Capital Gains Account Scheme (CGAS)

When you sell a capital asset, such as property or investments, you may be subject to capital gains tax on the profit. However, there are ways to defer or minimize your tax liability through schemes and provisions established by tax authorities. One such scheme is the Capital Gains Account Scheme (CGAS).

What is the Capital Gains Account Scheme (CGAS)?

The Capital Gains Account Scheme is a special account offered by certain banks that allows taxpayers to deposit capital gains proceeds from the sale of a capital asset. The scheme provides a way to defer capital gains tax liability by allowing the taxpayer to use the deposited funds for specific types of reinvestments in qualifying assets, as outlined in the tax code. CAGS can be utilized only for the purpose of the exemption claimed under sections 54 to 54GB. the time limit available to the depositor for re-investment and avail the exemption, in many cases, is longer than the due date to file the return of income.

Who can deposit in the Capital Gains Account Scheme?

As stated in Section 54 and Section 54F, based on the taxpayer category for capital gains, you can check if you are eligible to invest in the Capital Gains Account Scheme. 

When Can One Deposit in Capital Gains Account Scheme?

Taxpayers who are unable to reinvest their capital gains in a specified investment (As per the table above) before the prescribed time restriction for that investment has expired and before the income tax returns are filed must deposit the unutilised capital gains into the capital gains account. This must be completed prior to the filing of income tax returns, i.e., before the due date of filing. It should not be after the deadline for filing income tax returns.

What are the types of accounts under Capital Gains Account Scheme?

There are two different types of deposits that you can avail of under the Capital Gains Account Scheme. 

•     Type A: Referred to as a savings deposit, this capital gains account is similar to a regular savings account. It even earns a similar interest rate. The interest is credited at regular intervals, and you will receive a passbook to record all your transactions. Like a savings account, this type of deposit is highly liquid, so you can easily withdraw at any time.
• Type B: Referred to as term deposits, this type of deposit is similar to fixed deposit schemes of banks. The rate of interest, terms of investment, and restrictions are also very similar to that of a fixed deposit. This type of account has a maximum term of 3 years, and it will not auto-renew at the end of the term. Like you would with a fixed deposit, you will receive a deposit certificate, which will be required when you need to withdraw. The term deposits can be cumulative or non-cumulative.

For both types of deposits, the RBI fixes the rate of interest periodically. Based on your plan of investment and rate of interest, you can select the deposit type that best aligns with your requirements.

How To Withdraw Money From a Capital Gains Account?

Depending on the type of deposit you’ve made, the withdrawal terms differ. For a type A deposit, there are no restrictions on withdrawing from your account. However, for a type B deposit, you first have to transfer the money to a type A account and then withdraw. A penalty may be charged on premature withdrawals.

The money withdrawn has to be reinvested in a specific investment within 60 days of the withdrawal or immediately redeposited in a type A account. The first time you withdraw, you need to submit Form C. For every subsequent withdrawal, you need to submit Form D with the details of how the previous money was used.

The funds in the account can be used for specific purposes such as purchasing a new residential property or constructing a house, as specified by tax authorities.

What are the Income tax   implications?

When filing your returns, it is mandatory to attach the deposit proof to be exempted. Income tax return forms are attachment less, meaning that no document may be attached to them, even though tax law requires proof of deposit to be attached to the income tax return in order to qualify for the capital gain exemption. Nonetheless, the taxpayer must keep the proof of deposit in case it needs to be submitted to the income tax agency later on demand.

Subject to tax laws, interest generated on Type A and Type B deposits is subject to taxation. The deposit office will deduct tax and issue a TDS certificate to the depositor.

Any sum that remains unutilized after 60 days of withdrawal or after the designated time frame will be subject to taxation.

How to Close Capital Gains Account ?

Closing a Capital Gains Account (CGA) under the Capital Gains Account Scheme (CGAS) involves utilizing the funds for qualifying reinvestments or following the procedures outlined by the bank and the tax authorities. When you are ready to close your CGAS account, there are a few steps you should take:

• If you opened the account to reinvest your capital gains in a qualifying asset, such as a new residential property or house construction, ensure the funds are used for this purpose.
• Once you've used the funds to purchase or construct the qualifying asset, you may submit proof of the investment to the bank and the tax authorities. This is necessary to document that you've complied with the requirements for deferring capital gains tax.

Closure of both types of accounts requires approval from jurisdictional income tax officers. Form G is required to be submitted for the closure of the account along with the jurisdictional income tax officer’s approval.

Form H shall be submitted for closure of account by the nominee/legal heir of a deceased depositor in the absence of the nominee.

How to Close Capital Gains Account in case fund not utilized.

If you have not utilized the funds in your Capital Gains Account within the specified time period (usually two or three years for property transactions) you may need to close the account.

for this first you need to pay capital gains tax on the unutilized funds. Because without the payment of taxes your jurisdictional income tax officers not signed “ Form – G” which is mandatory requirement for closure of Account and Report the capital gains on your income tax return as deemed income for the year in which the account is closed.

Submit a written request with the bank to close the account. The bank may provide you with a form to fill out for the closure process. Once the account is closed, the bank will release the funds to you, typically by transferring the funds to your regular bank account.

If you are unsure about how to calculate the capital gains tax or how to report it on your tax return, consult with a tax professional for assistance.