Capital Gains Account Scheme

To encourage the reinvestment of the capital gains that are made on the sale of the capital assets through the seller, the Indian government has given the relief from the tax of the capital gains, if such capital gains are reinvested in some specific assets in a mentioned time limit. In most of the cases, the available time limit is longer and sometimes even exceeds the due date of the return filing. To resolve this, the idea of Capital Gains Account Scheme (CGAS) is introduced.

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What is the Capital Gains Account Scheme?

This scheme was introduced in the year 1988 by the Central Government. As mentioned in the above paragraphs, the time limit provided to the depositors for re-investment and to avail the exemption, in most of the cases is longer than the due date for filing the income tax return. In these cases, the taxpayers are given the choice of depositing these underutilized gains of capital in the ‘Capital Gains Account’ that is introduced under the scheme that is known as capital gains account scheme.

Any capital gains that are invested in this scheme are eligible for the exemptions as same as the situation of further investment.

When Can a Person Deposit in the Capital Gains Account Scheme?

Any taxpayer who is not able to re-invest in the capital gains in a certain investment before providing the income tax return and certain timeline for investment is not expired is needed to deposit these unutilized gains of capital in the accounts of capital gains before providing the income tax return however not beyond the date that is due for providing the IT return.

Who Should Deposit in Capital Gains Account Scheme?

The taxpayer’s category that has capital gains and is eligible for investment in Capital Gains Account Scheme from Section 54 to Section 54F of the IT - Act, 1961 is given below:

Section Number Person’s Category Capital Gains Made On
54 HUF or Individual Sale of the residential house
54D Any Taxpayer Compulsory acquisition of building and land
54B HUF or Individual Sale of the land that is utilized for agriculture
54E Any Taxpayer Sale of any capital asset that is there for a long term
54F HUF or Individual Sale of a long term capital asset that is not a residential property
54EC Any Taxpayer Sale of any capital asset that is there for a long term, which can be building or land or both
54G Any Taxpayer Asset transfer (building or plant, machinery, building, right in land, or land) in the situation of the shift of industrial undertaking from the urban area.
54GB Any Taxpayer Residential property transfer
54GA Any Taxpayer Asset transfer (building or plant, machinery, right inland or land, or some building) in the situation of industrial undertaking shifting from the Urban Area to Special Economic Zone.

Where Can One Open a Capital Gains Account?

One can open a Capital Gains Account in any branch of an authorized bank excluding the branches of these banks in the rural area.

Steps to open a capital gains account:

  • The Capital Gains Account is opened by making an application in the duplicate in Form A.
  • Documents like address proof, PAN, and photographs are needed.
  • The deposits should be made by any mode like cheque, cash, demand draft, etc. In case of cheque deposits or deposits through DD, the deposit date is the date on which the DD or cheque is received in deposit office and is subject to realization.
  • The deposits are made either in installments or in a lump sum.
  • The separate applications should be made available for exemptions in separate capital gains and different sections accounts must be opened.

Deposit Types Available in Capital Gains Account Scheme

Under the capital gains account scheme, one can make two types of deposits:

  • Type A or Savings Deposit - Type A capital gains account is the same as a savings account of a bank, wherein the rate of interest is similar to the interest rate of the savings bank account. The interest in this type of account is credited in a regular interval and passbook is also issued to the account holder. Same as the savings deposits, Type A accounts offer good liquidity and the withdrawals can easily be made any time.
  • Type B or Term Deposit: This type of capital gains account is same as fixed deposit account of the bank that provides interest at the applicable rate of the term deposit and it also has restrictions same as term deposits. The maximum allowed term for Type B account is three years and the depositor has to select the term as per his/her plan for specified investment like two years for purchasing a new house or three years for house construction. Same as fixed deposit, the depositor receives deposit certificate that contains all the details of the deposits. This certificate is required to be submitted during the withdrawal time. Further, there is no possibility of auto-renewal of the term deposits which is possible in normal fixed deposits.

The term deposits can be a cumulative type or non-cumulative type, which means the interest, is cumulative and is reinvested with the principal or is paid periodically respectively.

The RBI time to time fixes the rate of interest for both types of deposits. The depositor can choose an appropriate deposit type by keeping his/her plans of investment, rate of interest, or fund requirement, etc. in mind.

How to Make Withdrawals from Capital Gains Account Scheme

As specified, there is no restriction over the withdrawals that one can make from his/her Type A account. However, from a Type B account, only premature withdrawals are allowed, which is possible after transferring the money to Type A account and there can also be some penalty.

Any withdrawn amount is needed to be utilized for some specific investment in 60 days of the withdrawal and the utilized amount can be re-deposited in the Type A account instantly.

Form C is submitted to withdraw money for the first time from an account and Form D for subsequent withdrawal by giving details of the type of utilization of money that is withdrawn previously. Therefore, no debit card or cheque is given to the depositor.

Points to Be Noted

  • Account Closure:
    • The closure of both Type A and Type B types of account need approval from the jurisdictional officer of income tax. Form G should be submitted to close the account with the jurisdictional officer of the income tax’s approval.
    • Form H must be submitted for the closure of the account by the legal heir or nominee of the depositor who is deceased.
  • Account Transfer:
    • At the time of change in the deposit’s nature like savings for term deposit or another way round. The transfer from Type B account to Type A account before the period of maturity is known as premature withdrawal. In addition to this, any transfer of account from one a branch to other branch is also allowed but is not possible between different banks.
    • Form B is needed to be submitted for account conversion.
  • Nomination:
    • Upon the death of the depositor, the nomination for the inheritance of the account can be done by submitting the Form E and nominee change is made by submitting the Form F.
    • The nomination of a maximum of three persons is allowed and the amount, if required to be received by the nominees is made available as per the order of the nomination. No nomination is required for the accounts that are opened on behalf of minors, AOP, HUF, firm, or BOI. However, a minor can be a legal heir or nominee and depositor may appoint a person for receiving the amount in the situation of demise and during the nominee’s minority.
  • Implications of Income Tax:
    • According to the law of the income tax, it is mandatory to attach the deposit proof to the return of the income tax to avail the exemption of capital gain. Return forms of the income tax do not need any attachment. However, the deposit proof is needed to be retained by the taxpayer to be submitted to the department of the income tax for future requirements.
    • Any amount that is either underutilized beyond withdrawal’s 60 days or beyond the mentioned time limit is eligible for tax.
    • The interest that is earned on both Type B and Type A deposits is liable for tax deduction subject to the laws of tax and the tax is deducted by the deposit office. The certificate of TDS, in this case, is issued to the depositor.
  • The facility of Loan:
    • There is no facility of loan provided against the scheme of Capital Gains Account. The deposit certificate cannot be offered as a guarantee or collateral security. Moreover, there would not be any charges created in it.

Helpful Resources: Tax Calculator

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