Capital Gains Account Scheme: Confusion & Clarification (I)

 

Any profit arising from 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 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 purchase or construction of another residential house property within a prescribed time frame as under:
i] For purchase:
One year before or two years after the date of sale.

ii] For Constructions: 

Three years from the date of sale.

Sounds easy, right? But life (and tax law) is never that simple. That’s where the Capital Gains Accounts Scheme (CGAS) comes into play.

 

What’s This Mysterious CGAS?

Imagine you sell a property in January, but by July (the ITR filing deadline for the majority of the taxpayers) you haven’t yet bought or built your new home. How can you still claim the exemption?

Simple: park the unutilized capital gain into a special Capital Gains Account at an authorized bank. Think of it like a tax shelter piggy bank — you tell the taxman, “I’ll use this money soon, promise!”. Simply on the basis of your deposit, you will be allowed exemption though the house property is not purchased or completed by the due date when you will be required to file your Income Tax Return (ITR).

But remember, this isn’t an indefinite parking lot. It is just to enable the taxpayer to claim an exemption while filing the ITR without actual purchase/construction. Taxpayers need to ensure that the amount is ultimately utilized for it within the prescribed period of 2 years or 3 years. If you don’t use the money within the prescribed time (2 or 3 years), the taxman comes knocking again — the exemption gets reversed, and the amount becomes taxable as LTCG when the period of 3 year expires.

Opening an Account – Expect Some Paperwork!

1.  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.

2.  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 can be made either in lump sum or installments.

3.  Separate applications shall be made for availing exemption under different sections and separate capital gains accounts shall be opened.

Types of CGAS Accounts – Choose Wisely!

There are two types of deposits account which can be opened under CGAS, as under:

1.  Type A (Savings Account):
It’s like your regular savings account, Passbook, periodic interest, easy withdrawals. If you want flexibility and don’t mind a little less interest, this is your jam.

2.  Type B (Term Deposit):
Like a fixed deposit. Higher interest, but you can’t just yank the money out. Here, the depositor would receive a deposit certificate containing all the details of 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 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 the amount from CGDAS:
For withdrawals of amount from CGDAS, prescribed procedure is required to be followed, as under:

1.  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 is required to be given. No cheque book or debit card is issued to the depositor of CGAS.

2.  There are no restrictions on withdrawal from Type A – savings accounts.

3.  Premature withdrawal in Type B Account? Sure — but only after moving it to Type A, and with a penalty (1% reduced interest).

4.  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 Type A account immediately for subsequent usage.

Withdrawal & Closure – Where the Real Drama Begins:

Here’s where many taxpayers hit a practical wall. You need the ITO’s blessing-because banks won’t let go without it.

1. To withdraw: You need Form C (first time) or Form D (later), detailing how you used prior withdrawals. No cheque books, no debit cards — this isn’t your everyday bank account.

2.  To close the account: You must get approval from your jurisdictional Income Tax Officer. Without it, the bank won’t shut the account. Taxpayers often find themselves trapped in bureaucracy, running between bank officers and tax officials. Even worse, some banks and officers aren’t fully familiar with the process — leading to delays, confusion, and a lot of “Come back next week, Sir!”

3.  Form G is required to be submitted to the bank 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.

 

Income tax implications:

1.  The interest on both the accounts is taxable like any other income of the taxpayers. Further, the interest is also subject to the Tax Deduction at Source (TDS).

2.  Now, no documents are required to be attached with the ITR but the details of the investment & utilization of CGAS is required to be given in the ITR forms.

3.  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.

4.  If the amount remained un-utilized:
The amount becomes taxable as LTCG only when the period of 3 year expires.

Other Quirks You Should Know:

i)  No loans against these deposits — don’t even think about pledging them as collateral!

ii)  Nomination: Allowed, but not for HUFs, minors, firms, etc. Nomination can be made by submitting Form E and change of nominee can be made by submitting Form F.
If the taxpayer passes away before using the funds, the unused amount isn’t taxed as income of the legal heirs — it simply becomes part of the estate.

Practical Challenges Faced by Taxpayers:

While the CGAS is a fantastic tool to defer taxes, it comes with strings attached – paperwork, deadlines, tax rate confusion, and the eternal dance between banks and the Income Tax Department.  Many taxpayers struggle to get ITO approvals on time. Taxpayers often tell me, “I just wanted to save some tax, but now I’m stuck managing a bureaucratic beast!” Let’s not sugarcoat it. There are various practical challenges which are coupled with the CGAS. We will discuss more about it in the next issue of The Tax Talk.

[Views expressed are the personal view of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at nareshjakhotia@gmail.com.  Other articles & response to queries are available at www.theTAXtalk.com]