Capital Gains Account Scheme (CGAS): A Detailed Overview
Selling a capital asset results in capital gains. A capital gain is the sum of money you get on the sale of a capital asset. The Capital Gains Accounts Scheme (CGAS) was started by the government of India in 1988. The scheme enables taxpayers to receive an exemption from capital gains. It is possible as long as the net consideration or amount of capital gains is deposited in a public sector bank by the deadline for filing a tax return.
Sections 54 to 54GB allow relief from the tax on capital gains for capital gains reinvested in particular assets within a specific period of time. This is done by the government to motivate sellers to reinvest their capital gains from the sale of capital assets. This article covers all the details that you need to know about the CGAS program.
Table of content
What is a Capital Gains Account?
The Reserve Bank of India (RBI) has notified all banks that provide this feature to allow customers to open capital gains accounts. Funds that are left over after an asset is sold and not yet used can be parked in a capital gains account to qualify for an LTCGT exemption. The interest rate that applies is the same as that of conventional savings plans. A passbook containing all of the account's transactions, including deposits, interest earned, and withdrawals, will be given to you. High liquidity will be available for the amount put in this account, which can be withdrawn whenever desired.
What is a Capital Gains Account Scheme?
The government of India introduced the 1988 Capital Gains Account Scheme (CGAS) with regard to the Income Tax Act of 1961. When certain assets are sold, the proceeds can be deposited into specified accounts to give taxpayers a chance to save on capital gains tax. Authorised financial institutions or banks handle the maintenance of these accounts. Taxpayers are eligible to receive an exemption from capital gains. It can happen if they deposit the net consideration or the amount of capital gains in a public sector bank by the deadline for filing their income returns.
Types of Deposits under CGAS
The capital gains account plan allows for the following two deposit kinds, which are described below:
Type A- Savings deposit: This type of account functions similarly to a standard savings account at any bank, with periodic crediting of interest at a rate commensurate with savings account interest and the issuance of a passbook to the depositor. A Type A account provides greater liquidity and allows withdrawals at any time, much like a savings deposit.
Type B- Term deposit: This type of account resembles a bank's fixed deposit account, with restrictions akin to those of a term deposit and interest at the rate applicable to term deposits. A Type B account can have a maximum term of three years. The depositor must select the duration according to his intended use of the funds, e.g., two years for the acquisition of real estate or three years for building. The depositor receives a deposit certificate. It is necessary to present at the time of withdrawal and contain all the deposit details, similar to fixed deposits. Furthermore, unlike a conventional fixed deposit, a term deposit cannot be automatically renewed.
A term deposit may be cumulative or non-cumulative. This means that interest is either paid on a regular basis or accumulates and is reinvested with the principal. The RBI periodically sets the interest rate for both types of deposits. The depositor may select the best kind of deposit based on his intended use of the funds, rate of interest, and other factors, as well as his intentions for specific investments.
Who can Deposit in the Capital Gains Account Scheme?
The following table represents the applicability of CGAS to different types of taxpayers:
When and Where to Open a Capital Gains Account?
When filing a return of income, a taxpayer must deposit any unused capital gains in the capital gains account as soon as possible. However, it should not be later than the deadline, if they are unable to reinvest their capital gains in the designated investment before the deadline has passed. Any approved bank branch, with the exception of those in rural areas, may create a capital gains account. The process to open a capital gains account and how to deposit money is stated as follows:
A duplicate Form A application can be submitted to open a capital gains account.
You would need to provide documents like your PAN, proof of address, and a photo.
Any method, including cash, checks, demand drafts, etc., may be used to make deposits. The date of deposit for checks or direct deposits is the day the check or direct deposit is received at the deposit office, with regard to its realisation.
You have the option of making the deposit all at once or in installments.
Different capital gains accounts must be formed and applications must be submitted separately in order to qualify for exemption under various sections.
Eligibility for Depositing in CGAS
The requirements listed below should be fulfilled before making a deposit into the CGAS account:
Any capital gains from the transfer or sale of the assets given in sections 54 to 54GB should go to the taxpayer.
Only citizens of India are eligible for the CGAS program. A non-resident CGAS account (NRCGAS) must be opened by non-residents.
It is required of the depositor to provide evidence of capital gains from the sale of the designated assets.
Time Limit for Depositing in CGAS
The Income Tax Act's Sections 54, 54F, and 54EC provide ways of lowering capital gains tax obligations. Reinvesting capital gains via designated channels allows taxpayers to reduce their tax liability under these laws. Individuals can invest all of the profits from selling a property into a residential property and avoid paying capital gains tax under Sections 54 and 54F. As an alternative, investments made in certain capital gains bonds are eligible for tax relief under Section 54EC. These payments have to be made within a year of the property sale or within two years of the closing.
How to Open a Capital Gains Account?
The following instructions will help you to open an account under the Capital Gains Savings Scheme:
Step 1: Complete form A and send it in with the required attachments, such as a copy of your PAN card, identification, and proof of address.
Step 2: Use a demand draft, check, or cash to make the deposit now. The day the draft is received counts as the date of deposit if you are making the payment using cash or a cheque.
Step 3: Payment can be made in installments or in one lump sum.
Step 4: To invest in various types of assets under distinct sections, you must open separate accounts.
Withdrawal from Capital Gains Account Scheme
Withdrawals from Type A savings accounts do not have any limits. However, premature withdrawal from a Type B account is allowed. However, it can be done only after the funds have been transferred to a Type A account. There may also be associated penalties. Any money that is taken out must be utilized for the designated investment within 60 days of the withdrawal. Any money that is not used can be instantly redeposited into a Type A account. First-time account withdrawals must be made using Form C, and subsequent withdrawals must be made using Form D. This includes information about how the funds were used before. As a result, the depositor does not receive a chequebook or debit card.
Tax Implications of Capital Gains Account Scheme
Tax law requires proof of deposit to be attached to the income tax return in order to be eligible for exemption on the capital gain. However, no document may be attached to them as income tax return forms lack attachments. Still, the taxpayer must keep the proof of deposit on record in case the income tax agency requests it later. Tax laws apply to interest earned on both Type A and Type B deposits. The bank's deposit office will minus the tax and issue a TDS certificate to the depositor. Any sum not used within 60 days of withdrawal or that is left over after the designated time frame will be subject to taxation.
Saving or Postponing Capital Gains Tax
Investing the gains from the purchase into a residential property can reduce your tax liability. You can claim an exemption under section 54 if you invest capital gains you made from the sale of a residential home in another residential property. You have to apply for an exemption under section 54F when investing gains in residential real estate if you earned money from the sale of any asset that was not a residential home.
Investing the capital gains and avoiding taxes is an additional possibility. You may be able to obtain an exemption under section 54EC by making an investment in capital gains bonds. The National Highways Authority of India (NHAI) and Rural Electrification Corporation (REC) Limited are offering bonds with a three-year maturity period that can be utilised to invest up to Rs. 50 lakh in a single fiscal year. You have to make the investment within six months following the property sale, regardless of the scenario.
CGAS Transfer, Closure, Nomination, and Loans
Account Transfer: Transferring from a Type B account to a Type A account prior to the maturity period is regarded as an early withdrawal, even though switching from savings to a term deposit or vice versa is permitted. Additionally, account transfers between branches are permitted, but not between banks. Form B needs to be submitted to convert an account.
Account closure: The jurisdictional income tax officer must give their consent before either type of account may be closed. The permission of the jurisdictional income tax officer and the submission of Form G is necessary for the account closure process. In the event that there is no nominee, the legal successor of the deceased depositor must submit Form H to request the closure of the account.
Nomination: Form E must be submitted to designate someone to inherit the account following the depositor's death. Conversely, Form F must be submitted to modify the nominee. A maximum of three individuals may be nominated, and the money that each nominee receives will depend on their nomination order. Accounts registered on behalf of a minor, HUF, AOP, BOI, or company are not qualified for nomination. The depositor may designate a person to receive the money in the event of the nominee's death or during their minority, even if the nominee is a juvenile.
Facility for loans: Loans against the Capital Gains Account Scheme are not available. The deposit certificate cannot be charged for, used as collateral security, or presented as a guarantee.
Budget 2024 Update Related to Capital Gains Account Scheme
The following budget was proposed on July 23, 2024, for the fiscal year 2024–2025:
The assets will be held for 12 months and 24 months, respectively, in order to categorise them as long-term and short-term capital assets. The 36-month long holding period is not more into effect.
All listed securities have a 12-month holding period. All mentioned securities are considered as Long-Term if they are held for more than 1 year. All other assets are held for a period of 24 months. Land that has been owned for more than 24 months is therefore regarded as long-term.
There is a deduction in the tax rate of long-term capital gains from 20% to 12.5% on other financial and non-financial assets. However, the indexation benefit that was formerly offered upon the sale of long-term assets has been eliminated. As a result, beginning from July 23, 2024, any land sales will only be subject to a 12.5% tax rate without the advantage of indexation.
The tax at slab rates will be applicable to short-term capital gains on the land sales.
Conclusion
Since real estate sales typically result in large gains, there is also a bigger tax burden. The best strategy to preserve money is to reinvest your gains in real estate or financial assets that offer tax exemptions on investment, withdrawal, and interest. Capital Gains Accounts Scheme can be your saviour during such high-value transactions.
FAQ
Q1. Where can I open the CGAS account?
You can open a CGAS account by contacting your bank, as CGAS is essentially a bank account. Syndicate Bank, IDBI Bank, Bank of Baroda, State Bank of India, Corporation Bank, and the Central Bank of India are a few of the banks involved in this initiative.
Q2 .What does Section 54 state?
According to section 54 of the Income Tax Act of 1961, the taxpayer is required to build a new home within three years of the property transfer or buy a new home within one year prior to and two years following the transfer of the residential home.
Q3. Should I mandatorily invest in CGAS to claim exemption u/s 54,54F etc?
You will only need to invest in CGAS if you are unable to use the proceeds to purchase the designated assets by the filing deadline u/s139(1) and you wish to request an exemption from such provisions. The scheme's goal is to commit the funds to be used for the designated purpose.
Q4. How much capital gain is not chargeable to tax?
Under sections 54 to 54 F, capital gains up to a total of 10 crore are subject to tax.
Q5. How long can money be retained in a Capital Gain Account?
You are limited to two or three years from the original asset transfer date, as stated below:
Maximum period of 24 months- if capital gains are under U/S 54, 54B, or 54 F (as determined by depositor in Form A).
Maximum period of 36 months- in case the capital gains are under U/S 54, 54 D, 54 F, 54 G, and 54 GB (as reported by the depositor in Form A).
Q6. Who has not been able to utilise the funds lying in CGAS even after 3 years? What is the implication?
The whole amount that remains unutilised will be regarded as long-term capital gain in the year of its expiry, and you will be responsible for paying capital gain tax on that date if you are unable to use the proceeds in CGAS for the particular purchase.
Q7. What are the conditions for withdrawing the amount from CGAS?
The Assessing Officer (AO) must receive the information on Form G and any accompanying documentation in order for the money to be withdrawn from CGAS. Form G will be approved if the AO is satisfied that all necessary paperwork is in order and that the tax owed on the presumed capital gain has been paid. However, it is also important to note that every bank has a different procedure for closing CGAS accounts. Certain banks permit CGAS account closures on the basis of self-declaration.
Q8. Does the CGAS account provide interest?
Yes, CAGS offers interest because it functions similarly to a fixed deposit at a bank.
Q9. What is a capital gain scheme account?
Capital gains are excluded under sections 54, 54B, 54D, 54F, 54G, and 54GA if they are reinvested in certain assets within the designated time frame. The net consideration or capital gain (as defined by sections 54F and 54GB) must be deposited in CGAS if it is not reinvested prior to the filing of income tax returns. However, under sections 54 and 54F, sums greater than ₹10 crore are not eligible for CGAS deposit.
Q10. How much should be deposited in the capital gain account scheme?
Users of the scheme are able to fund their accounts with their whole capital gains. However, the total amount that can be taken out of the account is limited. The maximum amount which can be withdrawn from the account balance is 60%.
Q11. What is the form G capital gain account?
The consent of the jurisdictional income tax officer and the submission of Form G are necessary for the account closure.
Q12. How to close the capital gain account after 3 years?
The depositor will need to present a specific authority letter or certificate from the relevant jurisdiction's income tax officer when closing all accounts. The conditions outlined in the authority letter would apply to the closure. There isn't a loan option available to use with this deposit.
Q13. What is the treatment of the unutilised amount in the capital gain account scheme?
You will be required to pay capital gain tax on the total amount that is not used if you are unable to use the proceeds in CGAS for the specific purchase. This will be the case in the year that the proceeds expire and will be regarded as long-term capital gain.
Q14. What is the capital gain account interest rate?
The government sets and periodically modifies the interest rate on the capital gain account scheme offered on the deposited capital gains. The interest rate for the CGAS plan is currently 7.15% annually.
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