What is Capital Gains Account Scheme?

By Adhil Shetty :

Introduced in 1988, it is a popular scheme for people who wish to take advantage of long-term capital gains along with tax exemption. The Income Tax Act of India allows certain exemptions on long-term capital gain schemes under Sections 54, 54B, 54D, 54F and 54G, which are not provided on short term capital gain.

Who can benefit from CGAS?

Individuals and members of HUF (Hindu Undivided Family) can benefit from Capital Gains Account scheme (CGAS). Basically, all those taxpayers who want to buy or construct a residential property to save income tax can benefit from CGAS 1988. If any investment with respect to purchase of a property is made within two years from the date of sale of a property, the taxpayer can save on tax on capital gain.

Taxpayers can avail exemptions under the CGAS only when the amount of capital gain, or net consideration, is deposited by the last date for filing the income tax return.

For example: If Mr Sen sells a property for a lump sum amount, also termed as a long-term capital gain, on June 10, 2011, he must invest that amount either in the purchase or construction of a new residential property within two years and three years respectively from the date of sale. If he is not able to buy or construct a property before the last date for filing income tax return, he should deposit the unused amount in CGAS.

In this example, Mr Sen sold his property on June 10, 2011; hence, he can buy or begin construction on a new property by September 30, 2012. If he fails to do so he must deposit the money on or before September 30, 2012 in CGAS.

Types of Deposits

Deposit Account Type A

All deposits into this account are in the form of savings. This account is suitable for taxpayers who want to construct a house over a long period as withdrawals are permitted according to the provisions of the scheme.

Deposit Account Type B

This account is similar to a term deposit as it is payable after a fixed time duration. The depositor can opt to keep the deposits cumulative or non-cumulative and withdrawals from this account can be made only after a stipulated duration.

Opening a CGAS Account

Every taxpayer keen to open a CGAS account needs to apply to the bank and fill a form in which the type of account (A or B) should to be specified. In case of account type B, they need to mention whether the account will be cumulative or non-cumulative. The proof of the deposit needs to be given with income tax returns.

While opening this account, a taxpayer should ensure that CGAS is mentioned in the account. Many taxpayers forget mentioning CGAS and later use the money for buying or constructing residential property. However, according to the income tax law the money to be used for this purpose should be kept exclusively under a CGAS scheme. The deposits in these bank accounts can be made in installments or in a lump sum.

A CGAS account cannot be opened with all banks and their branches with only 28 government recognised banks that can receive a deposit under this scheme. These include SBI, CBI, Dena Bank, Indian Overseas Bank, Andhra Bank and Canara Bank among others. Rural branches are not authorised to receive and maintain deposits under CGAS.

The interest rate is dictated by the RBI at regular intervals and is allowed every month on the lowest balance in account A. In case of Account B, the interest amount accrued is reinvested and for non cumulative deposits, the interest amount is payable quarterly.

Transfer of CGAS A/c

The account holder can transfer the account from one deposit office to another of the same bank. The amount can be transferred from Type B to Type A. However, this is subjective to other provisions of the scheme. If the account is converted from A to B or vice versa, the interest in the newly opened account shall be calculated w.e.f the date of openings these accounts.

Withdrawal from CGAS

Withdrawal from account A is subjective to the scheme provisions. The bank entertains a request after receiving the deposit request and, thereby, approves withdrawal. Withdrawals can only be made from type A account with a declaration that the amount withdrawn will be exclusively used for the intended purpose. If the amount is more than Rs 25,000, the bank issues a crossed demand draft in favour of the person to whom the payment is to be made. If the request is made to withdraw money from the Type B account before the expiry of the term, it is considered as a premature withdrawal from the account.

The author is CEO, BankBazaar.com

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