Capital Gains Account Scheme: Confusion & Clarification (II) – Bureaucracy, Bewilderment & the Battle for Tax Exemption

In the previous issue of The Tax Talk (dated 27.05.2025), we unpacked the basics of the Capital Gains Account Scheme (CGAS) – the government’s not-so-simple piggy bank for taxpayers who wish to save on Long Term Capital Gains (LTCG) tax by investing in a new house. We covered how and where to open the account, the difference between Type A (Savings) and Type B (Term Deposit), and how to play by the rules when withdrawing or closing the account.

This week, let’s roll up our sleeves and go deep into the few real life issues – the ones that crop up after the honeymoon phase of simply “opening the account.” The CGAS, while helpful, is sprinkled with bureaucratic hurdles, grey zones, and more red tape than a gift-wrapped parcel from your local tax office. So, here’s a handy FAQ, spiced with humor and marinated in tax reality.

Q: Do I need to visit the Income Tax Department for every small thing related to withdrawal from CGAS?

A: Thankfully, no – but don’t celebrate yet!

• Type A Account: Freely withdrawable. No ITO needed. Just smile at the bank teller and fill Form C.
• Type B Account: A bit trickier. You can withdraw early only after converting it to Type A (with a 1% interest penalty – a little “thank you” for changing your mind).
• Form C (first withdrawal) and Form D (subsequent ones) are needed for tracking how you used past withdrawals. But for those, the ITO doesn’t need to bless you with their signature.
• Form G (for account closure)? Yes, here comes the big boss – your friendly neighborhood Income Tax Officer’s approval is a must. Without it, banks won’t close the account, no matter how nicely you ask.

In short: Open the account without much fuss. Use it cautiously. Close it with bureaucratic blessings.

Q: I deposited LTCG in CGAS when the tax rate was 20%. Now it’s 12.5%. Which rate applies if I couldn’t use it in time & wish to withdraw it?

Ah, the classic case of “Old Wine, New Tax Rate” dilemma. Let’s decode it. LTCG earned before 23rd July 2024 enjoyed a 20% tax rate with indexation. Now, post-July 2024, we have a leaner 12.50% rate – but without indexation. So, if your CGAS investment lapses today and the exemption gets revoked, what tax rate do you face in respect of LTCG earned prior to 23^rd July 24?

Answer: In my view, the old 20% rate still applies in such cases. Why?

• That was the rate when you earned the capital gain.
• The new 12.50% rate applies only to property transferred after 23rd July 2024 and with no indexation love.

In other words, no tax time travel allowed.

Q: I withdrew money from CGAS for house construction but couldn’t use it due to a health issue. What now?

Health comes first – but sadly, tax rules don’t come with empathy. There’s a 60-day rule! You must utilize withdrawn CGAS funds within 60 days, or else redeposit it back into your CGAS account. If you don’t? Well, the taxman may knock the door – with interest, penalties, and unfruitful chat about “intent.”
Moral of the story: CGAS doesn’t allow emotional appeals. If you can’t use it, redeposit quickly.

Q: I earned the LTCG, but the new property was purchased in my wife’s name. Now the ITO is not approving Form G. Is that fair?

As a normal verification measure, the tax Officer demands proof of utilization (such as purchase agreements, construction invoices, etc.) before approving Form G. Officers often believe in the “what’s yours is yours” principle – not “your spouse is yours” theory. The logic is: if the asset is not in your name, the exemption may not apply. Purchase of property in the name of the wife may not be accepted by the taxmen without payment of tax (Also refer next FAQ).
Lesson: If you want tax relief, make sure your name finds a place on the title deed or be prepared for some litigation at appellate level.

Q: I bought the property in joint name with my spouse. But the ITO is only allowing 50% of the investment for exemption. Is that right?

It’s a great debate of logic vs. law. Some ITOs say: “Joint name = shared investment = split exemption.” Though some officers may accept that the entire money came from you & hence full exemption should apply, it remains a game of the difference of opinion or different viewpoints. Taxpayers often struggle here because the ITO may sometimes logically and sometimes un-logically refuse the grant of approval. But remember, Form G approval is not a tax assessment. Even if tax is collected at closure, the final say lies with your ITR and assessment, not the ITO’s mood that day or the quality of their morning Tea.

Q: What if I simply… don’t use the money? Just let it sit in CGAS for eternity?

Taxpayers often wrongly assume the money just sits there tax-free indefinitely. It’s not so. That’s like buying gym shoes and hoping fitness will just… happen.
If CGAS funds remain unutilized beyond 3 years, the tax exemption vanishes! The amount becomes taxable in the year the 3-year deadline expires, whether you withdraw it or not. But many taxpayers don’t proactively declare this, leading to problems later when they finally try to close or withdraw the account. The unutilized amount is automatically taxable in the financial year in which the 3^rd year ends whether it is withdrawn or not. If the taxpayers don’t offer it in the 3^rd year, the officer may reopen the assessment of the relevant year and may bring the amount to tax and this may be subject to penal consequences as well. Not worth the gamble – unless your hobby is playing poker with the taxman.

Q: I am a banker. The customer has furnished the copy of the sale deed which shows investment in the house property. Can we close the account by taking the proof?

No. Even if the customer brings sweets or smiles – no Form G, no closure!

In Summary: CGAS Is Like a Gym Membership –

• It sounds great in theory.
• You sign up with good intentions.
• But unless you use it wisely and regularly, it ends up costing more than it saves.

CGAS is a powerful tax-saving tool – but it comes with rules, red tape, and real consequences. If you plan to use it, treat it like a ticking clock and not a long-term locker. Until next time, stay compliant – and may your forms be complete, your deadlines met, and your ITO in a good mood.

[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]