Tax on long-term gains can be avoided if you utilise the amount received from the transfer or sale of any capital asset for the construction or purchase of a House Property or a plot of an agricultural land within one year before of such transfer / sale or before the due date of filing Income Tax Return, whichever is earlier.
Since purchase and construction of property is not a short-term process, a relaxation is provided, i.e., you have 2 full years to buy a property and 3 full years to construct a house property under the Capital Gains Account Scheme of the Income Tax Act, 1961.
Capital Gain Account Scheme is a scheme where an individual can open an account and park his un-invested sale proceeds of any capital asset to avail tax deduction which could have been invested under section 54,section 54F, etc. of the Income Tax Act, 1961 before the due date of filing Income tax return, i.e. 31st July of the respective assessment year to claim exemption under the said Act on such capital gains.
Any assessee (individuals and HUF) who is eligible and required to make a deposit under section 54, 54B, 54D, 54F, 54G or an eligible company as referred to in section 54GB of this Act. However, it should be noted that there can be no joint account for any of the saving option under Capital Gain Account Scheme.
An individual can have an account under CGAS with the banks authorised / approved by the Government of India. However, these accounts do not come with any cheque book or debit card as withdrawal from such accounts is regulated by various forms as specified under the rules and regulations section of this article. Rural branches of such authorised / approved banks do not provide such services.
There are 2 types of accounts under Capital Gains Account Scheme:
Account A (savings scheme): Account A is a savings account scheme similar to a regular Savings Bank Account in any bank. The interest rate on such account is similar to the savings account. A passbook is issued reflecting the transactions such as deposit, interest credit and withdrawals. This account-A type offers high liquidity, i.e. the amount can be withdrawn at any time as per the requirement but has to be invested as specified under the respective section of the Income Tax Act, 1961.
Account B (term deposit): Account B type is similar to the Fixed Deposit Scheme. The tenure for such account is maximum of 3 years (36 months). The interest rate applicable is same as Fixed Deposit. Also, the terms of withdrawal are aligned with the FDs, i.e. the pre-matured withdrawals attract penalty. Deposit certificate is issued which has the details such as principle amount, rate of interest, maturity period and maturity value.
Further, account B comes with 2 options:
The Income Tax Act allows an individual to invest his proceeds from sale / transfer of any capital asset to avail exemption on such gains if the proceeds are re-invested before one year of such sale or within 2 years of such sale in case such proceeds are utilised for purchase of any property or 3 years in case the proceeds are utilised for construction of the property. But in case if he cannot invest the whole or part of the amount of capital gain or sale proceeds (as the case may be) before the due date of return filing (31st July) for the related assessment year, then he can invest the balance under Capital Gains Account Scheme till he buys or constructs the same within next 2/3 years. The proof of deposit needs to be attached with the ITR to claim exemption from capital gains. The interest earned on any account under Capital Gains Account Scheme is chargeable to income tax and is not tax free. TDS is deducted on the same if the annual interest exceeds Rs 10,000.
To open the account an individual needs to make an application to the authorised bank by the way of FORM-A in duplicate. Also, few KYC documents such as address proof, copy of PAN, photographs, etc. needs to be attached.
The proceeds of transfer / sale of capital asset can be deposited in full by the way of cash, demand draft or cheque. However, in case of demand draft and cheque, the effective date for claiming such exemption shall be the date of realisation of the demand draft or cheque.
To withdraw the funds under Capital Gains Account Scheme, an individual needs to make an application in writing to the authorised bank in the prescribed FORM-C mentioning the purpose of withdrawal. Further, the application for subsequent withdrawals shall be made in the prescribed FORM-D mentioning the reason for such withdrawal. It should be noted that the withdrawal from account-B is followed by the transfer to account-A, i.e. the funds from term deposit account is first transferred to the savings account and then can be withdrawn. Even on maturity of term deposit, the funds are first transferred to account A.
The funds withdrawn shall be utilised within 2 months (60 days) of withdrawal for the stated purpose. The purpose should not be other than purchase or construction of a residential house property as specified under section 54. However, if the funds are not utilised within the stipulated time it should immediately be deposited again in the account.
The account under CGAS can be transferred from one branch to another branch within the same bank. However, switching of banks is not allowed. The funds can be transferred from one account type to other, i.e. from account A type to account B type and vice-versa. The request for the same can be made in the prescribed FORM-B.
The nomination for such account type can be made in FORM-E providing sufficient information about the nominee and the same can be verified by FORM-F.
The term deposit scheme is recommended only if the capital gains are available in the lump sum as it would serve the purpose of investing in the purchase of the property by the end of 2 years. This way one can benefit from the interest accrued on such deposit. The saving scheme will be more beneficial if you are getting the sale proceeds in instalments or you need to withdraw every now and then, let’s say, for the construction of the house for avoiding pre-mature withdrawal penalties.