be submitted to the bank 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 the deceased depositor in the absence of the nominee.
Income tax implications:
The interest on both accounts is taxable like any other income of the taxpayers. Further, the interest is also subject to the Tax Deduction at Source (TDS).
Now, no documents are required to be attached to the ITR but the details of the investment & utilization of CGAS are required to be given in the ITR forms.
If the amount remained un-utilized & taxpayer dies:
CBDT has clarified that in such cases, said amount cannot be taxed in the hands of the deceased. This amount is not taxable in the hands of legal heirs also as the unutilized portion of the deposit does not partake the character of income in their hands but is only a part of the estate devolving upon them.
Nomination Facility:
Nomination of up to 3 persons is 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. Nominees can be a minor and depositors 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.
Transfer of account:
Transfer of account from one branch to another branch is allowed but not between different banks.
The change in nature of the deposit is also allowed such as savings to a term deposit or vice versa. However, any transfer from a Type B account to a Type A account before the maturity period is considered a premature withdrawal. Form B is required to be submitted for conversion of account.
Loan facility:
Neither loan can be obtained against CGAS nor can it be offered as collateral security or guarantee. Any charge cannot be created over it.