Capital Gains Account Scheme or commonly known as CGAS is made for claiming tax exemption on long term capital gains. This avenue is specifically used when you are not sure of these funds utilization or the utilization is spread for next 2-3 years. But the scheme has its caveats and cannot be chosen for complete tax exemption as it only defers your tax liability. You should be clear on the scheme provision and its rules to derive benefits from it.
Let’s understand the scheme in detail and see where it benefits :
Capital Gains Account Scheme
As the name suggest this scheme is meant for capital gains earned from various avenues. Income Tax has Sec 54 & 54 F under which you can claim tax exemption on long term capital gains. But many a times you are not sure when you will utilize the funds or there is delay in buying a new residential property. Even when you are constructing a new property you are not utilizing the funds upfront but in tranches. Now the tax liability on these capital gains falls for the financial year in which the gains have been derived i.e. it gets taxable in the same assessment year. In such situation the gains not utilized within the stipulated time becomes taxable. But income tax has provision to invest in new residential property till 2 years or construct within three years from date of transfer to claim exemption. It will be then unfair to tax the gains unless this time horizon is completed. A capital gains account scheme gives you the window of deferring your tax liability till the funds are utilized within this period. If your gains are held in this account then you are exempted from paying tax on the long term capital gains for the respective year.
Type of Account
There are two type of capital gains account available :
Savings Account: This is a savings account wherein you can withdraw funds as per your requirement. This account is highly beneficial when you have a property constructed and your payment structure is scattered at various time interval.
Term Deposit: This is a fixed deposit account where funds are kept for a define period and at the end of it you are paid deposit amount along with interest accrued. The account has provision of interest being paid periodically or reinvested. A term deposit account is an ideal option when you wish to purchase the asset after a specific period.
Where You Can Open The Account?
A capital gains account scheme can be opened with nationalized bank specified by the government. In total there are 28 banks listed to offer this scheme mostly of which are PSUs. The process is much similar to opening a savings account or a term deposit. But many a times mistakes happen when investors open a normal savings account. CGAS account specifically mentions that it is a capital gains account scheme and so when you are opening this account verify else you loose the benefit.
How You Derive Benefits?
Under Section 54 & 54 F there are various avenues for saving long term capital gains earned from property or any other asset class. You can either invest in bonds, purchase a new property or construct one. But there may be a time lag between utilizing funds for these avenues. Since capital gains are taxable for the financial year they are derived it gets taxed as you file your ITR. Now a time gap for funds utilization beyond the last date of filing your ITR will make these gains taxable. The capital gains account scheme helps you in this situation. As per provision till the time of utilization of funds you have to deposit the gains in this scheme and report it in your ITR. In that case you are exempted from paying capital gains tax for that respective year. The deposit in the scheme has to be done by the last date of filing of income tax returns. This, income tax expert says, is a loophole since the provision does not mention what you should do with funds from date of transfer to date of filing of ITR wherein it gives a freedom to the taxpayer to utilize the gains as per his/her wish within this specific period .
How Long You Can Defer Tax?
The capital gains account scheme is not a tax saving scheme but a tax deferment scheme (for an expert consultation on the matter use this Tax Rebate contact number). This means by depositing the gains in this account you get exemption only upto the time period allowed for the chosen avenue to claim the exemption. The time period allowed for constructing a house is within three years from the date of transfer. So the capital gains account scheme is also available for three years. After that if you are not able to utilize the funds then the capital gains you have earned becomes taxable as the earnings of the previous year in which the three year from the date of transfer completes.
To open the account you will have to apply to the bank on the specific form created for this. You can opt for either a savings account or a tern deposit with cumulative or non-cumulative option. Once you have open the account then proof of the account will be submitted while filing your ITR. You can make nominations as per your wish and the bank will pay you interest for the term you have kept the deposit.
Withdrawal & Closure
There is withdrawal facility available in these two accounts. In savings account you can withdraw funds as per your requirement provided you utilize them within 60 days for the objective it has been kept. The bank pays you cash amount up to a certain level beyond which you are issued a demand draft. Contrary to this the term deposit has a maturity and so you receive the funds on a specific date. But you can withdraw the interest which you have earned or even reinvest it in the same account.
Once your objective gets completed you have provision of closing the capital gains account scheme. To do this you have to obtain the approval of the assessing officer and submit it along with closure letter to your bank.
Points for Consideration
There are many caveats and confusion on this account so its important that you should keep few points in consideration while managing it:
- It’s not a normal savings account and so check whether your account mentions clearly about the scheme
- The withdrawal flexibility is only for the specific objective and so you cannot treat it like your general savings account
- The interest earned on these account is not tax free and treated as your interest income
- The maximum period for which you can save tax through it is three years from the date of transfer of property post which the gains will become taxable if not utilized
- The amount has to be deposited by the last date of filing ITR
The capital gains account scheme is an effective tool for managing taxation on long term capital gains. The window specifically helps you in claiming the exemption if you are not utilizing the funds instantly. Understand it and derive maximum gains out of it.
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