Amount withdrawn by legal heir from the Capital Gain Deposit Accounts Scheme-1988 (CGDAS) of the deceased is Tax Free

Taxpayer is allowed a time period of 2 years & 3 years period for investment u/s 54 & 54F. Similarly, the period of 2 years from the date of transfer is allowed by purchasing agricultural land for claiming exemption u/s 54B.

However, if the amount is not utilized for purchase/ construction before due date of filing ITR of the relevant year in which capital gain is earned then the amount is required to be segregated by keeping it in Capital Gain Deposit Accounts Scheme-1988 (CGDAS). By depositing the amount, taxpayer can claim an exemption from LTCG Tax at the time of filing income tax return.

Amount from CGDAS could be utilized subsequently for purchase or construction.

The question arises what if the person who have earned the LTCG and who has deposited it in CGDAS dies subsequently. Whether the legal heir is also duty bound to use the amount for purchase/construction as the case may be?

Normal presumption is that the legal heir enters the shoes of the deceased and such amount is required to be used for the intended purpose by the legal heir. But this is not so.

The legal heir can withdraw the amount without any tax implications in such cases in view of the Ciruclar No.  743 issued by CBDT on 06/05/1993.

The circular is self explanatory and produced hereunder for easy reference:

CIRCULAR NO. 743, DATED 6TH MAY, 1996

Taxability of unutilised deposit under the Capital Gains Account Scheme, 1988 in the hands of the legal heirs of the assessee—Reg.

CAPITAL GAINS & SECTIONS 54, 54B, 54D, 54F, 54G

1. Under sections 54, 54B, 54D, 54F and 54G of the income-tax Act, 1961, capital gain is not chargeable to tax if the amount of capital gain or net consideration has been utilised for specified purposes by the assessee within the stipulated period laid down in the relevant section.

These provisions also provide for the deposit in specified banks etc. of the amount of capital gain which is not utilised by the assessee for the acquisition of new assets before the date of furnishing the return of income under section 139(1).

The amount of capital gain already utilised for the acquisition/ construction of new asset together with amount deposited is deemed to be the cost of new asset and consequently this amount is not chargeable to capital gain in the year of transfer of asset.

The provisions of sections 54, 54B, 54D, 54F and 54G further provide that if the amount deposited is not utilised wholly or partly for the prescribed purposes, within the period specified, the amount not so utilised shall be charged under section 45 as the income of the financial year in which the period of two/three years (as prescribed in the relevant section) from the date of transfer of the original asset expires.

 

2. A question has been raised regarding the taxability of the unutilised deposit amount in the case of an individual who dies before the expiry of the stipulated period.

 

3. The matter has been considered by the Board and it is clarified that in such cases the 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 unutilised 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.